<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
THE GLOBAL TOTAL RETURN FUND, INC.
(Exact Name of Registrant as Specified in Charter)
GATEWAY CENTER THREE
100 MULBERRY STREET, 9TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(Address Of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7525
Marguerite E.H. Morrison, Esq.
100 Mulberry Street
Gateway Center Three, 9th Floor
Newark, New Jersey 07102-4077
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
NO FILING FEE IS REQUIRED BECAUSE OF RELIANCE ON SECTION 24(F) OF THE
INVESTMENT COMPANY ACT OF 1940. PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF
1933, THE PROSPECTUS AND PROXY STATEMENT RELATES TO SHARES PREVIOUSLY REGISTERED
ON FORM N-1A (FILE NO. 33-63943).
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON AUGUST 8, 1999,
PURSUANT TO RULE 488.
TITLE OF SECURITIES BEING REGISTERED........................................
SHARES OF COMMON STOCK, PAR VALUE
$.01 PER SHARE
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<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
Facing Page
Contents of Registration Statement
Notice of Special Meeting
Part A--Proxy Statement and Prospectus
Part B--Statement of Additional Information
Part C--Other Information
Signature Page
Exhibits
1. Solicitation Letter to Shareholders
2. Form of Proxy Card
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
Gateway Center Three
100 Mulberry Street, 9th Floor
Newark, New Jersey 07102-4077
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
---------------------
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the Meeting)
of Prudential Intermediate Global Income Fund, Inc. (Intermediate Fund) will be
held at Prudential Plaza, 751 Broad Street, 24th Floor, Newark, New Jersey
07102, on September 8, 1999, at 9:00 a.m. Eastern time, for the following
purposes:
1. To approve an Agreement and Plan of Reorganization and Liquidation
between Prudential Intermediate Global Income Fund, Inc. (Intermediate Fund) and
The Global Total Return Fund, Inc. (Total Return Fund) providing for the
transfer of all of the assets of Intermediate Fund to Total Return Fund in
exchange solely for Class A, Class B, Class C and Class Z shares of common stock
of Total Return Fund and the assumption by Total Return Fund of Intermediate
Fund's liabilities, followed by the distribution of Total Return Fund Class A,
Class B, Class C and Class Z shares to shareholders of Intermediate Fund in
liquidation of Intermediate Fund.
2. To transact such other business as may properly come before the Meeting
or any adjournments of the Meeting.
The Board of Directors has fixed the close of business on July 2, 1999 as
the record date for the determination of the shareholders of Intermediate Fund
entitled to notice of, and to vote at, this Meeting and any adjournments.
Marguerite E. H. Morrison
SECRETARY
Dated: , 1999
PROXY CARDS FOR YOUR FUND ARE ENCLOSED ALONG WITH THE PROXY STATEMENT. PLEASE
VOTE YOUR SHARES TODAY BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD IN THE
POSTAGE PREPAID ENVELOPE PROVIDED. THE BOARD OF YOUR FUND RECOMMENDS THAT YOU
VOTE "FOR" THE PROPOSAL.
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET, 9TH FLOOR
NEWARK NEW JERSEY 07102-4077
(800) 225-1852
------------------------
PROXY STATEMENT AND PROSPECTUS
AUGUST , 1999
---------------------
This Proxy Statement and Prospectus (Proxy Statement) is being furnished to
shareholders of Prudential Intermediate Global Income Fund, Inc. (Intermediate
Fund) in connection with the solicitation of proxies by the Intermediate Fund's
Board of Directors for use at the Special Meeting of Shareholders of
Intermediate Fund and at any adjournments of the meeting (the Meeting). The
Meeting will be held on Wednesday, September 8, 1999, at 9:00 a.m. Eastern time
at 751 Broad Street, 24th Floor, Newark, New Jersey 07102.
The purpose of the Meeting is to vote on a proposed reorganization
(Reorganization) between Intermediate Fund and The Global Total Return Fund,
Inc. (Total Return Fund). Under an Agreement and Plan of Reorganization and
Liquidation (the Agreement), Intermediate Fund would transfer all of its assets
to Total Return Fund in exchange solely for Class A, Class B, Class C and Class
Z shares of common stock of Total Return Fund and the assumption by Total Return
Fund of Intermediate Fund's liabilities. The number of shares issued to
shareholders of Intermediate Fund in the proposed Reorganization will be based
upon the relative net asset values per share of the two Funds at the time of the
exchange. Intermediate Fund will distribute Class A, Class B, Class C and Class
Z shares of Total Return Fund to its shareholders in liquidation of Intermediate
Fund on September 17, 1999, or such later date as the parties may agree (the
Closing Date).
Total Return Fund is a non-diversified taxable bond fund registered as an
open-end management investment company and is organized as a Maryland
corporation. Total Return Fund's investment objective is to seek total return
made up of current income and capital appreciation. Total Return Fund seeks to
achieve its investment objective by investing at least 65% of total assets in
income-producing debt securities issued by U.S. and foreign governments,
supranational organizations, semi-governmental entities, government agencies,
authorities or instrumentalities, and short-term bank debt securities or bank
deposits The Fund maintains a dollar weighted average maturity of not more than
10 years. As of June 30, 1999, Total Return Fund's average duration was 4.2
years and its average maturity was 6.5 years. The majority of the Fund's
investments are investment grade, however, up to (15)% of the Fund's total
assets may be invested in lower rated securities, which are riskier and
considered "speculative" with respect to their capacity to pay principal and
interest.
Intermediate Fund is a non-diversified taxable bond fund registered as an
open-end management investment company and is organized as a Maryland
corporation. Intermediate Fund's investment objective is to seek to maximize
total return made up of current income and capital appreciation. Intermediate
Fund seeks to achieve its investment objective by investing at least 65% of
total assets in income-producing debt securities issued by U.S. and foreign
governments, supranational organizations, semi-governmental entities or
government agencies or any of their political subdivisions or instrumentalities.
Intermediate Fund is an "intermediate" fund, which means it has a
dollar-weighted average maturity of between 3 and 10 years. Intermediate Fund's
average duration as of June 30, 1999, was 4.2 years, while its average maturity
was 6.2 years. The majority of the Fund's investments are investment grade,
although up to 10% of the Fund's total assets may be invested in lower-rated
securities, known as junk bonds, which are riskier and considered "speculative"
with respect to their capacity to pay principal and interest.
This Proxy Statement should be retained for your future reference. It sets
forth concisely the information about the Reorganization and Total Return Fund
that a shareholder should know before
<PAGE>
voting on the proposed Reorganization. A Statement of Additional Information
dated July , 1999, which relates to this Proxy Statement, has been filed with
the Securities and Exchange Commission (Commission) and is incorporated into
this Proxy Statement by reference. This Proxy Statement is accompanied by the
Prospectus, dated March 1, 1999, which offers shares of Total Return Fund. The
Statement of Additional Information for Total Return Fund, dated March 1, 1999,
is available upon request. Attachment I to this Proxy Statement contains the
Annual Report of Total Return Fund for the year ended December 31, 1998. The
Prospectus and Statement of Additional Information for Total Return Fund have
been filed with the Commission and are incorporated into this Proxy Statement by
reference. The Prospectus and Statement of Additional Information for
Intermediate Fund, both dated March 16, 1999, as supplemented on May 27, 1999,
have been filed with the Commission and are incorporated into this Proxy
Statement by reference. Copies of the documents referred to above may be
obtained without charge by contacting Prudential Mutual Fund Services LLC at
Post Office Box 15005, New Brunswick, New Jersey 08906-5005, or by calling (800)
225-1852.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE TOTAL
RETURN FUND'S SHARES, NOR HAS THE COMMISSION DETERMINED THAT THIS PROXY
STATEMENT AND PROSPECTUS IS COMPLETE OR ACCURATE. IT IS A CRIMINAL OFFENSE TO
STATE OTHERWISE.
II
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
VOTING INFORMATION
SYNOPSIS
Investment Objectives and Policies
Expense Structures
The Proposed Reorganization
Comparative Fee Tables
Fund Operating Expenses
Examples of the Effect of Fund Expenses
Forms of Organization
Performance Comparisons of the Funds
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
Principal Investment Strategies
COMPARISON OF OTHER POLICIES OF THE FUNDS
Diversification
Borrowing
Lending
Illiquid Securities
Temporary Defensive Investments
COMPARISON OF PRINCIPAL RISK FACTORS
OPERATIONS OF TOTAL RETURN FUND FOLLOWING THE REORGANIZATION
PURCHASES, REDEMPTIONS AND EXCHANGES
Purchasing Shares
Redeeming Shares
Minimum Investment Requirements
Purchases and Redemptions of Intermediate Fund
Exchanges of Fund Shares
Dividends and Other Distributions
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
THE PROPOSED TRANSACTION
Reorganization Plan
Reasons for the Reorganization
Description of the Securities to be Issued
Federal Income Tax Considerations
Conclusion
ADDITIONAL INFORMATION ABOUT TOTAL RETURN FUND
MISCELLANEOUS
Legal Matters
Independent Accountants
Available Information
Notice to Banks, Broker-Dealers and Voting Trustees and the Their Nominees
SHAREHOLDER PROPOSALS
OTHER BUSINESS
ATTACHMENT I: Annual Report of Total Return Fund dated December 31, 1998
APPENDIX A: Agreement and Plan of Reorganization and Liquidation between Prudential
Intermediate Global Income Fund, Inc. and The Global Total Return Fund, Inc.
</TABLE>
III
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS OF
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
TO BE HELD ON SEPTEMBER 8, 1999 AT:
PRUDENTIAL PLAZA
751 BROAD STREET, 24TH FLOOR
NEWARK, NEW JERSEY 07102-4077
------------------------
PROXY STATEMENT AND PROSPECTUS
------------------------
VOTING INFORMATION
This Proxy Statement and Prospectus (Proxy Statement) is furnished in
connection with a solicitation of proxies made by, and on behalf of, the Board
of Directors of Prudential Intermediate Global Income Fund, Inc. (Intermediate
Fund) to be used at the Special Meeting of Shareholders of Intermediate Fund and
at any adjournments of the Special Meeting (the Meeting), to be held on
Wednesday, September 8, 1999 at 9:00 a.m. Eastern time at Prudential Plaza, 751
Broad Street, 24th Floor, Newark, New Jersey 07102, the principal executive
office of The Prudential Investment Corporation (PIC). PIC serves as the
investment adviser to The Global Total Return Fund, Inc. (Total Return Fund) and
the Intermediate Fund (each, a Fund, and collectively, the Funds).
The purpose of the Meeting is described in the accompanying Notice. The
solicitation is made primarily by the mailing of this Proxy Statement and the
accompanying proxy card on or about July , 1999. Supplementary solicitations
may be made by mail, telephone, telegraph, facsimile, electronic means or by
personal interview by representatives of Intermediate Fund. In addition,
Shareholder Communications Corporation, a proxy solicitation firm, may be
retained to solicit shareholders on behalf of Intermediate Fund. The expenses of
the Reorganization and the solicitation of proxies will be borne by Intermediate
Fund and Total Return Fund in proportion to their respective assets and will
include reimbursement of brokerage firms and others for expenses in forwarding
proxy solicitation materials to the shareholders of Intermediate Fund.
Even if you sign and return the enclosed proxy card, you may revoke your
proxy at any time prior to its use by written notification received by the
Intermediate Fund, by submitting a later-dated proxy card, or by attending the
Meeting and voting in person.
All proxy cards that are properly completed and received by the Secretary of
Intermediate Fund before the Meeting, and which are not revoked, will be voted
at the Meeting. Shares represented by proxies will be voted in accordance with
the instructions you provide. If no instruction is made on a proxy card, it will
be voted FOR Proposal No. 1. Only proxies that are actually voted will be
counted toward establishing a quorum, which is the minimum number of shares
necessary to transact business at the Meeting.
If a proxy that is properly signed and returned is accompanied by
instructions to withhold authority to vote (an abstention) or represents a
broker "non-vote" (that is, a proxy from a broker or nominee indicating that
they have not received instructions from the beneficial owner or other person
entitled to vote shares on this matter for which the broker or nominee does not
have discretionary power), the shares represented by the proxy will be
considered present for purposes of determining the existence of a quorum for the
transaction of business, but will have the effect of a vote against Proposal No.
1.
Intermediate Fund also may arrange to have votes recorded by telephone. The
expenses associated with telephone voting will be borne by Intermediate Fund and
Total Return Fund in proportion to their respective assets. If Intermediate Fund
takes votes by telephone, it will use procedures designed to authenticate
shareholders' identities, to allow shareholders to authorize the voting of their
shares in accordance with their instructions, and to confirm that their
instructions have been properly recorded. Proxies given by telephone may be
revoked at any time before they are voted in the same manner that proxies voted
by mail may be revoked.
<PAGE>
If a quorum is not present at the Meeting, or if a quorum is present at the
Meeting but sufficient votes to approve Proposal No. 1 are not received, or if
other matters arise requiring shareholder attention, the persons named as proxy
agents may propose one or more adjournments of the Meeting to permit the further
solicitation of proxies. An adjournment will require the affirmative vote of a
majority of shares present at the Meeting or represented by proxy. When voting
on a proposed adjournment, the persons named as proxy agents will vote FOR the
proposed adjournment all shares that they are entitled to vote with respect to
Proposal No. 1, unless directed to vote AGAINST the Proposal, in which case such
shares will be voted against the proposed adjournment. A shareholder vote may be
taken on the Reorganization described in this Proxy Statement or on any other
business properly presented at the Meeting prior to adjournment if sufficient
votes have been received.
On July 2, 1999, there were 14,047,632 Class A shares, 590,518 Class B
Shares, 50,344 Class C shares and 1,523,112 Class Z shares issued and
outstanding for Intermediate Fund. Shareholders of record at the close of
business on July 2, 1999 will be entitled to vote at the Meeting. Each such
shareholder will be entitled to one vote for each share (fractional shares may
vote fractionally) held on that date. [The following shareholders held 5% or
more of each class of shares of Intermediate Fund on July 2, 1999:]
As of July 2, 1999, the Directors and officers of both Intermediate Fund and
Total Return Fund owned, in the aggregate, less than 1% of each Fund's total
outstanding shares. Prudential intends to vote any shares for which it has
direct voting authority FOR the Proposal.
VOTE REQUIRED
APPROVAL OF THE REORGANIZATION REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF
THE OUTSTANDING SHARES OF COMMON STOCK OF INTERMEDIATE FUND.
SYNOPSIS
The following is a summary of information contained elsewhere in this Proxy
Statement, in the Agreement, and in the Prospectuses of Intermediate Fund and
Total Return Fund, which are incorporated into this Proxy Statement by this
reference. Shareholders should read the Proxy Statement and the Prospectus of
Total Return Fund for more complete information.
The Reorganization would transfer the assets and liabilities of Intermediate
Fund to Total Return Fund, a larger mutual fund also managed by Prudential
Investments Fund Management LLC (PIFM) and advised by PIC. If the Reorganization
is approved, Intermediate Fund will be liquidated and current shareholders of
Intermediate Fund will become shareholders of Total Return Fund instead.
INVESTMENT OBJECTIVES AND POLICIES
Intermediate Fund and Total Return Fund have substantially similar
investment objectives and policies. Both Funds seek total return through current
income and capital appreciation by investing at least 65% of total assets in
income-producing debt securities including securities issued by U.S. and foreign
governments, supranational organizations, government agencies or any of their
political subdivisions or instrumentalities. Total Return Fund maintains a
dollar weighted average maturity of not more than 10 years. As of June 30, 1999,
Total Return Fund's average duration was 4.2 years and its average maturity was
6.5 years.
Intermediate Fund is an "intermediate" fund, which means it has a
dollar-weighted average maturity of between 3 and 10 years. The Intermediate
Fund's average duration as of June 30, 1999, was 4.2 years, while its average
maturity was 6.2 years. The majority of both Funds' investments are investment
grade. However, up to 10% of Intermediate Fund's total assets may be invested in
lower rated securities; up to (15%) of the Total Return Fund's assets may be
invested in such securities. Both Funds have the same Manager (PIFM), the same
investment adviser, The Prudential Investment Corporation (PIC), the same
2
<PAGE>
sub-adviser, PRICOA Asset Management Ltd. (PRICOA) and the same portfolio
managers (Gabriel Irwin and Simon Wells). The address of PIFM is Gateway Center
Three, 9th Floor, Newark, New Jersey 07102-4077.
One benchmark index for both Intermediate Fund and Total Return Fund is the
Lipper Global Income Funds average (the Lipper average), an average of global
income mutual funds. PIC manages each Fund with the goal of having overall
interest rate risk similar to that of the Lipper average.
Intermediate Fund declares daily and distributes dividends, if any, every
month. Total Return Fund pays any dividends from net investment income every
quarter. Net realized capital gains for both Funds, if any, are also distributed
annually.
EXPENSE STRUCTURES
Intermediate Fund and Total Return Fund have different expense structures.
Both Funds pay a monthly management fee to PIFM. PIFM, in turn, reimburses the
investment adviser, PIC, for its reasonable costs and expenses in providing
advisory services to each Fund. PIC has entered into a service agreement with
PRICOA Asset Management Ltd. (PRICOA), a subsidiary of The Prudential Insurance
Company of America, for the provision of investment advisory services to the
Fund and compensates PRICOA for its reasonable costs and expenses in providing
such services. PRICOA, an indirect wholly-owned subsidiary of Prudential, is
located at Cutlers Court, 115 Houndsditch, London EC3A 7BR England. It was
incorporated under U.K. law in January 1997 and as of December 31, 1998 had
approximately $2.58 billion under management. Both Funds pay a management fee to
PIFM at an annual rate of 0.75% of average net assets.
The management fee paid by both Funds covers PIFM's oversight of the Funds'
respective investment portfolios. PIFM also administers each Fund's corporate
affairs and furnishes the Funds with office facilities, together with those
ordinary clerical and bookkeeping services that are not furnished by the Funds'
custodian or transfer and dividend disbursing agent. Officers and employees of
PIFM serve as officers and Directors of the Funds without compensation by the
Funds.
Prudential Investment Management Services LLC (PIMS), the Funds'
Distributor, has contractually agreed to waive a portion of the distribution and
service (12b-1) fee payable by Class A shares of both Funds to .25 of 1%, by
Class B and Class C shares of Total Return Fund to .75 of 1% of average daily
net assets for the fiscal year ending December 31, 1999, and Class C shares of
Intermediate Fund to .75 of 1% of average daily net assets for the fiscal year
ending December 31, 1999. As of December 31, 1998, the net operating expenses
for Intermediate Fund were 1.61%, 2.11%, 2.11% and 1.36% for Class A, Class B,
Class C and Class Z shares, respectively, and the net operating expenses for
Total Return Fund are 1.43%, 1.93%, 1.93% and 1.18% for Class A, Class B, Class
C and Class Z shares, respectively.
The contractual waivers by PIMS are enforceable for one-year periods and may
be terminated with respect to any subsequent fiscal year on not less than 30
days' notice prior to the end of a current fiscal year. The contractual waivers
for both Funds extend through December 31, 1999.
Overall, the proposed Reorganization would provide Intermediate Fund
shareholders with the following benefits:
- the opportunity to participate in a larger fund;
- investment in a fund with an investment objective and policies similar to
Intermediate Fund's investment objective and policies; and
- annual operating expenses that are estimated to be lower than those of
Intermediate Global Fund (aside from any Intermediate Global Fund expense
waivers, which are not expected to continue past this fiscal year.)
3
<PAGE>
THE BOARD OF DIRECTORS BELIEVES THAT THE REORGANIZATION WILL BENEFIT
INTERMEDIATE FUND SHAREHOLDERS AND RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF
THE REORGANIZATION.
THE PROPOSED REORGANIZATION
Shareholders of Intermediate Fund will be asked at the Meeting to vote upon
and approve the Reorganization and the Agreement, which provide for the
acquisition by Total Return Fund of all of the assets of Intermediate Fund in
exchange solely for Class A, Class B, Class C and Class Z shares of Total Return
Fund and the assumption by Total Return Fund of the liabilities of Intermediate
Fund. Class A, Class B, Class C and Class Z shares of Total Return Fund will be
distributed to Intermediate Fund Class A, Class B, Class C and Class Z
shareholders, so that each shareholder will receive the number of full and
fractional shares of Total Return Fund equal in value to the aggregate net asset
value of the shareholder's shares of Intermediate Fund on or about Friday,
September 17, 1999 (the Closing Date). The exchange of Intermediate Fund's
assets, subject to its liabilities, for Total Return Fund's shares will occur as
of the close of business of the New York Stock Exchange (NYSE) on the Closing
Date or such other time and date as the parties may agree. Intermediate Fund
will then be liquidated as soon as practicable after the Closing Date. Approval
of the Reorganization will be determined solely by approval of the shareholders
of Intermediate Fund. No vote by shareholders of Total Return Fund is required.
The Funds have received an opinion of counsel that the Reorganization will
not result in any gain or loss for federal income tax purposes to either
Intermediate Fund, Total Return Fund, or the shareholders of each Fund. The
rights and privileges of the former shareholders of Intermediate Fund will be
effectively unchanged by the Reorganization.
FUND OPERATING EXPENSES
Each Fund pays a management fee to PIFM for managing its investments and
business affairs which is calculated and paid to PIFM every month. Each Fund
pays PIFM a management fee at an annual rate of 0.75% of its average net assets.
In addition to the management fee, each Fund incurs other expenses for
services such as maintaining shareholder records and furnishing shareholder
statements and financial reports. For the fiscal year ended December 31, 1998,
Total Return Fund's and Intermediate Fund's annualized total operating expense
ratios for Class A shares were 1.43% and 1.61% (after waivers and
reimbursements), respectively; for Class B and Class C shares each were 1.93%
and 2.11%, respectively; and for Class Z shares each were 1.18% and 1.36%,
respectively. If shareholders approve the Reorganization, the combined fund will
retain Total Return Fund's expense structure. ASSUMING CONTINUATION OF TOTAL
RETURN FUND'S CURRENT EXPENSES, THIS EXPENSE STRUCTURE WOULD DECREASE THE TOTAL
OPERATING EXPENSES CURRENTLY INCURRED BY CLASS A SHAREHOLDERS OF INTERMEDIATE
FUND FROM 1.61% TO 1.41% OF AVERAGE NET ASSETS, FROM 2.11% TO 1.91% OF AVERAGE
NET ASSETS FOR CLASS B AND CLASS C SHAREHOLDERS AND 1.36% TO 1.16% OF AVERAGE
NET ASSETS FOR CLASS Z SHAREHOLDERS. If the proposed Reorganization is not
approved, Intermediate Fund will maintain its current fee structure. For more
information about the Funds' current fees, refer to their Prospectuses.
It is important to note that the Board of Directors of Total Return Fund
have also approved an Agreement and Plan of Reorganization and Liquidation of
Prudential Global Limited Maturity Fund, Inc. (Limited Maturity Fund) into Total
Return Fund. If that separate reorganization is approved by shareholders of
Limited Maturity Fund, the total fund operating expenses of Total Return Fund
are estimated to decrease further to 1.39% of average net assets for Class A
shares, 1.89% of average net assets for Class B and Class C shares and 1.14% for
Class Z shares.
COMPARATIVE FEE TABLES
The following table shows the fees and expenses of Class A, Class B, Class C
and Class Z shares of Intermediate Fund and Total Return Fund for the fiscal
year ended December 31, 1999, adjusted to reflect
4
<PAGE>
current fees, and pro forma fees for the combined fund based on the same time
period after giving effect to the Reorganization, including the effect of PIFM's
and PIMS' expense waivers previously described.
Fund operating expenses are paid out of each Fund's assets. Expenses are
factored into each Fund's share price or dividends and are not charged directly
to shareholder accounts. The following figures are based on historical expenses,
adjusted to reflect current fees, of each Fund for the 12-month period ending
December 31, 1999 and are calculated as a percentage of average net assets of
each Fund.
CLASS A SHARES
<TABLE>
<CAPTION>
GLOBAL TOTAL PRO FORMA
INTERMEDIATE FUND RETURN FUND CLASS COMBINED FUND
CLASS A SHARES A SHARES CLASS A SHARES
----------------- ----------------- -----------------
<S> <C> <C> <C>
Management fees.................................................. .75% .75% .75%
+ Distribution and service (12b-1) fees.......................... .30% .30% .30%
+ Other expenses................................................. .61% .43% .41%
= Total annual operating expenses................................ 1.66% 1.48% 1.46%
- - Fee waiver..................................................... (.05)% (.05)% (.05)%
= NET ANNUAL OPERATING EXPENSES.................................. 1.61% 1.43% 1.41%
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
INTERMEDIATE PRO FORMA
FUND TOTAL RETURN FUND COMBINED FUND
CLASS B SHARES CLASS B SHARES CLASS B SHARES
--------------- ----------------- -----------------
<S> <C> <C> <C>
Management fees.................................................. .75% .75% .75%
+ Distribution and service (12b-1) fees.......................... .75% 1.00% 1.00%
+ Other expenses................................................. .61% .43% .41%
= Total annual operating expenses................................ 2.36% 2.18% 2.16%
- - Fee waiver..................................................... (.25)% (.25)% (.25)%
= NET ANNUAL OPERATING EXPENSES.................................. 2.11% 1.93% 1.91%
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
PRO FORMA
INTERMEDIATE FUND TOTAL RETURN FUND COMBINED FUND
CLASS C SHARES CLASS C SHARES CLASS C SHARES
----------------- ----------------- -----------------
<S> <C> <C> <C>
Management fees.................................................. .75% .75% .75%
+ Distribution and service (12b-1) fees.......................... 1.00% 1.00% 1.00%
+ Other expenses................................................. .61% .43% .41%
= Total annual operating expenses................................ 2.36% 2.18% 2.16%
- - Fee waiver..................................................... (.25)% (.25)% (.25)%
= NET ANNUAL OPERATING EXPENSES.................................. 2.11% 1.93% 1.91%
</TABLE>
5
<PAGE>
CLASS Z SHARES
<TABLE>
<CAPTION>
INTERMEDIATE TOTAL RETURN PRO FORMA
FUND FUND COMBINED FUND
CLASS Z SHARES CLASS Z SHARES CLASS Z SHARES
--------------- --------------- -----------------
<S> <C> <C> <C>
Management fees.................................................. .75% .75% .75%
+ Distribution and service (12b-1) fees.......................... None None None
+ Other expenses................................................. .61% .43% .41%
= Total annual operating expenses................................ 1.36% 1.18% 1.16%
- - Fee waiver..................................................... None None None
= NET ANNUAL OPERATING EXPENSES.................................. 1.36% 1.18% 1.16%
</TABLE>
EXAMPLES OF THE EFFECT OF FUND EXPENSES
The following table illustrates the expenses on a hypothetical $10,000
investment in each Fund under the current and pro forma (combined fund) expenses
calculated at the rates stated above for the first year, and thereafter using
gross expenses, assuming a 5% annual return, and assuming that you sell your
shares at the end of each period.
CLASS A SHARES
<TABLE>
<CAPTION>
INTERMEDIATE TOTAL RETURN PRO FORMA
FUND FUND COMBINED FUND
CLASS A SHARES CLASS A SHARES CLASS A SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
1 Year........................ $ 459 $ 540 $ 439
3 Years....................... $ 803 $ 844 $ 743
5 Years....................... $1,171 $1,171 $1,069
10 Years...................... $2,202 $2,094 $1,990
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
INTERMEDIATE TOTAL RETURN PRO FORMA
FUND FUND COMBINED FUND
CLASS B SHARES CLASS B SHARES CLASS B SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
1 Year........................ $ 714 $ 696 $ 694
3 Years....................... $1,013 $ 958 $ 952
5 Years....................... $1,338 $1,247 $1,237
10 Years...................... $2,421 $2,233 $2,212
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
INTERMEDIATE TOTAL RETURN PRO FORMA
FUND FUND COMBINED FUND
CLASS C SHARES CLASS C SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
1 Year........................ $ 412 $ 394 $ 392
3 Years....................... $ 805 $ 752 $ 746
5 Years....................... $1,325 $1,235 $1,245
10 Years...................... $2,750 $2,569 $2,549
</TABLE>
6
<PAGE>
CLASS Z SHARES
<TABLE>
<CAPTION>
INTERMEDIATE TOTAL RETURN PRO FORMA
FUND FUND COMBINED FUND
CLASS Z SHARES CLASS Z SHARES CLASS Z SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
1 Year........................ $ 138 $ 120 $ 118
3 Years....................... $ 431 $ 375 $ 368
5 Years....................... $ 745 $ 649 $ 638
10 Years...................... $1,635 $1,432 $1,409
</TABLE>
These examples assume that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. These examples illustrate the
effect of expenses, but are not meant to suggest actual or expected expenses,
which may vary. The assumed return of 5% is not a prediction of, and does not
represent, actual or expected performance of any Fund.
FORMS OF ORGANIZATION
Intermediate Fund is a non-diversified, open-end management investment
company. It was organized as a Maryland corporation on March 15, 1988 and
commenced investment operations on May 26, 1988 as a closed-end fund. It began
operating as an open-end fund on October 7, 1991.
Total Return Fund is also a non-diversified, open-end management investment
company. It was organized as a Maryland corporation on May 6, 1986 and commenced
investment operations as a closed-end fund on July 7, 1986. Effective January
15, 1996, the Fund became an open-end investment company. Total Return Fund is
authorized to issue 2 billion shares of common stock, $.01 per share divided
into 500 million shares per class. Intermediate Fund is authorized to issue 2
billion shares of common stock, $.001 per share, divided into 500 million shares
per class.
Because the Funds are both organized as Maryland corporations under
substantially similar Articles of Incorporation, and because each Fund has
adopted substantially similar Bylaws, the rights of security holders of each
Fund under state law and the governing documents would be expected to remain
unchanged after the Reorganization.
PERFORMANCE COMPARISONS OF THE FUNDS
The following table compares each Funds' annual total returns for the one,
five and ten years ended June 30, 1999. Total returns do not include sales
charges, are based on past results and are not an indication of future
performance.
ANNUAL TOTAL RETURNS (CLASS A SHARES)
(PERIODS ENDED JUNE 30)
<TABLE>
<CAPTION>
SINCE
1 YEAR* 5 YEARS* 10 YEARS* INCEPTION*
-------- --------- ---------- ---------------
<S> <C> <C> <C> <C>
Intermediate Fund............. 1.09% 8.27% 7.35% 7.40%(5-26-88)
Total Return Fund............. 0.95% 9.13% 8.92% 9.71%(7-7-86)
</TABLE>
- ------------------------
*If the Fund's Distributor had not waived a portion of its fees during the
periods shown, total returns would have been lower.
7
<PAGE>
ANNUAL TOTAL RETURNS (CLASS B SHARES)
(PERIODS ENDED JUNE 3O)
<TABLE>
<CAPTION>
SINCE
1 YEAR* 5 YEARS* 10 YEARS* INCEPTION*
-------- -------- --------- ---------------
<S> <C> <C> <C> <C>
Intermediate Fund............. 0.57% 7.62% N/A 6.69%(1-15-92)
Total Return Fund............. 0.34% N/A N/A 5.77%(1-15-96)
</TABLE>
- ------------------------
*If the Fund's Distributor had not waived a portion of its fees during the
periods shown, total returns would have been lower.
ANNUAL TOTAL RETURNS (CLASS C SHARES)
(PERIODS ENDED JUNE 30)
<TABLE>
<CAPTION>
SINCE
1 YEAR* 5 YEARS* 10 YEARS* INCEPTION*
-------- -------- --------- --------------
<S> <C> <C> <C> <C>
Intermediate Fund............. 0.57% N/A N/A 7.68%(8-1-94)
Total Return Fund............. 0.34% N/A N/A 5.77%(1-15-96)
</TABLE>
- ------------------------
*If the Fund's Distributor had not waived a portion of its fees during the
periods shown, total returns would have been lower.
ANNUAL TOTAL RETURNS (CLASS Z SHARES)
(PERIODS ENDED JUNE 30)
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
-------- --------------
<S> <C> <C>
Intermediate Fund............. 1.30% 5.51%(9-13-96)
Total Return Fund............. 1.23% 4.85%(3-17-97)
</TABLE>
The following table compares the cumulative total returns of Intermediate
Fund and Total Return Fund for the one, five and ten years ending June 30, 1999.
Cumulative total returns are based on past results and are not an indication of
future performance.
CUMULATIVE TOTAL RETURNS (CLASS A SHARES)
(PERIODS ENDED JUNE 30)
<TABLE>
<CAPTION>
1 YEAR* 5 YEARS* 10 YEARS* SINCE INCEPTION*
-------- --------- ---------- ----------------
<S> <C> <C> <C> <C>
Intermediate Fund............. 1.09% 48.80% 103.33% 120.81%(5-26-88)
Total Return Fund............. 0.95% 54.80% 135.11% 233.08%(7-7-86)
</TABLE>
- ------------------------
*If the Fund's Distributor had not waived a portion of its fees during the
periods shown, total returns would have been lower.
8
<PAGE>
CUMULATIVE TOTAL RETURNS (CLASS B SHARES)
(PERIODS ENDED JUNE 30)
<TABLE>
<CAPTION>
1 YEAR* 5 YEARS* 10 YEARS* SINCE INCEPTION*
-------- -------- --------- ----------------
<S> <C> <C> <C> <C>
Intermediate Fund............. 0.57% 44.35% N/A 62.04%(1-15-92)
Total Return Fund............. 0.34% N/A N/A 21.38%(1-15-96)
</TABLE>
- ------------------------
*If the Fund's Distributor had not waived a portion of its fees during the
periods shown, total returns would have been lower.
CUMULATIVE TOTAL RETURNS (CLASS C SHARES)
(PERIODS ENDED JUNE 30)
<TABLE>
<CAPTION>
SINCE
1 YEAR* 5 YEARS* 10 YEARS* INCEPTION*
-------- -------- --------- --------------
<S> <C> <C> <C> <C>
Intermediate Fund............. 0.57% N/A N/A 43.81%(8-1-94)
Total Return Fund............. 0.34% N/A N/A 21.39%(1-15-96)
</TABLE>
- ------------------------
*If the Fund's Distributor had not waived a portion of its fees during the
periods shown, total returns would have been lower.
CUMULATIVE TOTAL RETURNS (CLASS Z SHARES)
(PERIODS ENDED JUNE 30)
<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION
-------- ---------------
<S> <C> <C>
Intermediate Fund............. 1.30% 16.12%(9-13-96)
Total Return Fund............. 1.23% 11.42%(3-17-97)
</TABLE>
The following graph shows the value of a hypothetical $10,000 investment in
each Fund made on , assuming all distributions are reinvested. The graph
compares the cumulative returns of the Funds through June 30, 1999.
CLASS A SHARES
<TABLE>
<CAPTION>
INTERMEDIATE FUND TOTAL RETURN FUND
----------------- -----------------
<S> <C> <C>
$10,000 $10,000
June 30, 1999................. $ $
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
INTERMEDIATE FUND TOTAL RETURN FUND
----------------- -----------------
<S> <C> <C>
$10,000 $10,000
June 30, 1999................. $ $
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
INTERMEDIATE FUND TOTAL RETURN FUND
----------------- -----------------
<S> <C> <C>
$10,000 $10,000
June 30, 1999................. $ $
</TABLE>
9
<PAGE>
CLASS Z SHARES
<TABLE>
<CAPTION>
INTERMEDIATE FUND TOTAL RETURN FUND
----------------- -----------------
<S> <C> <C>
$10,000 $10,000
June 30, 1999................. $ $
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
Intermediate Fund and Total Return Fund have substantially similar
investment objectives and policies. Intermediate Fund seeks to maximize total
return made up of current income and capital appreciation. Total Return Fund
seeks total return made up of high current income and capital appreciation. Each
Fund normally invests at least 65% of total assets in income-producing debt
securities, including securities issued by the U.S. and foreign governments,
supranational organizations, government agencies, authorities or
instrumentalities and short-term bank debt securities or bank deposits.
Intermediate Fund and Total Return Fund have the same Manager (PIFM), the same
investment adviser (PIC) the same subadviser (PRICOA)and the same portfolio
managers (Gabriel Irwin and Simon Wells).
One benchmark index for both Intermediate Fund and Total Return Fund is the
Lipper Global Income Funds average (the Lipper average), an average of global
income mutual funds. PIC manages each Fund with the goal of having overall
interest rate risk similar to that of the Lipper average.
The investment objective of each Fund is a fundamental policy. This means
that the objective can not be changed without the approval of shareholders of
the Fund. There can be no assurance that either Intermediate Fund or Total
Return Fund will achieve its objective. With the exception of fundamental
policies, investment policies (other than specified investment restrictions) of
the Funds can be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
Intermediate Fund and Total Return Fund have similar investment objectives,
stating total return as the primary goal. Typically, both Funds invest at least
65% of total assets in income-producing debt securities. However, Intermediate
Fund has the ability to invest up to 20% in corporate debt instruments, while
Total Return Fund can invest up to 35% in U.S. corporate debt. Intermediate Fund
typically limits investments in particularly currencies to 30% of the Fund's
total assets. Total Return Fund generally limits investments in particular
currencies to 40% of the Fund's total assets, except for the euro (up to 65%).
Since both Funds primarily invest in investment grade debt, they have credit
quality breakdowns that resemble each other.
Total Return Fund maintains a dollar-weighted average maturity of not more
than 10 years. As of June 30, 1999, Total Return Fund's average duration was 4.2
years and its average maturity was 6.5 years. Intermediate Fund is an
"intermediate" fund, which means it has a dollar-weighted average maturity of
between 3 and 10 years. The Fund's average duration as of June 30, 1999, was 4.2
years, while its average maturity was 6.2 years. The majority of the Funds'
investments are investment grade. However, up to 10% of the Intermediate Fund's
total assets may be invested in lower rated securities; up to (15%) of Total
Return Fund's total assets may be invested in these securities.
The investment adviser has a team of fixed-income professionals, including
credit analysts and traders, with experience in many foreign fixed-income
securities markets. In selecting portfolio securities, the investment adviser
considers country and currency selection, economic conditions and interest rate
fundamentals. The investment adviser also evaluates individual debt securities
within each fixed-income sector based upon their relative investment merit and
considers factors such as yield, duration and potential for price or currency
appreciation as well as credit quality, maturity and risk.
10
<PAGE>
COMPARISON OF OTHER POLICIES OF THE FUNDS
DIVERSIFICATION
Intermediate Fund and Total Return Fund are both non-diversified funds. This
means that the Fund may invest more than 5% of its total assets in the
securities of a single issuer.
BORROWING
Each Fund may borrow money for temporary or emergency purposes and for the
clearance of transactions from banks or through reverse repurchase agreements.
In addition, Total Return Fund may borrow money for investment purposes. Neither
Fund may borrow money in an amount exceeding 20% of its total assets.
LENDING
The Intermediate Fund may lend assets to brokers, dealers and financial
institutions up to 30% of its total assets, but this limitation does not apply
to purchases of debt securities or to repurchase agreements.
ILLIQUID SECURITIES
Each Fund may invest in illiquid securities, including those without a
readily available market and repurchase agreements with maturities longer than
seven days. Each Fund may hold up to 15% of its net assets in illiquid
securities.
TEMPORARY DEFENSIVE INVESTMENTS
Although PIC normally invests each Fund's assets according to the Fund's
investment strategy, there are times when each Fund may temporarily invest up to
100% of its assets in money market instruments in response to adverse market,
economic or political conditions.
For more information about the risks and restrictions associated with these
policies, see each Fund's Prospectus, and for a more detailed discussion of the
Funds' investments, see their Statements of Additional Information, all of which
are incorporated into this Proxy Statement by reference.
COMPARISON OF PRINCIPAL RISK FACTORS
Each Fund is subject to the risks normally associated with funds that invest
in debt obligations of foreign companies and governmental entities. As described
more fully above, each Fund has substantially similar investment objectives,
policies and permissible investments.
Because each Fund normally invests in similarly-rated debt obligations, the
Funds have substantially similar levels of risk. These risks include credit
risk, market risk and interest rate risk. In addition, effective August 23, 1999
Total Return will have the ability to invest up to 15% of its total assets in
lower-rated debt securities (as opposed to Intermediate Fund which has the
ability to invest up to 10% of total assets in such securities).
Both Funds may also use investment strategies--such as derivatives that
involve above average risks. The Funds may use these risk management techniques
to try to preserve assets or enhance return. Derivatives may not fully offset
the underlying positions and this could result in losses to the Fund that would
not otherwise have occurred. The Total Return Fund may borrow for investment
purposes, i.e. use "leverage". Leverage risk is the risk associated with
investments or trading strategies that relatively small market movements may
result in large changes in the value of an investment.
11
<PAGE>
Like any mutual fund, an investment in either Intermediate Fund or Total
Return Fund could lose value. For a more complete discussion of the risk
associated with either Fund, please refer to the "Risk/Return Summary" or the
section entitled "Investment Risks" of each Fund's Prospectus.
OPERATIONS OF TOTAL RETURN FUND
FOLLOWING THE REORGANIZATION
PIFM, PIC and PRICOA do not expect Total Return Fund to revise its
investment policies, management or general investment approach as a result of
the Reorganization. In addition, Gabriel Irwin and Simon Wells serve as
co-portfolio managers of both Intermediate Fund and Total Return Fund. The
agents that provide Total Return Fund with services, such as its Custodian and
Transfer Agent, which also provide these services to Intermediate Fund, are not
expected to change. The Directors and the officers of the Funds are the same.
All of the current investments of Intermediate Fund are permissible
investments for Total Return Fund. Nevertheless, PIC may sell securities held by
Intermediate Fund or Total Return Fund between shareholder approval and the
Closing Date of the Reorganization as may be necessary or desirable in the
ongoing management of each Fund and the adjustment of each Fund's portfolio in
anticipation of the Reorganization. Transaction costs associated with such
adjustments will be borne by the Fund that incurred them. Transaction costs
associated with such adjustments that occur after the Closing Date will be borne
by Total Return Fund.
PURCHASES, REDEMPTIONS AND EXCHANGES
PURCHASING SHARES
The price to buy one share of each Fund is each Fund's net asset value, or
NAV, plus, in the case of Class A and Class C shares, a front-end sales charge.
Each Fund offers Class A, Class B, Class C and Class Z shares. Intermediate Fund
charges a lower front-end sales charge on Class A shares (3% of the Class A
shares' offering price) than is charged by Total Return Fund (4% of the Class A
shares' offering price).
The contingent deferred sales charges (CDSC) imposed by Class B shares of
Intermediate Fund is 3% over five years, lower than the 5% CDSC on Total Return
Fund's Class B shares over seven years. Each CDSC declines by 1% every year. If
you are a Class B shareholder of the Intermediate Fund, the Manager will "add"
two years to the number of years you have held your Class B shares of
Intermediate Fund so that you are not subject to a longer CDSC period that you
would otherwise be. However, if you purchase additional Total Return Fund Class
B shares after the Reorganization, those shares will be subject to the higher
CDSC and longer conversion period.
The sales charges imposed on Class C shares of Total Return Fund are
identical to those charged by Intermediate Fund. Class C shares are sold with a
1% front-end load and a 1% CDSC for shares redeemed within 18 months of
purchase.
Both Funds also offer Class Z shares, which are sold without either a
front-end load or a CDSC and are available only to a limited group of investors.
You will receive the same class of shares in Total Return Fund that you own in
Intermediate Fund, except that you may exchange your shares for Class Z shares
if you qualify for Class Z shares.
The Class A shares you receive in the Reorganization are not subject to a
front-end sales charge. The Class B or Class C shares you receive in the
Reorganization will be subject to the identical CDSC as is applicable to your
Intermediate Fund investment (except that as noted above, the holding period for
your Class B shares will be increased by two years). In other words, the
contingent deferred sales charge will be calculated from the first day of the
month after your purchase of shares of Intermediate Fund, exclusive of any time
during which you may have been invested in a money market fund.
12
<PAGE>
Shares in both Funds are purchased at the next NAV calculated after your
investment is received and accepted. Each Fund's NAV is normally calculated each
business day at 4:15 p.m., New York Time. Refer to each Fund's Prospectus for
more information regarding how to buy shares.
REDEEMING SHARES
The redemption policies for each Fund are identical (except for the
different Class B deferred sales charge mentioned above). Your shares will be
sold at the next NAV, less any applicable CDSC imposed on Class B and Class C
shares, calculated after your order is received and accepted. Refer to each
Fund's Prospectus for more information regarding how to sell shares.
MINIMUM INVESTMENT REQUIREMENTS
For both Funds, the minimum initial investment amount is $1,000 for Class A
and Class B shares and $2,500 for Class C shares. The minimum additional
investment amount is $100. There is no minimum investment for Class Z shares.
PURCHASES AND REDEMPTIONS OF INTERMEDIATE FUND
On May 27, 1999, Intermediate Fund stopped accepting orders to purchase or
exchange into its shares of any class, except for purchases by certain automatic
investment, retirement and employee plans (excluding IRA accounts). Intermediate
Fund shareholders may continue to acquire shares through dividend reinvestment.
Shareholders of Intermediate Fund may redeem shares of Intermediate Fund
through the Closing Date of the Reorganization. If the Reorganization is
approved, the purchase and redemption policies of the combined fund will be the
same as the current policies of Total Return Fund.
EXCHANGES OF FUND SHARES
The exchange privilege currently offered by each Fund is the same and is not
expected to change after the Reorganization. Shareholders of the Funds may
exchange their shares for shares of the same class of any other Prudential
Mutual Fund. If you hold Class B or Class C shares and wish to exchange into a
money market fund, you must exchange into Prudential Special Money Market Fund,
Inc. During the time you are invested in Prudential Special Money Market Fund,
Inc., the period of time during which your contingent deferred sales charge is
calculated is frozen. Refer to each Fund's Prospectus for restrictions governing
exchanges.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund distributes substantially all of its net investment income and
capital gains to shareholders each year. Intermediate Fund declares daily and
distributes dividends, if any, every month. Total Return Fund pays any dividends
from net investment income every quarter. Net realized capital gains for both
Funds, if any, are also distributed annually. On or before the Closing Date,
Intermediate Fund may declare additional dividends or other distributions in
order to distribute substantially all of its investment company taxable income
and net realized capital gains.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
Each Fund will receive an opinion of outside counsel that the Reorganization
will constitute a tax-free reorganization within the meaning of Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the Code).
Accordingly, no gain or loss will be recognized to the Funds or their
shareholders as a result of the Reorganization. Please see the section entitled
"The Proposed Transaction--Federal Income Tax Considerations" for more
information.
13
<PAGE>
During the period between shareholder approval and the Closing Date, PRICOA
may sell certain securities to make portfolio adjustments to Intermediate Fund
and Total Return Fund in connection with the Reorganization. Selling these
securities may result in realization of capital gains, which, when distributed,
would be taxable to the selling fund's shareholders.
As of December 31, 1998, Intermediate Fund had capital loss carryforwards
for federal income tax purposes of approximately $46,655,300. As of December 31,
1998, Total Return Fund had capital loss carryforwards for federal income tax
purposes of approximately $ . Under current federal tax law, Total Return
Fund may be limited to using only a portion, if any, of its capital loss
carryforwards or the capital loss carryforwards transferred by Intermediate Fund
at the time of the Reorganization. There is no assurance that Total Return Fund
will be able to realize sufficient capital gains to use the capital loss
carryforwards before they expire. The capital loss carryforwards attributable to
Intermediate Fund will expire as follows: $14,010,600 expires in 1999,
$14,010,600 expires in 2000 and $18,634,100 expires in 2002. The capital loss
carryforwards attributable to Total Return Fund will expire between ,
and , .
THE PROPOSED TRANSACTION
REORGANIZATION PLAN
The Agreement and Plan of Reorganization describes the terms and conditions
under which the proposed transaction may be completed. Significant provisions of
the Agreement are summarized below; however, this summary is qualified in its
entirety by reference to the Agreement, a copy of which is attached as Appendix
A to this Proxy Statement.
The Agreement contemplates (a) Total Return Fund acquiring as of the Closing
Date all of the assets of Intermediate Fund in exchange solely for shares of
Total Return Fund and the assumption by Total Return Fund of Intermediate Fund's
liabilities; and (b) the distribution of shares of Total Return Fund to the
shareholders of Intermediate Fund as provided for in the Agreement.
The assets of Intermediate Fund to be acquired by Total Return Fund include
all cash, cash equivalents, securities, receivables (including interest or
dividends receivable), claims and other property owned by Intermediate Fund, and
any deferred or prepaid expenses shown as an asset on the books of Intermediate
Fund on the Closing Date. Total Return Fund will assume from Intermediate Fund
all liabilities, debts and obligations of Intermediate Fund of whatever kind or
nature, whether absolute, accrued, contingent or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable on the
Closing Date and whether or not specifically referred to in the Agreement;
provided, however, that Intermediate Fund will use its best efforts, to the
extent practicable, to discharge all of its known liabilities prior to the
Closing Date, other than liabilities incurred in the ordinary course of
business.
Total Return Fund will deliver to Intermediate Fund the number of full and
fractional shares of Total Return Fund having an aggregate net asset value equal
to the value of the assets of Intermediate Fund less the liabilities of
Intermediate Fund as of the Closing Date. Intermediate Fund will then distribute
the Total Return Fund shares PRO RATA to its shareholders, Class A shares for
Class A shares, Class B shares for Class B share, Class C shares for Class C
shares and Class Z shares for Class Z shares.
The value of Intermediate Fund's assets to be acquired by Total Return Fund
and the amount of its liabilities to be assumed by Total Return Fund will be
determined as of the close of business on the Closing Date, using the valuation
procedures set forth in Intermediate Fund's Prospectus and Statement of
Additional Information. The net asset value of a share of Total Return Fund will
be determined as of the same time using the valuation procedures set forth in
its Prospectus and Statement of Additional Information.
As of the Closing Date, Intermediate Fund will distribute to its
shareholders of record the shares of Total Return Fund it receives, so that each
Intermediate Fund shareholder will receive the number of full
14
<PAGE>
and fractional shares of Total Return Fund equal in value to the aggregate net
asset value of shares of Intermediate Fund held by such shareholder on the
Closing Date. Intermediate Fund will then be liquidated as soon as practicable.
The distribution of shares of Total Return Fund will be accomplished by opening
accounts on the books of Total Return Fund in the names of the Intermediate Fund
shareholders and by transferring to such accounts shares of Total Return Fund.
Each Intermediate Fund shareholder's account will be credited with the
respective PRO RATA number of full and fractional shares of Total Return Fund
due that shareholder. If requested, Total Return Fund will issue certificates
representing its shares only upon surrender of shares of Intermediate Fund.
Immediately after the Reorganization, each former Intermediate Fund
shareholder will own shares of Total Return Fund equal to the aggregate net
asset value of that shareholder's shares of Intermediate Fund immediately prior
to the Reorganization. The net asset value per share of Total Return Fund will
not be affected by the transaction. Thus, the Reorganization will not result in
a dilution of any shareholder interest.
Any transfer taxes payable upon issuance of shares of Total Return Fund in a
name other than that of the registered holder of the shares on the books of
Intermediate Fund as of that time will be payable by the person to whom such
shares are to be issued as a condition of such transfer. Any reporting
responsibility of Intermediate Fund is and will continue to be its
responsibility up to and including the Closing Date and such later date on which
Intermediate Fund is liquidated.
The completion of the Reorganization is subject to a number of conditions
set forth in the Agreement, some of which may be waived by a Fund. In addition,
the Agreement may be amended in any mutually agreeable manner, except that no
amendment that may have a materially adverse effect on the shareholders'
interests may be made subsequent to the Meeting.
REASONS FOR THE REORGANIZATION
The Board of Directors (the Board) of the Funds have each determined that
the Reorganization is in the best interests of the shareholders of both Funds
and that the Reorganization will not result in a dilution of the interests of
shareholders of either Fund.
In considering the Reorganization, the Boards each considered a number of
factors, including the following:
- the compatibility of the Funds' investment objectives and policies;
- the historical performance of the Funds;
- the relative expense ratios of the Funds;
- the tax consequences of the Reorganization;
- the relative size of the Funds; and
- the benefits to PIFM, PIC and to the shareholders of the Funds.
PIFM and PIC recommended the Reorganization to the Board of Directors at the
meeting of the Board held on May 26, 1999. In recommending the Reorganization,
PIFM and PIC advised the Board that the Funds have similar investment
objectives, policies and investment portfolios. PIFM and PIC informed the Board
that the Funds differed primarily with respect to the Funds' expense structures.
The Board considered that, if the Reorganization is approved, shareholders
of Intermediate Fund would likely incur lower total combined fund operating
expenses. This expense reduction would lower the total operating expenses from
1.61% to 1.41% of average daily net assets for Class A shares, from 2.11% to
1.91% of average daily net assets for Class B shares, from 2.11% to 1.91% of
average daily net assets for Class C shares, and 1.36% to 1.16% of average daily
net assets for Class Z shares, assuming current expense limitations.
15
<PAGE>
DESCRIPTION OF THE SECURITIES TO BE ISSUED
Total Return Fund was incorporated in Maryland on May 6, 1986. It is
registered with the Commission as an open-end management investment company.
Total Return Fund is authorized to issue 2 billion of shares of common stock,
$.01 par value per share, divided equally into four classes of shares,
designated as Class A, Class B, Class C and Class Z common stock. Each class of
common stock represents an interest in the same assets of Total Return Fund and
is identical in all respects except that:
- each class is subject to different sales charges and distribution and/or
service 12b-1) fees, except for Class Z shares, which are not subject to
any sales charges or distribution and/or service fees;
- 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;
- each class has a different exchange privilege;
- only Class B shares have a conversion feature whereby Class B shares held
for at least 6 years will automatically convert to Class A shares, on a
quarterly basis, approximately seven years after purchase; and
- Class Z shares are offered exclusively for sale to a limited group of
investors.
Shares of Total Return Fund, when issued, are fully paid, nonassessable,
fully transferable and redeemable at the option of the shareholder. Except for
the conversion feature applicable to Class B shares, there are no conversion,
preemptive or other subscription rights. The voting and dividend rights, the
right of redemption and the privilege of exchange are described in the Total
Return Fund's Prospectus.
Total Return Fund does not hold annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing Directors
unless less than a majority of the Directors holding office have been elected by
shareholders, at which time the Directors then in office will call a shareholder
meeting for the election of Directors. Under the Investment Company Act of 1940
(the 1940 Act), shareholders of record of at least two-thirds of the outstanding
shares of an investment company may remove a Director by votes cast in person or
by proxy at a meeting called for that purpose. The Directors are required to
call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director, or to transact any other business, when requested in
writing to do so by the shareholders of record holding at least 10% of the Total
Return Fund's outstanding shares.
FEDERAL INCOME TAX CONSIDERATIONS
The exchange of Intermediate Fund's assets for Total Return Fund's shares
and the assumption of the liabilities of Intermediate Fund by Total Return Fund
is intended to qualify for federal income tax purposes as a tax-free
reorganization under the Internal Revenue Code. With respect to the
Reorganization, the Funds will receive an opinion from Gardner, Carton & Douglas
counsel to Total Return Fund, based upon representations made by both
Intermediate Fund and Total Return Fund, substantially to the effect that:
(1) The acquisition by Total Return Fund of all of the assets of
Intermediate Fund solely in exchange for Total Return Fund shares and the
assumption by Total Return Fund of Intermediate Fund's liabilities,
followed by the distribution by Intermediate Fund of Total Return Fund
shares to the shareholders of Intermediate Fund pursuant to the
liquidation of Intermediate Fund, will constitute a reorganization within
the meaning of section 368(a)(1)(C) of the Code, and Intermediate Fund
and Total Return Fund will each be "a party to a reorganization" within
the meaning of section 368(b) of the Code;
16
<PAGE>
(2) No gain or loss will be recognized by Intermediate Fund upon the
transfer of all of its assets to Total Return Fund in exchange solely for
Total Return Fund shares and Total Return Fund's assumption of
Intermediate Fund's liabilities, followed by Intermediate Fund's
subsequent distribution of those shares to shareholders in liquidation of
Intermediate Fund;
(3) No gain or loss will be recognized by Total Return Fund upon the receipt
of the assets of Intermediate Fund in exchange solely for Total Return
Fund shares and its assumption of Intermediate Fund's liabilities;
(4) The shareholders of Intermediate Fund will recognize no gain or loss
upon the exchange of their Intermediate Fund shares solely for Total
Return Fund shares;
(5) The basis of Intermediate Fund's assets in the hands of Total Return
Fund will be the same as the basis of those assets in the hands of
Intermediate Fund immediately prior to the Reorganization, and the
holding period of those assets in the hands of Total Return Fund will
include the holding period of those assets in the hands of Intermediate
Fund;
(6) The basis of Intermediate Fund shareholders in Total Return Fund shares
will be the same as their basis in Intermediate Fund shares to be
surrendered in exchange for Total Return Fund shares; and
(7) The holding period of the Total Return Fund shares to be received by the
Intermediate Fund shareholders will include the period during which the
Intermediate Fund shares to be surrendered in exchange for Total Return
Fund shares were held, provided such Intermediate Fund shares were held
as capital assets by those shareholders on the date of the
Reorganization.
Shareholders of Intermediate Fund should consult their tax advisers
regarding the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Because the foregoing discussion relates only to the
federal income tax consequences of the Reorganization, shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
CONCLUSION
The Agreement and Plan of Reorganization was approved by the Board of
Directors of Intermediate Fund and Total Return Fund at the Board meeting held
on May 26, 1999. The Board of Directors of both Funds determined that the
proposed Reorganization is in the best interests of shareholders of each Fund
and that the interests of existing shareholders of Intermediate Fund and Total
Return Fund would not be diluted as a result of the Reorganization. If the
Reorganization is not completed, Intermediate Fund will continue to engage in
business as a registered investment company and the Board of Directors of
Intermediate Fund will consider other proposals for the Fund, including
proposals for the reorganization or liquidation of the Fund.
ADDITIONAL INFORMATION ABOUT TOTAL RETURN FUND
Total Return Fund's Prospectus dated March 1, 1999, is enclosed with this
Proxy Statement and is incorporated into this Proxy Statement by reference. The
Prospectus contains additional information about Total Return Fund, including
its investment objective and policies, Manager, investment adviser, subadviser,
advisory fees and expenses, organization and procedures for purchasing and
redeeming shares. The Prospectus also contains Total Return Fund's financial
highlights for the fiscal period ended December 31, 1998. The audited financial
statements of Total Return Fund are included in the Fund's Annual Report, which
is attached as Attachment I to this Proxy Statement.
17
<PAGE>
MISCELLANEOUS
LEGAL MATTERS
Certain legal matters in connection with the issuance of Total Return Fund
shares have been passed upon by Piper & Marbury LLP, Maryland counsel to Total
Return Fund. Certain legal and tax matters in connection with the reorganization
have been passed upon by Gardner Carton & Douglas, counsel to Total Return Fund
and Intermediate Fund.
INDEPENDENT ACCOUNTANTS
The audited financial statements of Intermediate Fund and Total Return Fund,
incorporated by reference into the Statement of Additional Information, have
been examined by PricewaterhouseCoopers LLP, independent accountants, whose
reports thereon are included in the Annual Report to Shareholders for the each
Fund's fiscal year December 31, 1998, respectively. The financial statements
audited by PricewaterhouseCoopers LLP have been incorporated by reference in
reliance on their reports given on their authority as experts in auditing and
accounting.
AVAILABLE INFORMATION
Intermediate Fund and Total Return Fund are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance with these laws, they each file reports, proxy material
and other information with the Commission. Such reports, proxy material and
other information can be inspected and copied at the Public Reference Room
maintained by the Commission at 450 Fifth Street, N.W., Washington D.C. 20549
and 7 World Trade Center, New York, NY 10048. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington D.C. 20549,
at prescribed rates.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise Total Return Fund, in care of Prudential Investment Management
Services LLC, Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New
Jersey 07102-4077, whether other persons are beneficial owners of shares for
which proxies are being solicited and, if so, the number of copies of the Proxy
Statement you wish to receive in order to supply copies to the beneficial owners
of the shares.
SHAREHOLDER PROPOSALS
Any shareholder of Intermediate Fund who wishes to submit a proposal to be
considered by the Fund's shareholders at the next meeting of shareholders should
send the proposal to Intermediate Fund at Gateway Center Three, 100 Mulberry
Street, 9th Floor, Newark, New Jersey 07102-4077, so as to be received within a
reasonable time before the Board of Directors of Intermediate Fund makes the
solicitation relating to such meeting. Shareholder proposals that are submitted
in a timely manner will not necessarily be included in the Intermediate Fund's
proxy materials. Including shareholder proposals in proxy materials is subject
to limitations under federal securities laws.
The Intermediate Fund's By-Laws provide that the Fund will not be required
to hold annual meetings of shareholders if the election of Directors is not
required under the 1940 Act. It is the present intention of the Board of
Directors not to hold annual meetings of shareholders unless required to do so
by the 1940 Act.
18
<PAGE>
OTHER BUSINESS
Management of Intermediate Fund knows of no business to be presented at the
Meeting other than the Proposal described in this Proxy Statement. However, if
any other matter requiring a shareholder vote should arise, the proxies will
vote according to their best judgment in the interest of Intermediate Fund.
By order of the Board of Directors,
MARGUERITE E. H. MORRISON
SECRETARY
August , 1999
IT IS IMPORTANT THAT YOU EXECUTE AND RETURN YOUR PROXY PROMPTLY.
19
<PAGE>
ATTACHMENT I
ANNUAL REPORT OF
THE GLOBAL TOTAL RETURN FUND, INC.
DATED DECEMBER 31, 1998
<PAGE>
(ICON)
The Global
Total Return
Fund, Inc.
ANNUAL
REPORT
Dec. 31, 1998
(LOGO)
<PAGE>
The Global Total Return Fund, Inc.
Performance At A Glance.
A financial crisis that simmered in Asia early in 1998 finally spread to
Russia and Latin America in the second half of the year. Investors responded
by fleeing to the government securities of major developed Western economies
and by selling assets that carried greater credit risk. The Global Total
Return Fund provided higher returns than the average comparable fund, as
measured by Lipper Analytical Services, primarily because we invested heavily
in long-term German government bonds, U.S. Treasuries, and other "safe haven"
debt securities that rallied sharply.
<TABLE>
<CAPTION>
Cumulative Total Returns1 As of 12/31/98
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 8.92% 50.69% 147.21% 244.44%
Class B 8.13 N/A N/A 25.91
Class C 8.13 N/A N/A 25.92
Class Z 9.07 N/A N/A 15.13
Lipper Global
Income Fund Avg.3 6.23 31.79 108.57 ***
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1 As of 12/31/98
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 4.56% 7.67% 9.03% 10.05%
Class B 3.13 N/A N/A 7.22
Class C 6.05 N/A N/A 7.73
Class Z 9.07 N/A N/A 8.19
</TABLE>
<TABLE>
Distributions & Yields As of 12/31/98
<CAPTION>
Total Distributions 30-Day
Paid for 12 Mos. SEC Yield
<S> <C> <C>
Class A $0.53 4.75%
Class B $0.48 4.34
Class C $0.48 4.31
Class Z $0.54 5.11
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Past performance numbers, with
the exception of one-year returns, do not fully reflect the higher operating
expenses incurred since the Fund commenced operations as an open-end mutual
fund on January 15, 1996. If these expenses had been applied since the Fund's
inception, past performance returns would have been lower. Prior to January
15, 1996, the Fund operated as a closed-end fund, with shares being traded on
the New York Stock Exchange.
1 Source: Prudential Investments Fund Management and Lipper, Inc. The
cumulative total returns do not take into account sales charges. The average
annual total returns do take into account applicable sales charges. The Fund
charges a maximum front-end sales load of 4% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically
convert to Class A shares, on a quarterly basis, approximately seven years
after purchase. Class C shares are subject to a front-end sales load of 1%
and a CDSC of 1% for 18 months. Class C shares bought before November 2, 1998
have a 1% CDSC if sold within one year. Class Z shares are not subject to a
sales charge or distribution fee.
2 Inception dates: Class A, 7/7/86; Class B and Class C, 1/15/96; and Class Z,
3/17/97.
3 Lipper average returns are for all funds in each share class for the one-,
five-, and ten-year periods in the Global Income Fund category.
***Lipper Since Inception returns are 190.10% for Class A; 18.66% for Class B
and Class C; and 12.10% for Class Z based on all funds in each share class.
How Investments Compared.
(As of 12/31/98)
(Graph)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
Source: Lipper, Inc. Financial markets change, so a mutual fund's past
performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month
total returns for several Lipper mutual fund categories to show you that
reaching for higher yields means tolerating more risk. The greater the risk,
the larger the potential reward or loss. In addition, we've included
historical 20-year average annual returns. These returns assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help
smooth out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments,
state agencies and/or municipalities. This investment provides income that is
usually exempt from federal and state income taxes.
U.S. Taxable Money Funds attempt to preserve a constant share value; they
don't fluctuate much in price but, historically, their returns have been
generally among the lowest of the major investment categories.
<PAGE>
Gabriel Irwin and Simon Wells, Fund Managers
(PHOTOS)
Portfolio
Managers'Report
Your Fund seeks total return, which is current income plus any capital
appreciation of its underlying bonds. The Fund invests primarily in
intermediate-term investment-grade debt securities issued around the world.
The Fund may also invest up to 10% of total assets in bonds rated below
investment grade with a minimum rating of "B" by Standard & Poor's or Moody's
or of comparable quality. Lower-rated securities carry a greater risk of loss
of principal and interest than higher-rated securities. There are special
risks associated with foreign investing, including social, political and
currency risks as well as potential illiquidity. There can be no assurance
that the Fund's investment objective will be achieved.
New Year Brings New Currency.
The new single European currency, the euro, debuted on January 1, 1999. The
individual currencies of the 11 member nations will continue to exist at
fixed exchange rates until euro bills and coins are introduced into
circulation in 2002.
Strategy Session.
Thriving Despite Global Turmoil.
Global economic growth was bound to slow, and commodity prices were set to
decline in 1998 as struggling Asian nations imported fewer goods and services
from abroad. In this deflationary environment, we expected interest rates to
fall and bond prices to rise. Therefore, we positioned the Fund to take
advantage of this anticipated rally by extending its duration, which is a
measure of sensitivity to interest rate fluctuations. A longer duration
enables Fund shares to gain more rapidly when interest rates decline.
The Fund's duration lengthened to 6.1 years as of December 31, 1998 from 5.1
years at the end of 1997. We accomplished this through buying European debt
securities such as German bonds, which comprised 20.4% of the Fund's total
investments as of December 31, 1998, up from 13.3% a year earlier. Most of
these purchases took place in the summer both before and while the spreading
global financial crisis spurred increased demand for German government
securities.
While we added to certain European bond holdings, we reduced others. U.K.
government bonds and currency fell to 4.5% of the Fund's total investments
as of December 31, 1998 from 8.6% at the end of 1997. We took profits because
we anticipated the decline in sterling that occurred as the economy weakened
and the Bank of England cut its benchmark interest rate to stimulate growth.
Exposure to both Norwegian bonds and currency was eliminated early on amid
concern that declining crude prices would hurt the nation's oil-based economy.
We also began to cut the Fund's emerging market exposure before the deepening
global financial turmoil battered the bonds of most developing countries. By
the end of the year, our exposure to below-investment-grade emerging market
debt fell to 2.0% from 5.9%.
<PAGE>
What Went Well.
The Flight to Quality.
In August, the Russian government devalued the ruble and defaulted on some
ruble-denominated debt. Latin America also fell prey to the financial
contagion. Investors took refuge in U.S. Treasuries and the government
securities of major Western European nations and dumped riskier assets. A
lack of liquidity was the greatest concern in the bond markets. There was
little trading, except in the most popular securities such as Treasuries and
German government bonds, which rallied to record levels in early October.
This trend benefited the Fund as it was heavily invested in both.
In order to calm financial markets and restore confidence in the U.S. economy,
the Federal Reserve cut the Federal funds rate (the rate banks charge each
other for overnight loans) by a quarter percentage point on September 29,
October 15, and November 17, leaving the key rate at 4.75%. Some other
central banks also eased monetary policy, and the flight to quality began to
reverse.
Bonds of Greece, Hungary and Poland rallied nicely in 1998 as the three
countries are expected to become part of the European Union and adopt the
euro currency early in the next century. Our exposure to these government
securities rose to 6.2% by the end of 1998 from 1.9% a year earlier.
And Not So Well.
Lack of Japanese Yen Exposure.
The Fund's lack of exposure to the Japanese yen hurt its performance in the
fourth quarter.
The Japanese yen gained more than 17% against the U.S. dollar in the final
three months of 1998. Hedge fund managers began purchasing yen to repay
low-cost yen loans that were used partly to finance investments in higher-
yielding U.S. dollar assets. Renewed hope that Japan would heal its ailing
banking system and revitalize its economy also helped boost the nation's
currency.
Looking Ahead.
The Fund began 1999 with a 27.4% exposure to the euro that will probably
decrease by a slight amount in coming months. Because of slowing economic
growth in Europe, there is political pressure in the short term to allow the
euro to soften versus the U.S. dollar. This would enhance the competitiveness
of European exports, which would strengthen the economy there. On a longer-
term basis, Euroland (the 11 founding members of the new currency) boasts a
large current account surplus that could help support the value of the euro.
Five Largest Issuers.
22.6% U.S.Treasury Obligations
17.8% German Government Bonds
6.0% Danish Government Bonds
5.4% New South Wales
Treasury Corporation
4.3% United Kingdom
Treasury Strip
Expressed as a percentage of net assets as of 12/31/98.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 12/31/98.
(PIE CHART)
- -------------------------------------------------------------------------------
1
<PAGE>
Comparing A $10,000 Investment.
The Global Total Return Fund, Inc. vs. the
J.P. Morgan Government Bond Index Global (GBI).
// The Global Total Return Fund, Inc.
- -- J.P. Morgan Gov't Bond Index Global (GBI)
(Class A)
Average Annual
Total Returns - Class A
With Sales Load
10.05% Since Inception
9.03% for 10 Years
7.67% for 5 Years
4.56% for 1 Year
Without Sales Load
10.41% Since Inception
9.48% for 10 Years
8.55% for 5 Years
8.92% for 1 Year
(Class B)
Average Annual
Total Returns - Class B
With Sales Load
7.22% Since Inception
3.13% for 1 Year
Without Sales Load
8.10% Since Inception
8.13% for 1 Year
(Class C)
Average Annual
Total Returns - Class C
With Sales Load
7.73% Since Inception
6.05% for 1 Year
Without Sales Load
8.10% Since Inception
8.13% for 1 Year
(Class Z)
Average Annual
Total Returns - Class Z
8.19% Since Inception
9.07% for 1 Year
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in The Global Total Return Fund, Inc. (Class A,
B, C, and Z shares) with a similar investment in the J.P. Morgan Government
Bond Index Global (GBI) (the Index) by portraying the initial account values
at the commencement of operations of Class B, C, and Z shares, and for 10
years for Class A shares, and subsequent account values at the end of each
fiscal year (December 31), as measured on a quarterly basis, beginning in
1988 for Class A shares, 1996 for Class B and Class C shares, and 1997 for
Class Z shares. For purposes of the graphs, and unless otherwise indicated
in the accompanying tables, it has been assumed that (a) the maximum
applicable front-end sales load was deducted from the initial $10,000
investment in Class A shares; (b) the maximum applicable contingent deferred
sales charges were deducted from the value of the investment in Class B and
Class C shares, assuming full redemption on December 31, 1998; (c) Class C
shares are subject to a front-end sales load of 1% and a CDSC of 1% for 18
months. Class C shares bought before November 2, 1998 have a 1% CDSC if sold
within one year; (d) all recurring fees (including management fees) were
deducted; and (e) all dividends and distributions were reinvested. Class B
shares will automatically convert to Class A shares, on a quarterly basis,
approximately seven years after purchase. This conversion feature is not
reflected in the graphs. Class Z shares are not subject to a sales charge
or distribution fee.
The Index is traded, unhedged, and measured in U.S. dollars. The Index is
market weighted and represents the total return of government bonds from 13
countries, including Australia, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, the Netherlands, Spain, Sweden, the United Kingdom and the
United States. The Index provides a broad measure of market performance.
The Index is unmanaged and includes the reinvestment of all dividends, but
does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund. The Index is not the only
index that may be used to characterize performance of global bond funds,
and other indexes may portray different comparative performance. Investors
cannot invest directly in an index.
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the day of , 1999, by and between Prudential Intermediate Global
Income Fund, Inc. (Intermediate Fund) and The Global Total Return Fund, Inc.
(Total Return Fund) (collectively, the Funds and each individually, a Fund).
Intermediate Fund and Total Return Fund are both corporations organized under
the laws of the State of Maryland. Each Fund maintains its principal place of
business at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. Shares of both Funds are divided into four classes, designated Class
A, Class B, Class C and Class Z.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). Upon receipt of such representations
from each of the Funds as Gardner, Carton & Douglas may require, Gardner, Carton
& Douglas will deliver the opinion referenced in paragraph 8.6 herein. The
reorganization will comprise the transfer of all of the assets of Intermediate
Fund, in exchange solely for shares of common stock of Total Return Fund, and
Total Return Fund's assumption of Intermediate Fund's liabilities, if any, and
the constructive distribution, after the Closing Date hereinafter referred to,
of such shares of Total Return Fund to the shareholders of Intermediate Fund, in
liquidation of Intermediate Fund as provided herein, all upon the terms and
conditions as hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF INTERMEDIATE FUND IN EXCHANGE FOR SHARES OF TOTAL
RETURN FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND LIQUIDATION OF
INTERMEDIATE FUND.
1.1 Subject to the terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, Intermediate
Fund agrees to sell, assign, transfer and deliver its assets, as set forth
in paragraph 1.2, to Total Return Fund, and Total Return Fund, agrees (a) to
issue and deliver to Intermediate Fund in exchange therefor the number of
shares in Total Return Fund determined by dividing the net asset value of
Intermediate Fund allocable to Class A, Class B, Class C and Class Z shares
of common stock (computed in the manner and as of the time and date set
forth in paragraph 2.1) by the net asset value allocable to a Class A, Class
B, Class C and Class Z share of Total Return Fund (rounded to the third
decimal place) (computed in the manner and as of the time and date set forth
in paragraph 2.2); and (b) to assume all of Intermediate Fund's liabilities,
if any, as set forth in paragraph 1.3. Such transactions shall take place at
the closing provided for in paragraph 3 (Closing).
1.2 The assets of Intermediate Fund to be acquired by Total Return Fund
shall include without limitation all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property
of any kind owned by Intermediate Fund and any deferred or prepaid expenses
shown as assets on the books of Intermediate Fund on the closing date
provided in paragraph 3 (Closing Date). Total Return Fund has no plan or
intent to sell or otherwise dispose of any assets of Intermediate Fund,
other than in the ordinary course of business.
1.3 Except as otherwise provided herein, Total Return Fund will assume
from Intermediate Fund all debts, liabilities, obligations and duties of
Intermediate Fund of whatever kind or nature, whether absolute, accrued,
contingent or otherwise, whether or not arising in the ordinary course of
business, whether or not determinable as of the Closing Date and whether or
not specifically referred to in this Agreement; provided, however, that
Intermediate Fund agrees to utilize its best efforts to discharge all of its
known debts, liabilities, obligations and duties prior to the Closing Date.
1.4 On or immediately prior to the Closing Date, Intermediate Fund will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially
A-1
<PAGE>
all (and in any event not less than ninety-eight percent) of its investment
company taxable income (computed without regard to any deduction for
dividends paid), and realized net capital gains, if any, for all taxable
years through the Closing Date so as to retain its qualification as a
regulated investment company pursuant to Section 851 of the Internal Revenue
Code.
1.5 On a date (Liquidation Date) as soon after the Closing Date as is
conveniently practicable but in any event within 30 days of the Closing
Date, Intermediate Fund will distribute PRO RATA to its Class A, Class B,
Class C and Class Z shareholders of record, determined as of the close of
business on the Closing Date, the Class A, Class B, Class C and Class Z
shares of Total Return Fund received by Intermediate Fund pursuant to
paragraph 1.1 in exchange for their interest in Intermediate Fund. Such
distribution will be accomplished by opening accounts on the books of Total
Return Fund in the names of Intermediate Fund shareholders and transferring
thereto the shares credited to the account of Intermediate Fund on the books
of Total Return Fund. Each account opened shall be credited with the
respective PRO RATA number of Total Return Fund Class A, Class B, Class C
and Class Z shares due Intermediate Fund's Class A, Class B, Class C and
Class Z shareholders, respectively. Fractional shares of Total Return Fund
shall be rounded to the third decimal place. On or about the Closing Date,
Total Return Fund will file Articles of Transfer with the State Department
of Assessments and Taxation of the State of Maryland. Upon the receipt of an
order from the Securities and Exchange Commission (SEC) indicating
acceptance of the Form N-8F that Intermediate Fund must file pursuant to the
Investment Company Act of 1940, as amended (Investment Company Act) to
deregister as an investment company, Intermediate Fund will file with the
State of Maryland Articles of Dissolution, but in any event such liquidation
will be completed within twelve months following the Closing Date.
1.6 Total Return Fund shall not issue certificates representing its
shares in connection with such exchange. With respect to any Intermediate
Fund shareholder holding Intermediate Fund stock certificates as of the
Closing Date, until Total Return Fund is notified by Intermediate Fund's
transfer agent that such shareholder has surrendered his or her outstanding
Intermediate Fund stock certificates or, in the event of lost, stolen or
destroyed stock certificates, posted adequate bond or submitted a lost
certificate form, as the case may be, Total Return Fund will not permit such
shareholder to (1) receive dividends or other distributions on Total Return
Fund shares in cash (although such dividends and distributions shall be
credited to the account of such shareholder established on Total Return
Fund's books pursuant to paragraph 1.5, as provided in the next sentence),
(2) exchange Total Return Fund shares credited to such shareholder's account
for shares of other Prudential Mutual Funds, or (3) pledge or redeem such
shares. In the event that a shareholder is not permitted to receive
dividends or other distributions on Total Return Fund shares in cash as
provided in the preceding sentence, Total Return Fund shall pay such
dividends or other distributions in additional Total Return Fund shares,
notwithstanding any election such shareholder shall have made previously
with respect to the payment of dividends or other distributions on shares of
Intermediate Fund. Intermediate Fund will, at its expense, request its
shareholders to surrender their outstanding Intermediate Fund stock
certificates, post adequate bond or submit a lost certificate form, as the
case may be.
1.7 Ownership of Total Return Fund shares will be shown on the books of
Total Return Fund's transfer agent. Shares of Total Return Fund will be
issued in the manner described in Total Return Fund's then-current
prospectus and statement of additional information.
1.8 Any transfer taxes payable upon issuance of shares of Total Return
Fund in a name other than the registered holder of the shares on the books
of Intermediate Fund as of that time shall be paid by the person to whom
such shares are to be issued as a condition to the registration of such
transfer.
1.9 Any reporting responsibility with the SEC or any state securities
commission of Intermediate Fund is, and shall remain, the responsibility of
Intermediate Fund up to and including the Liquidation Date.
A-2
<PAGE>
1.10 All books and records of Intermediate Fund, including all books
and records required to be maintained under the Investment Company Act and
the rules and regulations thereunder, shall be available to Total Return
Fund from and after the Closing Date and shall be turned over to Total
Return Fund on or prior to the Liquidation Date.
2. Valuation
2.1 The value of Intermediate Fund's assets and liabilities to be
acquired and assumed, respectively, by Total Return Fund shall be the net
asset value per share of Intermediate Fund computed as of 4:15 p.m., New
York time, on the Closing Date (such time and date being hereinafter called
the Valuation Time), using the valuation procedures set forth in
Intermediate Fund's then-current prospectus and statement of additional
information.
2.2 The net asset value of Class A, Class B, Class C and Class Z shares
of Total Return Fund shall be the net asset value for Class A, Class B,
Class C and Class Z shares computed as of the Valuation Time, using the
valuation procedures set forth in Total Return Fund's then-current
prospectus and statement of additional information.
2.3 The number of Total Return Fund shares to be issued (including
fractional shares, if any) in exchange for Intermediate Fund's net assets
shall be calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the
direction of Prudential Investments Fund Management LLC (PIFM) in accordance
with its regular practice as manager of the Funds.
3. Closing and Closing Date
3.1 The Closing Date shall be [ ] or such later
date as the parties may agree. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the
Closing Date unless otherwise provided. The Closing shall be at the office
of Total Return Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian
for Intermediate Fund, shall deliver to Total Return Fund at the Closing a
certificate of an authorized officer of State Street stating that (a)
Intermediate Fund's portfolio securities, cash and any other assets have
been transferred in proper form to Total Return Fund on the Closing Date and
(b) all necessary taxes, if any, have been paid, or provision for payment
has been made, in conjunction with the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the
New York Stock Exchange (NYSE) or other primary exchange is closed to
trading or trading thereon is restricted or (b) trading or the reporting of
trading on the NYSE or other primary exchange or elsewhere is disrupted so
that accurate appraisal of the value of the net assets of Intermediate Fund
and of the net asset value per share of Total Return Fund is impracticable,
the Closing Date shall be postponed until the first business day after the
date when such trading shall have been fully resumed and such reporting
shall have been restored.
3.4 Intermediate Fund shall deliver to Total Return Fund on or prior to
the Liquidation Date the names and addresses of its shareholders and the
number of outstanding shares owned by each such shareholder, all as of the
close of business on the Closing Date, certified by the Transfer Agent of
Intermediate Fund. Total Return Fund shall issue and deliver to Intermediate
Fund at the Closing a confirmation or other evidence satisfactory to
Intermediate Fund that shares of Total Return Fund have been or will be
credited to the accounts of shareholders of Intermediate Fund on the books
of the Total Return Fund. At the Closing, each party shall deliver to the
other such bills of sale, checks, assignments, share certificates, receipts
and other documents as such other party or its counsel may reasonably
request to effect the transactions contemplated by this Agreement.
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4. Representations and Warranties
4.1 Intermediate Fund represents and warrants as follows:
4.1.1 Intermediate Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;
4.1.2 Intermediate Fund is an open-end management investment company
duly registered under the Investment Company Act, and such registration
is in full force and effect;
4.1.3 Intermediate Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the Articles of Incorporation or By-Laws of Intermediate
Fund or of any material agreement, indenture, instrument, contract, lease
or other undertaking to which Intermediate Fund is a party or by which
Intermediate Fund is bound;
4.1.4 All material contracts or other commitments to which
Intermediate Fund, or the properties or assets of Intermediate Fund, is
subject, or by which Intermediate Fund is bound, except this Agreement,
will be terminated on or prior to the Closing Date without Intermediate
Fund or Total Return Fund incurring any liability or penalty with respect
thereto;
4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Intermediate Fund or any
of its properties or assets. Intermediate Fund knows of no facts that
might form the basis for the institution of such proceedings, and
Intermediate Fund is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of Intermediate Fund at December 31, 1998 and
for the year then ended (copies of which have been furnished to Total
Return Fund) have been audited by PricewaterhouseCoopers LLP, independent
accountants, in accordance with generally accepted auditing standards.
Such financial statements are prepared in accordance with generally
accepted accounting principles and present fairly, in all material
respects, the financial position, results of operations, changes in net
assets and financial highlights of Intermediate Fund as of and for the
period ended on such date, and there are no material known liabilities of
Intermediate Fund (contingent or otherwise) not disclosed therein;
4.1.7 Since December 31, 1998, there has not been any material
adverse change in Intermediate Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Intermediate Fund of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by Total
Return Fund. For the purposes of this paragraph 4.1.7, a decline in net
asset value, net asset value per share or change in the number of shares
outstanding shall not constitute a material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Intermediate Fund required by law to
have been filed on or before such dates shall have been timely filed, and
all federal and other taxes shown as due on said returns and reports
shall have been paid insofar as due, or provision shall have been made
for the payment thereof, and, to the best of Intermediate Fund's
knowledge, all federal or other taxes required to be shown on any such
return or report have been shown on such return or report, no such return
is currently under audit and no assessment has been asserted with respect
to such returns;
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4.1.9 For each past taxable year since it commenced operations,
Intermediate Fund has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and will meet those requirements for the current
taxable year; and, for each past calendar year since it commenced
operations, Intermediate Fund has made such distributions as are
necessary to avoid the imposition of federal excise tax or has paid or
provided for the payment of any excise tax imposed; and Intermediate Fund
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M of the Internal Revenue Code did not apply to
it;
4.1.10 All issued and outstanding shares of Intermediate Fund are,
and at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of Intermediate Fund will, at the time of the Closing, be held in
the name of the persons and in the amounts set forth in the list of
shareholders submitted to Total Return Fund in accordance with the
provisions of paragraph 3.4. Intermediate Fund does not have outstanding
any options, warrants or other rights to subscribe for or purchase any of
its shares, nor is there outstanding any security convertible into any of
its shares, except for the Class B shares which have the conversion
feature described in Intermediate Fund's current prospectus;
4.1.11 At the Closing Date, Intermediate Fund will have good and
marketable title to its assets to be transferred to Total Return Fund
pursuant to paragraph 1.1, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment for
such assets, Total Return Fund will acquire good and marketable title
thereto;
4.1.12 The execution, delivery and performance of this Agreement has
been duly authorized by the Board of Directors of Intermediate Fund and
by all necessary corporate action, other than shareholder approval, on
the part of Intermediate Fund, and this Agreement constitutes a valid and
binding obligation of Intermediate Fund, subject to shareholder approval;
4.1.13 The information furnished and to be furnished by Intermediate
Fund for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection with
the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is in compliance and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and
4.1.14 On the effective date of the registration statement filed
with the SEC by Total Return Fund on Form N-14 relating to the shares of
Total Return Fund issuable hereunder, and any supplement or amendment
thereto (Registration Statement), at the time of the meeting of the
shareholders of Intermediate Fund and on the Closing Date, the Proxy
Statement of Intermediate Fund, the Prospectus of Total Return Fund and
the Statements of Additional Information of both Funds and each other
document to be included in the Registration Statement (collectively,
Proxy Statement) (i) will comply in all material respects with the
provisions and regulations of the Securities Act of 1933 (1933 Act),
Securities Exchange Act of 1934 (1934 Act) and the Investment Company Act
and the rules and regulations thereunder and (ii) will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein in light of the circumstances under which
they were made or necessary to make the statements therein not
misleading; provided, however, that the representations and warranties in
this paragraph 4.1.14 shall not apply to statements in or omissions from
the Proxy Statement and Registration Statement made in reliance upon and
in conformity with information furnished by Total Return Fund for use
therein.
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4.2 Total Return Fund represents and warrants as follows:
4.2.1 Total Return Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;
4.2.2 Total Return Fund is an open-end management investment company
duly registered under the Investment Company Act, and such registration
is in full force and effect;
4.2.3 Total Return Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of its Articles of Incorporation or By-Laws or of any material
agreement, indenture, instrument, contract, lease or other undertaking to
which Total Return Fund is a party or by which Total Return Fund is
bound;
4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or threatened against Total Return Fund or any of its properties
or assets, except as previously disclosed in writing to Intermediate
Fund. Total Return Fund knows of no facts that might form the basis for
the institution of such proceedings, and Total Return Fund is not a party
to or subject to the provisions of any order, decree or judgment of any
court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions herein
contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of Total Return Fund at December 31, 1998 and
for the fiscal year then ended (copies of which have been furnished to
Intermediate Fund) have been audited by PricewaterhouseCoopers LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with
generally accepted accounting principles and present fairly, in all
material respects, the financial position, results of operations, changes
in net assets and financial highlights of Total Return Fund as of and for
the period ended on such date, and there are no known material
liabilities of Total Return Fund (contingent or otherwise) not disclosed
therein;
4.2.6 Since December 31, 1998, there has not been any material
adverse change in Total Return Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Total Return Fund of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by
Intermediate Fund. For the purposes of this paragraph, a decline in net
asset value, net asset value per share or a decrease in the number of
shares outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Total Return Fund required by law to
have been filed on or before such dates shall have been filed, and all
federal and other taxes shown as due on said returns and reports shall
have been paid insofar as due, or provision shall have been made for the
payment thereof, and, to the best of Total Return Fund's knowledge, all
federal or other taxes required to be shown on any such return or report
are shown on such return or report, no such return is currently under
audit and no assessment has been asserted with respect to such returns;
4.2.8 For each past taxable year since it commenced operations,
Total Return Fund has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and will meet those requirements for the current
taxable year; and, for each past calendar year since it commenced
operations, Total Return Fund has made such distributions as are
necessary to avoid the imposition of federal excise tax or has paid or
provided for the payment of any excise tax imposed; and Total Return Fund
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M of the Internal Revenue Code did not apply to
it;
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4.2.9 All issued and outstanding shares of Total Return Fund are,
and at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. Except as contemplated by
this Agreement, Total Return Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares
nor is there outstanding any security convertible into any of its shares,
except for Class B shares which have a conversion feature described in
Total Return Fund's current prospectus;
4.2.10 The execution, delivery and performance of this Agreement has
been duly authorized by the Board of Directors of Total Return Fund and
by all necessary corporate action on the part of Total Return Fund, and
this Agreement constitutes a valid and binding obligation of Total Return
Fund;
4.2.11 The shares of Total Return Fund to be issued and delivered to
Intermediate Fund pursuant to this Agreement will, at the Closing Date,
have been duly authorized and, when issued and delivered as provided in
this Agreement, will be duly and validly issued and outstanding shares of
Total Return Fund, fully paid and non-assessable and no shareholder of
Total Return Fund has any pre-emptive right to subscribe therefor or
purchase such shares;
4.2.12 The information furnished and to be furnished by Total Return
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with
the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is and shall comply in all material
respects with applicable federal securities and other laws and
regulations; and
4.2.13 On the effective date of the Registration Statement, at the
time of the meeting of the shareholders of Intermediate Fund and on the
Closing Date, the Proxy Statement and the Registration Statement (i) will
comply in all material respects with the provisions of the 1933 Act, the
1934 Act and the Investment Company Act and the rules and regulations
under such Acts, (ii) will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) with
respect to the Registration Statement, at the time it becomes effective,
it will not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein in the
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
paragraph 4.2.13 shall not apply to statements in or omissions from the
Proxy Statement and the Registration Statement made in reliance upon and
in conformity with information furnished by Intermediate Fund for use
therein.
5. Covenants of Total Return Fund and Intermediate Fund
5.1 Intermediate Fund and Total Return Fund each covenants to operate
its respective business in the ordinary course between the date hereof and
the Closing Date, it being understood that the ordinary course of business
will include declaring and paying customary dividends and other
distributions and such changes in operations as are contemplated by the
normal operations of the Funds, except as may otherwise be required by
paragraph 1.4 hereof.
5.2 Intermediate Fund covenants to call a shareholders' meeting to
consider and act upon this Agreement and to take all other action necessary
to obtain approval of the transactions contemplated hereby (including the
determinations of its Board of Directors as set forth in Rule 17a-8(a) under
the Investment Company Act).
5.3 Intermediate Fund covenants that Total Return Fund shares to be
received by Intermediate Fund in accordance herewith are not being acquired
for the purpose of making any distribution thereof other than in accordance
with the terms of this Agreement.
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5.4 Intermediate Fund covenants that it will assist Total Return Fund
in obtaining such information as Total Return Fund reasonably requests
concerning the beneficial ownership of Intermediate Fund's shares.
5.5 Subject to the provisions of this Agreement, each Fund will take,
or cause to be taken, all action, and will do, or cause to be done, all
things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.6 Intermediate Fund covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each such Act.
5.7 Intermediate Fund covenants that it will, from time to time, as and
when requested by Total Return Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action, as Total Return Fund may deem
necessary or desirable in order to vest in and confirm to Total Return Fund
title to and possession of all the assets of Intermediate Fund to be sold,
assigned, transferred and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.
5.8 Total Return Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Board of Directors as set
forth in Rule 17a-8(a) thereunder) and such of the state Blue Sky or
securities laws as it may deem appropriate in order to continue its
operations after the Closing Date.
5.9 Total Return Fund covenants that it will, from time to time, as and
when requested by Intermediate Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action, as Intermediate Fund may deem
necessary or desirable in order to (i) vest in and confirm to Intermediate
Fund title to and possession of all the shares of Total Return Fund to be
transferred to Intermediate Fund pursuant to this Agreement and (ii) assume
all of Intermediate Fund's liabilities in accordance with this Agreement.
5.10 Intermediate Fund and Total Return Fund each covenants to take
such action as is required to continue to meet the requirements of
Subchapter M of the Internal Revenue Code for qualification and treatment as
a registered investment company through the Closing Date.
6. Conditions Precedent to Obligations of Intermediate Fund
The obligations of Intermediate Fund to consummate the transactions provided
for herein shall be subject to the performance by Total Return Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:
6.1 All representations and warranties of Total Return Fund contained
in this Agreement shall be true and correct in all material respects as of
the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.
6.2 Total Return Fund shall have delivered to Intermediate Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Total Return Fund, in form and substance satisfactory to
Intermediate Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Total Return Fund in this Agreement are
true and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as Intermediate Fund shall reasonably request.
6.3 Intermediate Fund shall have received on the Closing Date a
favorable opinion from Piper & Marbury LLP, Maryland counsel to Total Return
Fund, dated as of the Closing Date, to the effect that:
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6.3.1 Total Return Fund is duly organized and validly existing as a
Maryland corporation, with power under its Articles of Incorporation to
own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business described in its current prospectus;
6.3.2 This Agreement has been duly authorized for execution and
delivery by an authorized officer of Total Return Fund and assuming due
authorization, execution and delivery of the Agreement by Intermediate
Fund, is a valid and binding obligation of Total Return Fund enforceable
in accordance with its terms, except to the extent that enforcement
thereof may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles (regardless of whether enforcement is sought in a proceeding
at law or in equity), and provided further that such counsel may state
that they express no opinion as to the validity or enforceability of any
provision regarding New York law to govern this Agreement;
6.3.3 The shares of Total Return Fund to be distributed to
Intermediate Fund shareholders under this Agreement, assuming their due
authorization and delivery as contemplated by this Agreement, will be
validly issued and outstanding and fully paid and non-assessable, and no
shareholder of Total Return Fund has any pre-emptive right to subscribe
therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i)
conflict with Total Return Fund's Articles of Incorporation or By-Laws or
(ii) result in a default or a breach of (a) the Management Agreement
dated October 3, 1988 and amended and restated on January 15, 1996
between Total Return Fund and Prudential Investments Fund Management LLC
as successor to Prudential Mutual Fund Management, Inc., (b) the
Custodian Contract dated September 5, 1990 between Total Return Fund and
State Street Bank and Trust Company, (c) the Distribution Agreement with
respect to Total Return Fund dated May 9, 1996 , as amended and restated
on June 1, 1998, between Total Return Fund and Prudential Investment
Management Services LLC, and (d) the Transfer Agency and Service
Agreement dated January 15, 1996 between Total Return Fund and Prudential
Mutual Fund Services LLC as successor to Prudential Mutual Fund Services,
Inc.; provided, however, that such counsel may state that they express no
opinion in their opinion with respect to this paragraph 6.3.4 with
respect to federal or state securities laws, other antifraud laws and
fraudulent transfer laws; and provided further that insofar as
performance by Total Return Fund of its obligations under the Agreement
is concerned, such counsel may state that they express no opinion as to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles;
6.3.5 To the knowledge of such counsel and without independent
inquiry or investigation, no consent, approval, authorization, filing or
order of any court or governmental authority is required for the
consummation by Total Return Fund of the transactions contemplated
herein, except such as have been obtained under the 1933 Act, the 1934
Act and the Investment Company Act and such as may be required under
state Blue Sky or securities laws;
6.3.6 Total Return Fund is registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued
or proceeding instituted by the SEC to suspend such registration; and
6.3.7 To the knowledge of such counsel and without independent
inquiry or investigation, no litigation or government proceeding has been
instituted or is threatened against Total Return Fund that would be
required to be disclosed in its Registration Statement on Form N-1A, as
amended and is not so disclosed.
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In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Total Return Fund and certificates of
public officials. In rendering such opinion, such counsel also may (i) make
assumptions regarding the authenticity, genuineness and/or conformity of
documents and copies thereof without independent verification thereof, (ii)
limit such opinion to applicable federal and state law and (iii) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly related to this
Agreement and the reorganization.
7. Conditions Precedent to Obligations of Total Return Fund
The obligations of Total Return Fund to complete the transactions provided
for herein shall be subject to the performance by Intermediate Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:
7.1 All representations and warranties of Intermediate Fund contained
in this Agreement shall be true and correct in all material respects as of
the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.
7.2 Intermediate Fund shall have delivered to Total Return Fund on the
Closing Date a statement of its assets and liabilities, which statement
shall be prepared in accordance with generally accepted accounting
principles consistently applied, together with a list of its portfolio
securities showing the adjusted tax bases of such securities by lot, as of
the Closing Date, certified by the Treasurer or Assistant Treasurer of
Intermediate Fund.
7.3 Intermediate Fund shall have delivered to Total Return Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Intermediate Fund, in form and substance satisfactory to Total
Return Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Intermediate Fund made in this Agreement
are true and correct at and as of the Closing Date except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as Total Return Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Intermediate Fund
shall have declared and paid to its shareholders of record one or more
dividends and/or other distributions so that it will have distributed
substantially all (and in any event not less than ninety-eight percent) of
such Fund's investment company taxable income (computed without regard to
any deduction for dividends paid), and realized net capital gain, if any, of
Intermediate Fund for all completed taxable years from the inception of the
Fund through the Closing Date.
7.5 Total Return Fund shall have received on the Closing Date a
favorable opinion from Gardner, Carton & Douglas, counsel to Intermediate
Fund, dated as of the Closing Date, to the effect that:
7.5.1 Intermediate Fund is duly organized and validly existing as a
Maryland corporation, with power under its Articles of Incorporation to
own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business as described in its current prospectus;
7.5.2 This Agreement has been duly authorized for execution and
delivery by an authorized officer of Intermediate Fund and assuming due
authorization, execution and delivery of the Agreement by Total Return
Fund, constitutes a valid and binding obligation of Intermediate Fund
enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles (regardless of whether enforcement is sought in a
proceeding at law or in equity),
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provided that such counsel may state that they express no opinion as to
the validity or enforceability of any provision regarding New York law to
govern this Agreement;
7.5.3 The execution and delivery of the Agreement did not, and the
consummation of the
transactions contemplated hereby will not, (i) conflict with Intermediate
Fund's Articles of Incorporation or By-Laws or (ii) result in a default
or a breach of (a) the Management Agreement, dated October 7, 1991,
between Intermediate Fund and Prudential Investments Fund Management LLC
as successor to Prudential Mutual Fund Management, Inc., (b) the
Custodian Contract, dated May 19, 1988, between Intermediate Fund and
State Street Bank and Trust Company, (c) the Distribution Agreement dated
May 9, 1996 as amended and restated as of June 1, 1998, between
Intermediate Fund and Prudential Investment Management Services LLC, and
(d) the Transfer Agency and Service Agreement, dated August 8, 1991,
between Intermediate Fund and Prudential Mutual Fund Services LLC as
successor to Prudential Mutual Fund Services, Inc.; provided, however,
that such counsel may state that they express no opinion in their opinion
pursuant to this paragraph 7.5.3 with respect to federal or state
securities laws, other antifraud laws and fraudulent transfer laws; and
provided further that insofar as performance by Intermediate Fund of its
obligations under this Agreement is concerned, such counsel may state
that they express no opinion as to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
7.5.4 To the knowledge of such counsel and without independent
inquiry or investigation, no consent, approval, authorization, filing or
order of any court or governmental authority is required for the
consummation by Intermediate Fund of the transactions contemplated
herein, except such as have been obtained under the 1933 Act, the 1934
Act and the Investment Company Act (other than such as may be required
under Maryland securities laws or Blue Sky laws as to which such counsel
may state that they express no opinion);
7.5.5 To the knowledge of such counsel and without independent
inquiry or investigation, no litigation or government proceeding has been
instituted or is threatened against Intermediate Fund that would be
required to be disclosed in its Registration Statement on Form N-1A, as
amended, and is not so disclosed; and
7.5.6 Intermediate Fund is registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued
or proceeding instituted by the SEC to suspend such registration.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Intermediate Fund and certificates of
public officials. Such opinion may rely on an opinion of Maryland counsel to the
extent it addresses Maryland law. As to paragraph 7.5.2, such counsel may state
that they have assumed that the agreement is governed by the laws of the State
of Illinois. In rendering such opinion, such counsel also may (i) make
assumptions regarding the authenticity, genuineness and/or conformity of
documents and copies thereof without independent verification thereof, (ii)
limit such opinion to applicable federal and state law and (iii) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly related to the
Agreement and the reorganization.
8. Further Conditions Precedent to Obligations of Total Return Fund and
Intermediate Fund
The obligations of each Fund hereunder are subject to the further conditions
that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of (a) the Board of Directors of
Intermediate Fund and the Board of Directors of Total
A-11
<PAGE>
Return Fund, as to the determinations set forth in Rule 17a-8(a) under the
Investment Company Act, (b) the Board of Directors of Total Return Fund as
to the assumption by Total Return Fund of the liabilities of Intermediate
Fund and (c) the holders of the outstanding shares of Intermediate Fund in
accordance with the provisions of Intermediate Fund's Articles of
Incorporation, and certified copies of the resolutions evidencing such
approvals shall have been delivered to Total Return Fund and Intermediate
Fund, as applicable.
8.2 Any proposed change to Total Return Fund's operations that may be
approved by the Board of Directors of Total Return Fund subsequent to the
date of this Agreement but in connection with and as a condition to
implementing the transactions contemplated by this Agreement, for which the
approval of Total Return Fund's shareholders is required pursuant to the
Investment Company Act or otherwise, shall have been approved by the
requisite vote of the holders of the outstanding shares of the Total Return
Fund in accordance with the Investment Company Act and Maryland law, and
certified copies of the resolutions evidencing such approval shall have been
delivered to Intermediate Fund.
8.3 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits
of federal, state and local regulatory authorities (including those of the
SEC and of state Blue Sky or securities authorities, including "no-action"
positions of such authorities) deemed necessary by Total Return Fund or
Intermediate Fund to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where
failure to obtain any such consent, order or permit would not involve a risk
of a material adverse effect on the assets or properties of Total Return
Fund or Intermediate Fund, provided that either party hereto may for itself
waive any part of this condition.
8.5 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued, and to the best knowledge of the parties hereto, no
investigation or proceeding under the 1933 Act for that purpose shall have
been instituted or be pending, threatened or contemplated.
8.6 Intermediate Fund and Total Return Fund shall have received on or
before the Closing Date an opinion of Gardner, Carton & Douglas satisfactory
to Intermediate Fund and to Total Return Fund, substantially to the effect
that for federal income tax purposes:
8.6.1 The acquisition by Total Return Fund of the assets of
Intermediate Fund in exchange solely for voting shares of Total Return
Fund and the assumption by Total Return Fund of Intermediate Fund's
liabilities, if any, followed by the distribution of Total Return Fund's
voting shares by Intermediate Fund PRO RATA to its shareholders, as a
liquidating distribution and the liquidation of Intermediate Fund
pursuant to the reorganization and constructively in exchange for their
Intermediate Fund shares, will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code, and
Intermediate Fund and Total Return Fund each will be "a party to a
reorganization" within the meaning of Section 368(b) of the Internal
Revenue Code;
8.6.2 Intermediate Fund's shareholders will recognize no gain or
loss upon the receipt of Class A, Class B, Class C and Class Z shares of
Total Return Fund solely in exchange for and in cancellation of the
Intermediate Fund shares of common stock, as described above and in the
Agreement;
8.6.3 No gain or loss will be recognized to the Intermediate Fund
upon the transfer of its assets to Total Return Fund in exchange solely
for Class A, Class B, Class C and Class Z shares of Total Return Fund and
the assumption by Total Return Fund of Intermediate Fund's liabilities,
if
A-12
<PAGE>
any. In addition, no gain or loss will be recognized to the Intermediate
Fund on the distribution of such shares to the Intermediate Fund
shareholders in liquidation by terminating the Intermediate Fund;
8.6.4 No gain or loss will be recognized to Total Return Fund upon
the acquisition of Intermediate Fund's assets in exchange solely for
shares of Total Return Fund and the assumption of Intermediate Fund's
liabilities, if any;
8.6.5 Total Return Fund's basis for those assets will be the same as
the basis thereof when held by Intermediate Fund immediately before the
transfer, and the holding period of such assets acquired by Total Return
Fund will include the holding period thereof when held by Intermediate
Fund;
8.6.6 Intermediate Fund shareholders' basis for the shares of Total
Return Fund to be received by them pursuant to the reorganization will be
the same as their basis for the shares of Intermediate Fund to be
constructively surrendered in exchange therefor; and
8.6.7 The holding period of Total Return Fund shares to be received
by Intermediate Fund shareholders will include the period during which
Intermediate Fund shares to be constructively surrendered in exchange
therefor were held; provided such Intermediate Fund shares were held as
capital assets by those shareholders on the date of the exchange.
In rendering such opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the representations made in
this Agreement (or in separate letters addressed to such counsel) and the
certificates delivered pursuant to paragraph 3.4.
9. Finder's Fees and Expenses
9.1 Each Fund represents and warrants to the other that there are no
finder's fees payable in connection with the transactions provided for
herein.
9.2 The expenses incurred in connection with the entering into and
carrying out of the provisions of this Agreement shall be allocated to
Intermediate Fund and Total Return Fund PRO RATA in a fair and equitable
manner in proportion to their respective assets.
10. Entire Agreement; Survival of Warranties
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. Termination
Either Fund may at its option terminate this Agreement at or prior to the
Closing Date because of:
11.1 A material breach by the other of any representation, warranty or
covenant contained herein to be performed at or prior to the Closing Date;
or
11.2 A condition herein expressed to be precedent to the obligations of
either party not having been met and it reasonably appearing that it will
not or cannot be met; or
11.3 A mutual written agreement of Intermediate Fund and Total Return
Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director or officer
of Total Return Fund or Intermediate Fund.
A-13
<PAGE>
12. Amendment
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Intermediate Fund pursuant to paragraph 5.2, no such amendment may have the
effect of changing the provisions for determining the number of shares of Total
Return Fund to be distributed to Intermediate Fund shareholders under this
Agreement to the detriment of such shareholders without their further approval.
13. Notices
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Investments Fund Management LLC, Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey, 07102, Attention: Marguerite E. H. Morrison.
14. Headings; Counterparts; Governing Law; Assignment
14.1 The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each
of which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.
14.4 This Agreement shall bind and inure to the benefit of the parties
and their respective successors and assigns, and no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by either
party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation other than the parties and their
respective successors and assigns any rights or remedies under or by reason
of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its President or Vice President.
Prudential Intermediate Global Income
Fund, Inc.
By: _________________________________
Its: _________________________________
The Global Total Return Fund, Inc.
By: _________________________________
Its: _________________________________
A-14
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
STATEMENT OF ADDITIONAL INFORMATION
dated August , 1999
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
By and in Exchange for Class A, Class B, Class C and Class Z Shares of
THE GLOBAL TOTAL RETURN FUND, INC.
This Statement of Additional Information specifically relates to the
proposed transfer of all of the assets and the assumption of all of the
liabilities, if any, of Prudential Intermediate Global Income Fund, Inc.
(Intermediate Fund) by The Global Total Return Fund, Inc. (Total Return Fund).
This Statement of Additional Information consists of this cover page and the
following described documents, each of which is attached hereto and incorporated
herein by reference:
1. Pro Forma Financial Statements as of December 31, 1998.
2. Statement of Additional Information of Total Return Fund.
3. Annual Report of the Total Return Fund for the fiscal year ended
December 31, 1998.
4. Annual Report of Intermediate Fund for the fiscal year ended December
31, 1998.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated
August , 1999, relating to the above-referred matter. A copy of the Prospectus
and Proxy Statement may be obtained from Total Return Fund without charge by
writing or calling Total Return Fund at the address or phone number listed
above.
B-1
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of Prudential Intermediate Global
Income, Inc. will be exchanged for shares of The Global Total Return Fund, Inc.
and The Global Total Return Fund, Inc. will assume the liabilities, if any, of
Prudential Intermediate Global Income Fund, Inc. Immediately thereafter, the
shares of The Global Total Return Fund, Inc. will be distributed to the
shareholders of in a total liquidation of Prudential Intermediate Global Income
Fund, Inc. which will subsequently be dissolved. The following pro forma
financial statements include a pro forma Portfolio of Investments at December
31, 1998, a pro forma Statement of Assets and Liabilities at December 31, 1998
and a pro forma Statement of Operations for the year ended December 31, 1998.
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
31-DEC-98
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------- -------------------------------------------
PRUDENTIAL PRUDENTIAL
THE GLOBAL INTERMEDIATE THE GLOBAL INTERMEDIATE
TOTAL RETURN GLOBAL INCOME TOTAL RETURN GLOBAL INCOME PRO FORMA
FUND, INC. FUND, INC. TOTAL DESCRIPTION(A) FUND, INC. FUND, INC. COMBINED
- ------------ ------------- --------- ------------------------------------ ------------- ------------- -------------
<C> <C> <C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS--85.7%
AUSTRALIA--6.4%
$ 2,750 $ 2,250 $ 5,000 Federal National Mortgage $ 1,774,722 $ 1,452,045 $ 3,226,767
Association, 6.375%, 8/15/07
13,700 10,900 24,600 New South Wales Treasury 8,960,622 7,129,254 16,089,876
Corporation, 6.50% 5/1/06
------------- ------------- -------------
10,735,344 8,581,299 19,316,643
------------- ------------- -------------
CANADA--3.2%
3,250 1,750 5,000 British Columbia Provincial Bond, 2,233,543 1,202,677 3,436,220
6.00%, 6/9/08
-- 500 500 Canadian Government Bond, 9.00%, -- 394,100 394,100
12/1/04
4,500 3,800 8,300 Province of Quebec, 6.50%, 10/1/07 3,149,678 2,659,728 5,809,406
------------- ------------- -------------
5,383,221 4,256,505 9,639,726
------------- ------------- -------------
DENMARK--6.0%
Danish Government Bonds,
20,000 17,000 37,000 7.00%, 12/15/04 3,620,752 3,077,639 6,698,391
32,750 26,500 59,250 8.00%, 3/15/06 6,343,850 5,133,192 11,477,042
------------- ------------- -------------
9,964,602 8,210,831 18,175,433
------------- ------------- -------------
GERMANY--19.6%
German Government Bonds,
7,700 5,300 13,000 6.00%, 1/5/06 5,225,921 3,597,063 8,822,984
15,500 12,500 28,000 6.25%, 1/4/24 11,261,516 9,081,867 20,343,383
18,000 10,500 28,500 7.375%, 1/3/05 12,910,983 7,531,407 20,442,390
5,000 4,000 9,000 Republic of Cloumbia, 7.25%, 3,052,465 2,441,972 5,494,437
12/21/00
-- 4,000 4,000 Tokyo Gas, Co. Ltd., 7.00%, 7/27/05 -- 2,794,128 2,794,128
-- 2,000 2,000 United Mexican States, 8.125%, -- 1,226,370 1,226,370
9/10/04
------------- ------------- -------------
32,450,885 26,672,807 59,123,692
------------- ------------- -------------
GREECE--3.3%
Hellenic Republic, FRN
430,000 360,000 790,000 8.60%, 3/26/08, 1,695,138 1,419,185 3,114,323
350,000 285,000 635,000 9.20%, 3/21/02, 1,285,914 1,047,102 2,333,016
-- 545,000 545,000 11.90%, 12/31/03 -- 1,953,964 1,953,964
680,000 -- 680,000 12.70%, 12/31/03 2,437,973 -- 2,437,973
------------- ------------- -------------
5,419,025 4,420,251 9,839,276
------------- ------------- -------------
HUNGARY--0.7%
300,000 130,000 430,000 Hungarian Government Bonds, 16.00%, 1,402,700 607,836 2,010,536
4/12/00
------------- ------------- -------------
</TABLE>
B-2
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS
31-DEC-98
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------- -------------------------------------------
PRUDENTIAL PRUDENTIAL
THE GLOBAL INTERMEDIATE THE GLOBAL INTERMEDIATE
TOTAL RETURN GLOBAL INCOME TOTAL RETURN GLOBAL INCOME PRO FORMA
FUND, INC. FUND, INC. TOTAL DESCRIPTION(A) FUND, INC. FUND, INC. COMBINED
- ------------ ------------- --------- ------------------------------------ ------------- ------------- -------------
<C> <C> <C> <S> <C> <C> <C>
NETHERLANDS--4.0%
Dutch Government Bonds,
$ 6,000 $ 5,600 $ 11,600 7.00%, 6/15/05 $ 3,764,500 $ 3,513,534 $ 7,278,034
3,750 2,600 6,350 7.50%, 1/15/23 2,767,957 1,919,116 4,687,073
------------- ------------- -------------
6,532,457 5,432,650 11,965,107
------------- ------------- -------------
NEW ZEALAND--4.3%
6,700 5,400 12,100 Federal National Mortgage 3,656,473 2,947,008 6,603,481
Association, 7.25%, 6/20/02
3,300 2,700 6,000 International Bank Reconstruction 1,807,909 1,479,198 3,287,107
Development, 7.25%, 5/27/03
3,100 2,500 5,600 New Zealand Government Bond, 8.00%, 1,825,837 1,472,449 3,298,286
4/15/04
------------- ------------- -------------
7,290,219 5,898,655 13,188,874
------------- ------------- -------------
RUSSIA
European Bank Reconstruction
Development,
5,300 4,100 9,400 31.00%, 5/5/00 61,485 47,564 109,049
8,600 6,800 15,400 Zero Coupon, 5/28/02 23,944 18,933 42,877
------------- ------------- -------------
85,429 66,497 151,926
------------- ------------- -------------
SPAIN--3.3%
Spanish Government Bonds,
650,000 550,000 1,200,000 6.15%, 1/31/13 5,406,026 4,574,330 9,980,356
------------- ------------- -------------
SWEDEN--2.4%
29,000 24,000 53,000 Swedish Government Bonds, 6.00%, 3,965,962 3,282,175 7,248,137
2/9/05
------------- ------------- -------------
3,965,962 3,282,175 7,248,137
------------- ------------- -------------
UNITED KINGDOM--4.2%
-- 400 400 Powergen PLC, 8.875%, 3/26/03 -- 734,261 734,261
9,100 6,100 15,200 United Kingdom Treasury Strip, Zero 7,176,140 4,810,380 11,986,520
Coupon, 12/7/15
------------- ------------- -------------
7,176,140 5,544,641 12,720,781
------------- ------------- -------------
UNITED STATES--28.3%
Sovereign Bonds--5.0%
3,500 1,500 5,000 Ministry of Finance (Russia), 997,500 427,500 1,425,000
10.00%, 6/26/07
1,000 2,300 3,300 Republic of Columbia, 7.25%, 2/23/04 896,000 2,060,800 2,956,800
</TABLE>
B-3
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS
31-DEC-98
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------- -------------------------------------------
PRUDENTIAL PRUDENTIAL
THE GLOBAL INTERMEDIATE THE GLOBAL INTERMEDIATE
TOTAL RETURN GLOBAL INCOME TOTAL RETURN GLOBAL INCOME PRO FORMA
FUND, INC. FUND, INC. TOTAL DESCRIPTION(A) FUND, INC. FUND, INC. COMBINED
- ------------ ------------- --------- ------------------------------------ ------------- ------------- -------------
<C> <C> <C> <S> <C> <C> <C>
Republic of Croatia, FRN,
$ 2,000 $ 1,357 $ 3,357 6.5625%, 7/31/06 $ 1,429,551 $ 1,072,164 $ 2,501,715
960 770 1,730 6.5625%, 7/31/10 758,400 608,300 1,366,700
800 500 1,300 Republic of Lithuania, 7.125%, 748,000 467,500 1,215,500
7/22/02
1,400 1,100 2,500 Republic of Peru, 4.00%, 3/7/17 878,500 690,250 1,568,750
1,675 1,345 3,020 Russian Federation, 11.00%, 7/24/18 414,563 332,888 747,451
1,000 750 1,750 Sultan of Oman, 7.125%, 3/20/02 1,020,000 765,000 1,785,000
-- 500 500 Trinidad & Tobago Republic, 9.75%, -- 500,000 500,000
11/3/00
-- 1,000 1,000 United Mexican States, 9.75%, 2/6/01 -- 1,032,500 1,032,500
------------- ------------- -------------
7,142,514 7,956,902 15,099,416
------------- ------------- -------------
Supranational Bonds--3.8%
4,800 1,350 6,150 Corporacion Andina de Formento, 4,847,664 1,363,406 6,211,070
7.357%, 7/21/00
1,200 1,000 2,200 General Motors Acceptance Corp., 1,209,312 1,007,760 2,217,072
5.75%, 11/10/03
1,700 1,300 3,000 Household Finance Corporation, 1,755,335 1,342,315 3,097,650
6.40%, 6/17/08
------------- ------------- -------------
7,812,311 3,713,481 11,525,792
------------- ------------- -------------
U.S. GOVERNMENT OBLIGATIONS--19.5%
United States Treasury Bonds,
13,810 1,700 15,510 6.25%, 2/15/07 15,147,775 1,864,679 17,012,454
9,250 7,500 16,750 6.625%, 2/15/27 10,940,992 8,871,075 19,812,067
United States Treasury Notes,
5,000 7,000 12,000 6.125%, 9/30/00 5,122,650 7,171,710 12,294,360
-- 6,000 6,000 5.75%, 8/15/03 -- 6,265,320 6,265,320
-- 3,100 3,100 7.7875%, 11/15/04 -- 3,591,629 3,591,629
------------- ------------- -------------
31,211,417 27,764,413 58,975,830
------------- ------------- -------------
46,166,242 39,434,796 85,601,038
------------- ------------- -------------
TOTAL LONG-TERM INVESTMENTS (COST 141,978,252 116,983,273 258,961,525
$312,605,778)
------------- ------------- -------------
SHORT-TERM INVESTMENTS--10.6%
HUNGARY--0.9%
Hungarian Government Bonds,
-- 120,000 120,000 16.50%, 4/12/99 -- 555,853 555,853
250,000 200,000 450,000 16.50%, 7/24/99 1,160,737 928,590 2,089,327
------------- ------------- -------------
1,160,737 1,484,443 2,645,180
------------- ------------- -------------
</TABLE>
B-4
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS
31-DEC-98
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------- -------------------------------------------
PRUDENTIAL PRUDENTIAL
THE GLOBAL INTERMEDIATE THE GLOBAL INTERMEDIATE
TOTAL RETURN GLOBAL INCOME TOTAL RETURN GLOBAL INCOME PRO FORMA
FUND, INC. FUND, INC. TOTAL DESCRIPTION(A) FUND, INC. FUND, INC. COMBINED
- ------------ ------------- --------- ------------------------------------ ------------- ------------- -------------
<C> <C> <C> <S> <C> <C> <C>
POLAND--1.2%
Polish Treasury Bills,
$ 3,800 $ 3,000 $ 6,800 Zero Coupon, 2/17/99 $ 1,057,221 $ 839,297 $ 1,896,518
1,200 1,000 2,200 Zero Coupon, 3/3/99 333,344 278,345 611,689
2,000 1,600 3,600 Zero Coupon, 4/28/99 543,912 435,129 979,041
------------- ------------- -------------
1,934,477 1,552,771 3,487,248
------------- ------------- -------------
UNITED STATES--8.5%
Sovereign Bonds--2.8%
2,750 2,750 2,750 Banco Gandero Colombian Bond 1,006,250 352,187 1,358,437
(Columbia), 9.75%, 8/26/99
2,900 1,100 2,750 Financiera Energica National 2,900,000 1,100,000 4,000,000
(Columbia), 9.00%, 11/8/99
1,000 2,000 3,000 Petroleas Mexicano (Mexico), FRN, 987,300 1,974,600 2,961,900
6.71875%, 3/8/99
------------- ------------- -------------
4,893,550 3,426,787 8,320,337
------------- ------------- -------------
Repurchase Agreement--1.5%
3,061 1,609 4,670 Joint Repurchase Agreement Account, 3,061,000 1,609,000 4,670,000
4.69%, 1/4/99
U.S. Government Obligations--4.2%
6,000 6,600 12,600 United States Treasury Bills, 6.75%, 6,063,720 6,670,092 12,733,812
6/30/99
------------- ------------- -------------
14,018,270 11,705,879 25,724,149
TOTAL SHORT-TERM INVESTMENTS (COST 17,113,484 14,743,093 31,856,577
$38,739,068)
------------- ------------- -------------
TOTAL INVESTMENTS--96.3% (COST 159,091,736 131,726,366 290,818,102
$351,344,846)
OTHER ASSETS IN EXCESS OF 6,175,538 4,982,338 11,157,876
LIABILITIES--3.7%
------------- ------------- -------------
NET ASSETS--100% $ 165,267,274 $136,708,704 $ 301,975,978
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
B-5
<PAGE>
PRO-FORMA STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL THE GLOBAL
INTERMEDIATE TOTAL RETURN PRO FORMA
GLOBAL INCOME FUND FUND COMBINED
------------------ ------------- -------------
<S> <C> <C> <C>
ASSETS
Investments, at value (cost $129,901,995, $62,756,652 and
$158,686,199, respectively)..................................... $ 131,726,366 $ 159,091,736 $ 290,818,102
Cash.............................................................. 586 -- 586
Foreign currency, at value (cost $1,518,767, $2,065,161 and
$1,767,880, respectively)....................................... 1,509,832 1,757,476 3,267,308
Interest receivable............................................... 3,736,615 4,747,224 8,483,839
Forward currency contracts--amount receivable from
counterparties.................................................. 283,708 355,541 639,249
Receivable for investments sold................................... 253,164 253,165 506,329
Receivable for Fund shares sold................................... 45,396 22,770 68,166
Other assets...................................................... 3,205 5,231 8,436
------------------ ------------- -------------
Total assets.................................................... 137,558,872 166,233,143 303,792,015
------------------ ------------- -------------
LIABILITIES
Bank Overdraft.................................................... -- 88,425 88,425
Accrued expenses and other liabilities............................ 302,167 192,405 494,572
Payable for Fund shares reacquired................................ 282,581 404,297 686,878
Forward currency contracts--amount payable to counterparties...... 120,639 151,267 271,906
Management fee payable............................................ 87,527 106,493 194,020
Dividends payable................................................. 23,150 -- 23,150
Distribution fee payable.......................................... 20,516 22,982 43,498
Withholding tax payable........................................... 13,588 -- 13,588
------------------ ------------- -------------
Total liabilities............................................... 836,580 965,869 1,802,449
------------------ ------------- -------------
NET ASSETS........................................................ $ 136,722,292 $ 165,267,274 $ 301,989,566
------------------ ------------- -------------
------------------ ------------- -------------
Net assets were comprised of:
Common stock, at par............................................ $ 16,896 $ 205,901
Paid in capital in excess of par................................ 181,785,195 164,988,534
------------------ ------------- -------------
181,802,091 165,194,435 --
Undistributed net investment income............................... (472,762) -- (472,762)
Investments..................................................... (46,655,394) (600,027) (47,255,421)
Net unrealized appreciation of investments........................ 2,034,769 672,866 2,707,635
------------------ ------------- -------------
Net assets, December 31, 1998..................................... $ 136,708,704 $ 165,267,274 $ (45,020,548)
------------------ ------------- -------------
------------------ ------------- -------------
Class A:
Net asset value and redemption price per share.................. $ 8.09 $ 8.03 $ 8.03
Maximum sales charge (3% and 4% of offering price).............. 0.25 0.33 0.33
------------------ ------------- -------------
Maximum offering price.......................................... $ 8.34 $ 8.36 $ 8.36
------------------ ------------- -------------
------------------ ------------- -------------
Class B:
Net asset value, offering price and redemption price per share.. $ 8.10 $ 8.03 $ 8.03
------------------ ------------- -------------
------------------ ------------- -------------
Class C:
Net asset value and redemption price per share.................. $ 8.10 $ 8.03 $ 8.03
Maximum sales charge (4% of offering price)..................... 0.08 0.08 0.08
------------------ ------------- -------------
Maximum offering price.......................................... $ 8.18 $ 8.11 $ 8.11
------------------ ------------- -------------
------------------ ------------- -------------
Class Z:
Net asset value, offering price and redemption price per share.. $ 8.09 $ 8.03 $ 8.03
------------------ ------------- -------------
------------------ ------------- -------------
</TABLE>
B-6
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL THE GLOBAL
INTERMEDIATE GLOBAL TOTAL RETURN PRO FORMA PRO FORMA
INCOME FUND FUND ADJUSTMENTS COMBINED
------------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Interest and discount
earned.................... $10,842,233 $ 13,687,048 $ -- $24,529,281
------------------- ------------ ----------- -----------
Expenses
Distribution Fee--Class A... 196,029 257,141 -- 453,170
Distribution Fee--Class B... 59,041 22,860 -- 81,901
Distribution Fee--Class C... 1,886 1,647 -- 3,533
Management fee.............. 1,066,593 1,323,490 -- 2,390,083
Transfer agent's fees &
expenses.................. 363,000 320,000 -- 683,000
Custodian's fees &
expenses.................. 206,000 225,000 (118,180)(a) 312,820
Reports to shareholders..... 112,000 50,000 (60,000)(a) 102,000
Registration fees........... 66,000 50,000 (66,000)(a) 50,000
Legal fees.................. 58,000 45,000 (43,000)(a) 60,000
Audit fee................... 36,000 36,000 (30,000)(a) 42,000
Directors'/Trustees' fees... 20,000 18,000 (17,000)(a) 21,000
Insurance expense........... 3,000 4,000 -- 7,000
Miscellaneous............... 10,370 12,608 (9,393)(a) 13,585
------------------- ------------ ----------- -----------
Total Expenses............ 2,197,919 2,365,746 (343,573) 4,220,092
------------------- ------------ ----------- -----------
NET INVESTMENT INCOME......... 8,644,314 11,321,302 343,573 20,309,189
------------------- ------------ ----------- -----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS NET
REALIZED GAIN (LOSS) ON:
Investment transactions..... 1,649,210 2,920,023 -- 4,569,233
Foreign currency
transactions.............. (2,048,387) (1,349,135) -- (3,397,522)
------------------- ------------ ----------- -----------
(399,177) 1,570,888 -- 1,171,711
------------------- ------------ ----------- -----------
Net change in unrealized
appreciation (depreciation)
of:
Investments................. 4,951,096 2,767,090 -- 7,718,186
Foreign currencies.......... (1,084,378) (909,628) -- (1,994,006)
------------------- ------------ ----------- -----------
3,866,718 1,857,462 -- 5,724,180
------------------- ------------ ----------- -----------
Net gain (loss) on
investments................. 3,467,541 3,428,350 -- 6,895,891
------------------- ------------ ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS... $12,111,855 $ 14,749,652 $ 343,573 $27,205,080
------------------- ------------ ----------- -----------
------------------- ------------ ----------- -----------
</TABLE>
- --------------------------
(a) Adjustment to reflect elimination of duplicative expenses.
B-7
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
3/1/97- 1/1/98- 3/1/97-
12/31/97 2/28/97 12/31/97 2/28/98 2/28/98
----------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Interest and discount earned....................... 13,380,233 2,391,029 10,989,204 2,000,046 12,989,250
Expenses
Distribution Fee--Class A.......................... 136,641 22,400 114,241 21,887 136,128
Distribution Fee--Class B.......................... 628,860 114,725 514,135 88,163 602,298
Distribution Fee--Class C.......................... 6,428 1,040 5,388 1,145 6,533
Management fee..................................... 879,039 151,843 727,196 132,551 859,747
Transfer agent's fees & expenses................... 350,000 64,657 285,343 45,929 331,272
Reports to shareholders............................ 91,000 12,931 78,069 10,674 88,743
Custodian's fees & expenses........................ 170,000 45,260 124,740 22,708 147,448
Taxes.............................................. -- -- -- -- --
Registration fees.................................. 74,000 9,779 64,221 7,569 71,790
Directors'/Trustees' fees.......................... 28,000 8,405 19,595 4,526 24,121
Legal fees......................................... 34,000 7,274 26,726 3,233 29,959
Audit fee.......................................... 28,000 9,213 18,787 5,657 24,444
Insurance expense.................................. -- -- -- -- --
Miscellaneous...................................... 14,814 1,530 13,284 1,130 14,414
----------- --------- ----------- ---------- -----------
Total Expenses................................... 2,440,782 449,057 1,991,725 345,172 2,336,897
Less: Management fee waiver.......................... (238,812) (60,737) (178,075) -- (178,075)
----------- --------- ----------- ---------- -----------
Net Expenses..................................... 2,201,970 388,320 1,813,650 345,172 2,158,822
----------- --------- ----------- ---------- -----------
NET INVESTMENT INCOME................................ 11,178,263 2,002,709 9,175,554 1,654,874 10,830,428
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions............................ 873,036 (159,413) 1,032,449 455,898 1,488,347
Financial futures contracts........................ (199,073) -- (199,073) -- (199,073)
Written options.................................... -- -- -- -- --
----------- --------- ----------- ---------- -----------
673,963 (159,413) 833,376 455,898 1,289,274
Net change in unrealized appreciation/depreciation
of:
Investment transactions............................ 1,996,049 (203,344) 2,199,393 (1,486,813) 712,580
Financial futures contracts........................ -- -- -- -- --
----------- --------- ----------- ---------- -----------
1,996,049 (203,344) 2,199,393 (1,486,813) 712,580
Net gain (loss) on investments....................... 2,670,012 (362,757) 3,032,769 (1,030,915) 2,001,854
----------- --------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS......................................... 13,848,275 1,639,952 12,208,323 623,959 12,832,282
</TABLE>
B-8
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
The Global Total Return Fund, Inc. (the Fund) is an open-end, non diversified
management investment company. The Fund's investment objective is to seek total
return made up of current income and capital appreciation. The Fund seeks to
achieve this objective by investing at least 65% of its total assets in
income-producing debt securities of the U.S. and foreign governments,
supranational organizations, semi-governmental entities or governmental
agencies, authorities or instrumentalities and short-term bank debt securities
or bank deposits. We look primarily for investment-grade securities denominated
in U.S. dollars and in foreign currencies.
The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of Prudential Intermediate Global
Income, Inc. will be exchanged for shares of The Global Total Return Fund, Inc.
and The Global Total Return Fund, Inc. will assume the liabilities, if any, of
Prudential Intermediate Global Income Fund, Inc. Immediately thereafter, the
shares of The Global Total Return Fund, Inc. will be distributed to the
shareholders of in a total liquidation of Prudential Intermediate Global Income
Fund, Inc. which will subsequently be dissolved. The following pro forma
financial statements include a pro forma Portfolio of Investments at December
31, 1998, a pro forma Statement of Assets and Liabilities at December 31, 1998
and a pro forma Statement of Operations for the year ended December 31, 1998.
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 VALUATIONS: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollars 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 contract 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 transaction in repurchase
agreements with U.S. financial institutions, it is the Fund's policy that its
custodian or designed 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 on
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 proceeding 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) purchase and sales of investment securities, income and expenses at the
rates of exchange prevailing on the respective dates of such transactions.
B-9
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ACCOUNTING POLICIES (CONTINUED)
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
price of the securities held at year-end.
Similarly, the Fund does not isolate the effect of change 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 transaction 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 amount actually received or paid. Net currency gains and losses from
valuing foreign currency denominated assets (excluding investment) 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 forwards currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivable and payable 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: stated coupon, original
issue discount and market discount, is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fee), 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.
B-10
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ACCOUNTING POLICIES (CONTINUED)
DIVIDENDS AND DISTRIBUTIONS: Dividends are declared quarterly.
Distributions of capital gains, if any, will be declared at least annually.
Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease undistributed net investment income by
$4,015,166, decrease accumulated net realized loss on investments by $4,460,978,
and decrease paid in capital in excess of par by $445,812 for foreign currency
losses realized and recognized during the year ended December 31, 1998. Net
investment income, net realized gains and net assets were not affected by this
change.
REORGANIZATION AND SOLICITATION EXPENSES: Expenses of reorganization and
solicitation will be borne by the Fund and Prudential Global Limited Maturity
Fund, Inc. in proportion to their respective assets and will include
reimbursement of brokerage firms and others for expenses in forwarding proxy
solicitation material to shareholders.
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"), 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.
Then Fund has a distribution agreement with Prudential Securities
Incorporated ("PSI"), which acted as the distributor of the Class A, B, C and Z
shares of the Fund through May 31, 1998. Prudential Investment Management
Service LLC ("PIMS") became the distributor of the Fund effective June 1, 1998
and is serving 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 them. The distribution fees were accrued daily and payable
monthly. No distribution or service fees were paid to PSI or PIMS as distributor
of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI and PIMS
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, 1998. Effective January 1, 1999 the expense
under the Class A plan is .25 of 1% of the average daily net assets of the Class
A shares.
B-11
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. AGREEMENTS (CONTINUED)
PSI and PIMS have advised the Fund that they have received approximately
$12,200 and $300 in front-end sales charges resulting from sales of Class A and
Class C shares, respectively, during the year ended December 31, 1998. From
these fees, PSI and PIMS paid such sales charges to dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended December 31,
1998, they received approximately $27,800 and $800 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM, PIC, PIMS and PRICOA are indirect, wholly owned subsidiaries of
The Prudential Insurance Company of America.
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 borrowing 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, 1998. The Funds pay a commitment fee at an
annual rate of .055 of 1% on the unused portion of the credit facility. The
commitment fee is accrued and paid quarterly on a pro rata basis by the Funds.
The Agreement expired on December 29, 1998 and has been extended through
February 28, 1999 under the same terms.
B-12
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION OF TOTAL RETURN FUND
DATED MARCH 1, 1999.
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
Statement of Additional Information
dated March 1, 1999
The Global Total Return Fund, Inc. (the Fund) is an open-end,
non-diversified management investment company. The Fund's investment objective
is to seek total return made up of current income and capital appreciation. The
Fund seeks to achieve this objective by investing at least 65% of its total
assets in income-producing debt securities of the U.S. and foreign governments,
supranational organizations, semi-governmental entities or governmental
agencies, authorities or instrumentalities and short-term bank debt securities
or bank deposits. We look primarily for investment-grade securities denominated
in U.S. dollars and in foreign currencies. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the Fund's Prospectus, dated March 1, 1999, a
copy of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Description of the Fund, Its Investments and Risks . . . . . . . . . . . . B-2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . .B-19
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . .B-21
Control Persons and Principal Holders of Securities. . . . . . . . . . . .B-24
Investment Advisory and Other Services . . . . . . . . . . . . . . . . . .B-25
Brokerage Allocation and Other Practices . . . . . . . . . . . . . . . . .B-29
Capital Shares, Other Securities and Organization. . . . . . . . . . . . .B-30
Purchase, Redemption and Pricing of Fund Shares. . . . . . . . . . . . . .B-31
Shareholder Investment Account . . . . . . . . . . . . . . . . . . . . . .B-40
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-44
Taxes, Dividends and Distributions . . . . . . . . . . . . . . . . . . . .B-45
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . .B-48
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . .B-50
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . .B-61
Appendix A--Description of Security Ratings. . . . . . . . . . . . . . . . A-1
Appendix I--General Investment Information . . . . . . . . . . . . . . . . I-1
Appendix II--Historical Performance Data . . . . . . . . . . . . . . . . .II-1
Appendix III--Information Relating to Prudential . . . . . . . . . . . . III-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FUND HISTORY
The Global Total Return Fund, Inc. was incorporated under the laws of
Maryland on May 6, 1986 under the name "The Global Yield Fund, Inc." as a
closed-end, non-diversified management investment company. In connection with a
change in the Fund's investment objective approved by shareholders in November,
1994, shareholders approved a change in the name of the Fund to The Global Total
Return Fund, Inc. The Fund operated as a closed-end fund prior to January 15,
1996. On December 6, 1995, shareholders approved open-ending the Fund, and since
January 15, 1996, the Fund has operated as an open-end fund.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(A) CLASSIFICATION. The Fund is a "non-diversified" management investment
company and may invest more than 5% of its total assets in the securities of one
or more issuers. However, the Fund intends to limit its investments in the
securities of any one issuer, except for securities issued or guaranteed as to
payment of principal and interest by any one government, supranational issuer,
semi-government or government agency, authority or instrumentality, to 5% of its
total assets at the time of purchase. Except for securities issued or guaranteed
by the U.S. government, its agencies, authorities or instrumentalities, the Fund
will not invest 25% or more of its total assets at the time of purchase in the
securities of a central government or a supranational issuer and not more than
10% of its total assets in securities of a semi-government or government agency,
authority or instrumentality. Investment in a non-diversified investment company
involves greater risk than investment in a diversified investment company
because a loss resulting from the default of a single issuer may represent a
greater portion of the total assets of a non-diversified portfolio.
(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's
investment objective is to seek total return, made up of current income and
capital appreciation. While the principal investment policies and strategies for
seeking to achieve this objective are described in the Fund's prospectus, the
Fund may from time to time also use the securities, instruments, policies and
strategies described below in seeking to achieve its objective. The Fund may not
be successful in achieving its objective and you could lose money.
FOREIGN SECURITIES
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 and American Depositary
Shares. In many instances, foreign securities may provide higher yields but may
be subject to greater fluctuations in price than securities of domestic issuers
which have similar maturities and quality. Under certain market conditions these
investments may be less liquid and more volatile than the securities of U.S.
corporations and are certainly less liquid than securities issued or guaranteed
by the U.S. government, its instrumentalities or agencies.
Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political, economic or
social instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to U.S. companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States, and, for certain foreign countries, there is a
possibility of expropriation, confiscatory taxation or diplomatic developments
which could affect investment in those countries and potential difficulties in
enforcing contractual obligations and extended settlement periods. Finally, in
the event of a default of any such foreign debt obligations, it may be more
difficult for the Fund to obtain, or to enforce a judgment against, the issuers
of such securities.
The costs attributable to foreign investing are higher than the costs of
domestic investing. For example, the cost of maintaining custody of foreign
securities generally exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing are frequently higher than
those attributable to domestic investing. Costs are incurred in connection with
conversions between various currencies. In addition, foreign brokerage
commissions are generally higher than in the U.S., and the foreign securities
markets may be less liquid and more volatile than in the U.S. 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.
B-2
<PAGE>
The Fund invests in debt securities denominated in the currencies of
developed countries and developing or emerging market countries whose
governments are considered stable by the Fund's investment adviser. An issuer of
debt securities purchased by the Fund may be domiciled in a country other than
the country in whose currency the instrument is denominated. Companies in
emerging markets may have limited product lines, markets or financial resources
and may lack management depth. The securities of these companies may have
limited marketability and may be subject to more abrupt or erratic market
movements than securities of larger, more established companies or the market
averages in general. Investing in the fixed-income markets of emerging market
countries involves exposure to economies that are generally less diverse and
mature, and to political systems which can be expected to have less stability
than those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the markets of
developed countries. The risks associated with investments in foreign
securities, described above, may be greater with respect to investments in
developing countries.
The Fund may invest in debt securities issued by supranational
organizations such as the World Bank, the European Investment Bank, the European
Coal and Steel Community, and the Asian Development Bank. The Fund may invest in
debt securities issued by "semi-governmental entities" such as entities owned by
a national, state or equivalent government or are obligations of a political
unit that are not backed by the national government's "full faith and credit"
and general taxing powers. Examples of semi-governmental issuers include, among
others, the Province of Ontario and the City of Stockholm.
The Fund may also invest in 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.
The Fund may invest in component parts of debt securities of foreign
governments or semi-governmental entities, namely either the corpus (principal)
of such obligations or one or more of the interest payments scheduled to be paid
on such obligations. These securities may take the form of (1) obligations from
which the interest coupons have been stripped (principal only); (2) the interest
coupons that are stripped (interest only); (3) book-entries at a bank
representing ownership of obligation components; or (4) receipts evidencing the
component parts (corpus or coupons) of obligations that have not actually been
stripped. Such receipts evidence ownership of component parts of obligations
(corpus or coupons) purchased by a third party (typically an investment banking
firm) and held on behalf of the third party in physical or book-entry form by a
major commercial bank or trust company pursuant to a custody agreement with the
third party. The Fund may also invest in custodial receipts held by a third
party. Stripped securities are, in general, more sensitive to interest rate
changes than securities that have not been stripped. Combined with investments
in similar U.S. Government securities, the Fund will not invest more than 10% of
its total assets in such securities.
A change in the value of a foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of the Fund's assets
denominated in that currency. These currency fluctuations can result in gains or
losses for the Fund. For example, if a foreign security increases in value as
measured in its currency, an increase in value of the U.S. dollar, relative to
the currency in which the foreign security is denominated can offset some or all
of such gains. These currency changes will also affect the Fund's return, income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency decreases after the Fund's income has been accrued and translated into
U.S. dollars, the Fund would experience a foreign currency loss and 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 currency 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. 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. Gains and losses on security and currency transactions cannot be
predicted. This fact coupled with the different tax and accounting treatment of
certain currency gains and losses increases the likelihood of distributions in
whole or in part constituting a return of capital to shareholders.
The Fund's interest income from foreign government securities issued in
local markets may, in some cases, be subject to applicable withholding taxes
imposed by governments in such markets. The Fund may sell a foreign security it
owns prior to
B-3
<PAGE>
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."
Returns available from foreign currency denominated debt instruments can be
adversely affected by changes in exchange rates. The Fund's investment adviser
believes that the use of foreign currency hedging techniques, including
"cross-currency hedges" may assist, under certain conditions, in helping to
protect against declines in the U.S. dollar value of income available for
distribution to shareholders and declines in the net asset value of the Fund's
shares resulting from adverse changes in currency exchange rates. For example,
the return available from securities denominated in a particular foreign
currency would diminish in the event the value of the U.S. dollar increased
against such currency. Such a decline could be partially or completely offset by
an increase in value of cross-currency hedge involving a forward currency
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.
If a security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between currencies. The Fund may enter
into foreign currency forward contracts for the purchase or sale of foreign
currency for hedging purposes. See "Risk Management and Return Enhancement
Strategies" below.
SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED SECURITIES. On
January 1, 1999, 11 of the 15 member states of the European Monetary Union
introduced the "euro" as a common currency. During a three-year transitional
period, the euro will coexist with each participating state's currency and, on
July 1, 2002, the euro is expected to become the sole currency of the
participating states. During the transition period, the Fund will treat the
euro as a separate currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that may occur at
the time of the conversion, such as accrual periods, holiday conventions,
indices, and other features may require the realization of a gain or loss by the
Fund as determined under existing tax law.
The Fund's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Fund's other service providers to address the
conversion. The Fund has not borne any expenses related to these actions.
FIXED-INCOME 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 or
comparably rated by another NRSRO or if unrated, deemed to be of equivalent
quality by the investment adviser.
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, the market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated (i.e., high yield or "junk
bonds") securities are more likely to react to developments affecting market and
credit risk than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund.
B-4
<PAGE>
Generally, lower-rated securities and unrated securities of comparable
quality (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 (1) 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 (2) 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, the Subadviser and the Board of
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.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer. As a
result, the investment adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's net asset value.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. 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 securities, resulting in a decline in the overall credit quality of the
Fund's portfolio and increasing the exposure of the Fund to the risks of high
yield securities.
Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicates. See Appendix A--"Description of Security Ratings."
Subsequent to its purchase by the Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of these securities by the Fund, but
the 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, 1998, the monthly dollar-weighted
average ratings of the debt obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATING TOTAL INVESTMENTS
------- -----------------
<S> <C>
AAA/Aaa = 70.7%
AA/Aa = 3.9%
A/A = 10.0%
BBB/Baa = 10.3%
BB/Ba = 1.1%
CCC/Caa = 1.0%
Unrated = 3.0%
</TABLE>
B-5
<PAGE>
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund may invest in U.S. Treasury securities,
including bills, notes, bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. government and,
as such, are backed by the "full faith and credit" of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances.
OBLIGATIONS 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.
Obligations issued or guaranteed as to principal and interest by the U.S.
government may be acquired by the Fund in the form of U.S. Treasury notes or
bonds. Such notes and bonds are held in custody by a bank on behalf of the
owners. These custodial receipts are commonly referred to as Treasury Strips.
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 (1) obligations from which the interest coupons have been
stripped; (2) the interest coupons that are stripped; (3) book-entries at a
Federal Reserve member bank representing ownership of obligation components; or
(4) 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.
SPECIAL CONSIDERATIONS. U.S. government securities are considered among the
most creditworthy of fixed-income investments. The yields available from U.S.
government securities are generally lower than the yields available from
corporate debt securities. The values of U.S. government securities (like those
of fixed-income securities generally) will change as interest rates fluctuate.
During periods of falling U.S. interest rates, the values of outstanding
long-term U.S. government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of those fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. government securities
will not affect investment income from those securities, they will affect the
net asset value (NAV) of the Fund.
At a time when the Fund has written call options on a portion of its U.S.
government securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by the Fund. The termination of option
positions under these conditions would generally result in the realization of
capital losses, which would reduce the Fund's capital gains distributions.
Accordingly, the Fund would generally seek to realize capital gains to offset
realized losses by selling portfolio securities. In such circumstances, however,
it is likely that the proceeds of such sales would be reinvested in lower
yielding securities.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES
The Fund may invest in mortgage-backed securities and other derivative
mortgage products, including those representing an undivided ownership interest
in a pool of mortgages, e.g., GNMA, FNMA and FHLMC Certificates where the U.S.
government or its agencies or instrumentalities guarantees the payment of
interest and principal of these securities. However, these guarantees do not
extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates nor do these guarantees extend to the yield
or value of the Fund's shares. These certificates are in most cases
"pass-through" instruments, through which the holder receives a share of all
interest and principal payments from the mortgages underlying the certificate,
net of certain fees.
In addition to GNMA, FNMA or FHLMC certificates through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, the Fund may also invest in certain mortgage
pass-through securities
B-6
<PAGE>
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 (ARMs),
which are pass-through mortgage securities collateralized by adjustable rate
mortgages, and Fixed-Rate Mortgage Securities (FRMs), which are collateralized
by fixed-rate mortgages. For purposes of the Fund's maturity limitation, the
maturity of a mortgage-backed security will be deemed to be equal to its
remaining maturity (i.e., the average maturity of the mortgages underlying such
security determined by the investment adviser on the basis of assumed prepayment
rates with respect to such mortgages).
FHLMC SECURITIES. FHLMC presently issues two types of mortgage pass-through
securities, mortgage participation certificates (PCs) and guaranteed mortgage
certificates (GMCs). The Fund does not intend to invest in GMCs. PCs resemble
GNMA Certificates in that each PC represents a pro rata share of all interest
and principal payments made and owed on the underlying pool. FHLMC guarantees
timely monthly payment of interest on PCs and the stated principal amount.
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, 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 FRMs is that the interest rate and the rate of amortization of
principal of ARMs can and do change in accordance with movements in a
particular, pre-specified, published interest rate index. Because the interest
rate on ARMs generally moves in the same direction as market interest rates, the
market value of ARMs tends to be more stable than that of long-term fixed-rate
securities.
FIXED-RATE MORTGAGE SECURITIES. The Fund anticipates investing in
high-coupon fixed-rate mortgage securities. Such securities are collateralized
by fixed-rate mortgages and tend to have high prepayment rates when the level of
prevailing interest rates declines significantly below the interest rates on the
mortgages. Thus, under those circumstances, the securities are generally less
sensitive to interest rate movements than lower coupon FRMs.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
(CMOs) are debt instruments collateralized by GNMA, FNMA or FHLMC Certificates,
but also may be collateralized by whole loans or private mortgage pass-through
securities (such collateral collectively hereinafter referred to as Mortgage
Assets). Multi-class pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including depository institutions, mortgage banks, investment banks and
special-purpose subsidiaries of the foregoing. The issuer of a series of CMOs
may elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC).
All future references to CMOs include REMICs and multi-class pass-through
securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways.
SPECIAL CONSIDERATIONS OF MORTGAGE-BACKED SECURITIES. The underlying
mortgages which collateralize the ARMs, CMOs and REMICs 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. In
addition, because 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 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,
B-7
<PAGE>
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.
Because the prepayment characteristics of the underlying mortgages vary, it
is not possible to predict accurately the average life of a particular issue of
pass-through certificates. Mortgage-backed securities are often subject to more
rapid prepayment than their stated maturity date would indicate as a result of
the pass-through of prepayments on the underlying mortgage obligations. 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. During periods
of rising interest rates, the rate of prepayment mortgages underlying
mortgage-backed securities can be expected to decline, extending the projected
average maturity of the mortgage-backed securities. This maturity extension risk
may effectively change a security which was considered short- or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short- or intermediate-term securities.
CORPORATE AND OTHER NON-GOVERNMENT DEBT SECURITIES
The Fund may invest in corporate and other nongovernment 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.
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." 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 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.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund also may engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to enhance
return but not for speculation. The Fund, and thus its investors, may lose money
through any
B-8
<PAGE>
unsuccessful use of these strategies. These strategies currently include the use
of options on securities and foreign currencies, foreign currency forward
contracts and futures contracts and options on such contracts (including
interest rate futures contracts and currency futures contracts and options
thereon). The Fund's ability to use these strategies may be limited by various
factors, such as market conditions, regulatory limits and tax considerations,
and there can be no assurance that any of these strategies will succeed. If new
financial products and risk management techniques are developed, the Fund may
use them to the extent consistent with its investment objective and policies.
OPTIONS ON SECURITIES
The Fund may purchase and write (that is, sell) put and call options on
securities and currencies that are traded on U.S. and foreign securities
exchanges or in the over-the-counter market to seek to enhance return or to
protect against adverse price fluctuations in securities in the Fund's
portfolio. These options will be on debt securities, aggregates of debt
securities, indices of prices thereof, other financial indices (for example, the
S&P 500), U.S. Government securities (listed on an exchange and
over-the-counter), foreign government securities and foreign currencies.
The Fund may write covered put and call options to generate additional
income through the receipt of premiums, purchase put options in an effort to
protect the value of a security that it owns against a decline in market value
and purchase call options in an effort to protect against an increase in the
price of securities (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 series.
A call option gives the purchaser, in exchange for a premium paid, the
right for a specified period of time to purchase the securities 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, the Fund 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.
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, as the writer of a put option, might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.
The Fund may wish to protect certain portfolio securities against a decline
in market value through purchase of put options on other securities or
currencies which The Prudential Investment Corporation, doing business as
Prudential Investments (Prudential Investments), and PRICOA Asset Management Ltd
(PRICOA, and collectively with Prudential Investments, the Subadviser or
investment adviser) believes may move in the same direction as those portfolio
securities. If the Subadviser's judgment is correct, changes in the value of the
put options should generally offset changes in the value of the portfolio
securities being hedged. If the Subadviser's judgment is not correct, the value
of the securities underlying the put option may decrease less than the value of
the Fund's investments and therefore the put option may not provide complete
protection against a decline in the value of the Fund's investments below the
level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire through purchase of call options on
other debt securities which the Subadviser believes may move in the same
direction as those portfolio securities. In such circumstances the Fund will be
subject to risks analogous to those summarized above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Fund is not as close as anticipated
and the value of the securities underlying the call options increases less than
the value of the securities to be acquired by the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, it may purchase a security and concurrently write a call option against
that security. If the call option is exercised, the Fund's maximum gain will be
the premium it received for writing the option, adjusted upwards or downwards by
the difference between the Fund's purchase price of the security and the
exercise price of the option. If the option is not exercised and the price of
the underlying security declines, the amount of the decline will be offset in
part, or entirely, by the premium received.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying 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 an
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out-of-the-money call option may be used when it is expected that the premium
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call option
is exercised in such a transaction, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Fund's purchase price of the security and the exercise
price of the option. If the option is not exercised and the price of the
underlying security declines, the amount of the decline will be offset in part,
or entirely, by the premium received.
The Fund may 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 segregate 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 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.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an option may liquidate a position by effecting a
"closing sale transaction" by selling an option of the same series as the option
previously purchased. There is no guarantee that either a closing purchase or a
closing sale transaction can be effected.
Exchange-traded options in the U.S. are issued by a clearing organization
affiliated with the exchange on which the option is listed which, in effect,
gives its guarantee to the fulfillment of 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.
Exchange-traded options generally have a continuous liquid market while OTC
options may not. When the Fund writes an OTC option, it generally will be able
to close out the OTC option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally wrote
the OTC option. While the Fund will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
Until the Fund is able to effect a closing purchase transaction in a covered OTC
call option the Fund has written, it will not be able to liquidate securities
used as cover until the option expires or is exercised or different cover is
substituted. In the event of insolvency of the 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.
OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund may
repurchase any OTC options it writes for a maximum price to be calculated by a
formula set forth in the option agreement. The "cover" for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option.
The Fund will write only "covered" options. An option is covered if, as
long as the Fund is obligated under the option, it (1) owns an offsetting
position in the underlying security or (2) segregates 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.
There is no limitation on the amount of covered call options the Fund may
write. The Fund may write covered put options to the extent that cover for such
options does not exceed 25% of the Fund's net assets.
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SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury bonds and
notes tends to center on the most recently auctioned issues, the exchanges will
not indefinitely continue to introduce new series of options with expirations to
replace expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular issue will be
allowed to run their course, with the possible addition of a limited number of
new expirations as the original ones expire. Options trading on each series of
bonds or notes will thus be phased out as new options are listed on the more
recent issues, and a full range of expiration dates will not ordinarily be
available for every series on which options are traded.
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 segregate
with its Custodian Treasury bills maturing no later than those which would be
deliverable in the event of an assignment of an exercise notice to ensure that
it can meet its open option obligations.
ON GNMA CERTIFICATES. The Fund may purchase and write options on GNMA
Certificates in the over-the-counter market and, to the extent available, on any
exchange.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call option holding GNMA Certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA Certificates no longer have sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered or substitute cover.
A GNMA Certificate held by the Fund to cover a call option the Fund has
written in any but the nearest expiration month may cease to represent cover for
the option in the event of a decline in the GNMA coupon rate at which new pools
are originated under the FHA/VA loan ceiling in effect at any given time. Should
this occur, the Fund will no longer be covered, and the Fund will either enter
into a closing purchase transaction or replace the Certificate with a
Certificate which represents cover. When the Fund closes its option position or
replaces the Certificate, it may realize an unanticipated loss and incur
transaction costs.
OPTIONS ON CURRENCIES
Instead of purchasing or selling futures or foreign currency forward
contracts, the Fund may attempt to accomplish similar objectives by purchasing
put or call options on currencies either on exchanges or in over-the-counter
markets or by writing put options or covered call options on currencies. A put
option gives the Fund the right to sell a currency at the exercise price until
the option expires. A call option gives the Fund the right to purchase a
currency at the exercise price until the option expires. Both options serve to
insure against adverse currency price movements in the underlying portfolio
assets designated in a given currency. 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. The Fund's use of options on currencies
will be subject to the same limitations as its use of options on securities,
described above. The Fund will not purchase put or call options if, as a result
thereof, the value of the options would exceed 5% of the Fund's net assets.
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may enter into foreign currency forward 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 risks involved in entering into a foreign currency forward
contract are generally the same as for a futures contract having similar terms.
The Fund's transactions in foreign currency forward contracts will be
limited to risk management involving either specific transactions or portfolio
positions. Transaction risk management is the forward purchase or sale of
currency with respect to specific receivables or payables of the Fund generally
arising in connection with the purchase or sale of its portfolio securities and
accruals of interest receivable and Fund expenses. Position risk management is
the forward sale of currency with respect to portfolio security positions
denominated or quoted in that currency or in a currency bearing a high degree of
positive correlation to the value of that currency. The Fund may 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 the possible loss in
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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 that 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. If the Fund enters into a position
hedging transaction, the transaction will be "covered" by the position being
hedged or the Fund's Custodian will segregate cash or other liquid assets of the
Fund (less the value of the "covering" positions, if any) in an amount equal to
the value of the Fund's total assets committed to the consummation of the given
forward contract. If the value of the assets segregated declines, additional
assets will be segregated so that the value of the account will, at all times,
equal the amount of the Fund's net commitment with respect to the forward
contract.
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. The Fund is not required to enter into forward
contracts with regard to its foreign currency denominated securities.
The Fund will not enter into forward contracts to purchase or sell currency
if, as a result, the net market value of all such contracts exceeds 5% of the
Fund's net assets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may enter into futures contracts and options on futures contracts
to seek to reduce certain risks of its investments 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 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, in the investment adviser's judgment, an appropriate vehicle for
hedging. The Fund may enter into such futures contracts both on U.S. and foreign
exchanges.
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 Commodity
Futures Trading Commission (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.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator," subject to compliance with certain conditions. The
exemption is conditioned upon the Fund's purchasing and selling futures
contracts and options thereon for BONA FIDE hedging transactions, except that
the Fund may purchase and sell futures contracts and options thereon for any
other purpose to the extent that the aggregate initial margin and option
premiums on such non-hedging transactions do not exceed 5% of the market value
of the Fund's total assets. Although there are no other limits applicable to
futures contracts, the value of all futures contracts sold will not exceed the
total market value of the Fund's investments.
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. For example, 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. Also, 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. In addition, 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.
The Fund may only write "covered" put and call options on futures
contracts. The Fund will be considered "covered" with respect to a call option
it writes on a futures contract if the Fund owns the assets which are
deliverable under the futures contract
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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 with the Fund's Custodian for the term of the option cash or other
liquid assets equal to the fluctuating value of the optioned future. The Fund
will be considered "covered" with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the "covered" option or if it
segregates with the Custodian for the term of the option cash or other liquid
assets at all times equal in value to the exercise price of the put (less any
initial margin deposited by the Fund with the Custodian with respect to such put
option). There is no limitation on the amount of the Fund's assets which can be
segregated.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON
The Fund will purchase or sell interest rate futures contracts to take
advantage of or to protect the Fund against fluctuations in interest rates
affecting the value of debt securities which the Fund holds or intends to
acquire. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
a high degree of positive correlation to the values of the Fund's portfolio
securities. Such a sale would have an effect similar to selling an equivalent
value of the Fund's portfolio securities. If interest rates increase, the value
of the Fund's portfolio securities will decline, but the value of the futures
contracts to the Fund will increase at approximately an equivalent rate thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling debt securities
with longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a risk
management technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it is
expected that interest rates may decline. The purchase of futures contracts for
this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make the
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will segregate with the Fund's Custodian cash or
other liquid assets from its portfolio in an amount equal to the difference
between the fluctuating market value of such futures contracts and the aggregate
value of the initial margin deposited by the Fund with its Custodian with
respect to such futures contracts sufficient to cover the Fund's obligations
with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of debt securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
In addition, futures contracts entail risks. Although the Fund believes
that use of such contracts will benefit the Fund, if the investment adviser's
investment judgment about the general direction of interest rates is incorrect,
the Fund's overall
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<PAGE>
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 the investment adviser 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. 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.
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.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Participation in the options, futures and currency markets involves
investment risks and transaction costs to which the Fund would not be subject
absent the use of these strategies. The Fund, and thus investors, may lose money
through any unsuccessful use of these strategies. If the Subadviser's
predictions of movements in the direction of the securities, foreign currency or
interest rate markets are inaccurate, the adverse consequences to the Fund may
leave the Fund in a worse position than if such strategies were not used. Risks
inherent in the use of these strategies include: (1) dependence on the
Subadviser's ability to predict correctly movements in the direction of interest
rates, securities prices and currency markets; (2) imperfect correlation between
the price of options and futures contracts and options thereon and movements in
the prices of the securities or currencies being hedged; (3) the fact that the
skills needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; (5) the risk that the counterparty may be
unable to complete the transaction; and (6) the possible inability of the Fund
to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, due to the need for the Fund to maintain
"cover" or to segregate assets in connection with hedging transactions.
The Fund will generally purchase or sell options and futures on an exchange
only if there appears to be a liquid secondary market for such options or
futures; the Fund will generally purchase or sell OTC options only if the
investment adviser believes that the other party to the options will continue to
make a market for such options.
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ADDITIONAL RISKS OF OPTIONS ON SECURITIES AND
CURRENCIES, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Certain of the options, futures contracts and options thereon purchased or
sold by the Fund 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, the instrument
being traded. The value of such positions also could be adversely affected by
(1) other complex foreign political, legal and economic factors, (2) lesser
availability than in the U.S. of data on which to make trading decisions, (3)
delays in the Fund's ability to act upon economic events occurring in the
foreign markets during non-business hours in the U.S., (4) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the U.S. and (5) 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.
If so,this could limit the ability of the Fund fully to protect against these
risks. 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.
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, it might not be possible to effect closing transactions
in particular options the Fund has purchased with the result that the Fund would
have to exercise the options in order to realize any profit. If the Fund is
unable to effect a closing purchase transaction in a secondary market 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 include the following: (1) there may be insufficient trading interest in
certain options; (2) restrictions may be imposed by a securities exchange on
opening transactions or closing transactions or both; (3) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; (4) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (5) the facilities
of an exchange or clearing organization may not at all times be adequate to
handle current trading volume; or (6) one or more exchanges could, for economic
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 a particular class or series of options)
would cease to exist, although outstanding options would continue to be
exercisable in accordance with their terms.
SPECIAL RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS
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.
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.
B-15
<PAGE>
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.
Futures exchanges may establish daily limits in the amount that the price
of a futures contract or related options contract may vary either up or down
from the previous day's settlement price. Once the daily limit has been reached
in a particular contract, no trades may be made that day at a price beyond the
limit. The daily limit governs only price movements during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. Futures or options contract prices
could move to the daily limit for several consecutive trading days with little
or no trading and thereby prevent prompt liquidation of positions and subject
some traders to substantial losses. In such event, it may not be possible for
the Fund to close out a position, and in the event of adverse price movements,
the Fund would have to make daily cash payments of variation margin (except in
the case of purchased options).
Successful use of futures contracts and options thereon and forward
contracts by the Fund depends significantly on the ability of the investment
adviser to forecast movements in the direction of the market and interest and
foreign currency rates and requires skills and techniques different from those
used in selecting portfolio securities. The correlation between movements in the
price of a futures contract and movements in the price of the securities being
hedged is imperfect and the risk from imperfect correlation increases as the
composition of the Fund's portfolio diverges from the composition of the
relevant index. There is also a risk that the value of the securities being
hedged may increase or decrease at a greater rate than the related futures
contracts, resulting in losses to the Fund. 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. 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, OPTIONS ON FUTURES
CONTRACTS AND FOREIGN CURRENCY FORWARD CONTRACTS
The Fund will engage in transactions in futures contracts and options
thereon only to seek to reduce certain risks of its investments and to attempt
to enhance return 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 if the initial margin and premiums therefor
exceed 5% of the market value of the Fund's total assets after taking into
account unrealized profits and unrealized losses on any such contracts;
provided, however, that in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating the
5% limitation. The above restriction does not apply to the purchase and sale of
futures contracts and options thereon for BONA FIDE hedging purposes within the
meaning of CFTC regulations. 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 Custodian to cover the position,
or alternative cover will be employed, thereby insuring that the use of such
instruments is unleveraged.
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.
B-16
<PAGE>
When the investment adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract for a fixed amount of dollars to sell the
amount of foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date on which the forward contract is entered into
and the date it matures. The projection of short-term currency market movement
is extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. The Fund does not intend to enter into such
forward contracts to protect the value of its portfolio securities on a regular
or continuous basis. The Fund will also not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the long-term
investment decisions made with regard to overall diversification strategies.
However, the Fund believes that it is important to have the flexibility to enter
into such forward contracts when it determines that the best interest of the
Fund will thereby be served. 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 segregate cash or other liquid assets
of the Fund (less the value of the "covering" positions, if any) in an amount
equal to the value of the Fund's total assets committed to the consummation of
the given forward contract.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
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. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
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 (the Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
B-17
<PAGE>
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Directors. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. The investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Directors. In reaching liquidity decisions, the investment adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act, to be considered liquid (a) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (b) it must not be "traded
flat" (that is, without accrued interest) or in default as to principal or
interest.
The staff of the Securities and Exchange Commission (Commission) has taken
the position that purchased over-the-counter options and the assets used as
"cover" for written over-the-counter options are illiquid securities unless the
Fund and the counterparty have provided for the Fund, at the Fund's election, to
unwind the over-the-counter option. The exercise of such an option ordinarily
would involve the payment by the Fund of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the Fund
to treat the assets used as "cover" as "liquid." The Fund will also treat
non-U.S. Government interest-only and principal-only mortgage backed security
strips as illiquid so long as the staff of the Commission maintains its position
that such securities are illiquid.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund's Custodian will segregate cash or other liquid assets having a value equal
to or greater than the Fund's purchase commitments. The securities so purchased
are subject to market fluctuation and no interest accrues to the purchaser
during the period between purchase and settlement. At the time of delivery of
the securities the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value. Subject to the segregation
requirement, the Fund may purchase such securities without limit.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The Fund does not currently intend to invest in repurchase agreements
whose maturities exceed 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 repurchase agreement. The Fund's repurchase
agreements will at all times be fully collateralized by U.S. Government
obligations in an amount at least equal to the resale price. The instruments
held as collateral are valued daily, and if the value of instruments declines,
the Fund will require additional collateral. If the seller defaults and the
value of the collateral securing the repurchase agreement declines, the Fund may
incur a loss.
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's Directors. The investment
adviser will monitor the creditworthiness of such parties under the general
supervision of the Directors. In the event of a default or bankruptcy by a
seller, the Fund will promptly seek to liquidate the collateral.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (the Manager)
pursuant to an order of the Commission. On a daily basis, any uninvested cash
balances of the Fund may be aggregated with those of such investment companies
and invested in one or more repurchase agreements. Each fund participates in the
income earned or accrued in the joint account based on the percentage of its
investment.
B-18
<PAGE>
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes, or for the clearance of transactions and to take advantage of
investment opportunities. The Fund may pledge up to 20% of its total assets to
secure these borrowings. If the Fund borrows to invest in securities, any
investment gains made on the securities in excess of interest paid on the
borrowing will cause the net asset value of the shares to rise faster than would
otherwise be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to the Fund, the net asset value of the
Fund's shares will decrease faster than would otherwise be the case. This is the
speculative factor known as "leverage." If the Fund's asset coverage of
borrowings falls below 300%, the Fund will take prompt action (within 3 days) to
reduce its borrowings. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. The Fund will not purchase portfolio securities when borrowings
exceed 5% of the value of its total assets.
SEGREGATED ASSETS
The Fund will segregate with its Custodian, State Street Bank and Trust
Company (State Street), cash, U.S. government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets, equal in value to its obligations in respect of potentially leveraged
transactions. These include forward contracts, when-issued and delayed delivery
securities, futures contracts, written options and options on futures contracts
(unless otherwise covered). If collateralized or otherwise covered, in
accordance with Commission guidelines, these will not be deemed to be senior
securities. The assets segregated will be marked-to-market daily.
(D) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may temporarily
invest without limit in U.S. Treasury or other U.S. dollar-denominated
securities or high quality money market instruments, including commercial paper
of domestic and foreign corporations, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and short-term obligations issued or guaranteed by the U.S.
Government and its agencies denominated in either U.S. dollars or foreign
currencies. Such investments may be subject to certain risks, including future
political and economic developments, the possible imposition of withholding
taxes on interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions.
(E) PORTFOLIO TURNOVER
The portfolio turnover rate is generally the percentage computed by
dividing the lesser of portfolio purchases or sales (excluding all securities,
including options, whose maturities or expiration date at acquisition were one
year or less) by the monthly average value of the long-term portfolio. High
portfolio turnover (100% or more) involves correspondingly greater brokerage
commissions and other transaction costs, which are borne directly by the Fund.
In addition, high portfolio turnover may also mean that a proportionately
greater amount of distributions to shareholders will be taxed as ordinary income
rather than long-term capital gains compared to investment companies with lower
portfolio turnover. See "Brokerage Allocation and Other Practices" and "Taxes,
Dividends and Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (1) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (2) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of transactions; provided that the
deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow from banks up to 20% of the value of its total
assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes, for
B-19
<PAGE>
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.
B-20
<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
- ------------------------ --------- ----------------------
<S> <C> <C>
Edward D. Beach (74) Director President and Director of BMC Fund, Inc., a closed-end investment
company; formerly Vice Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary and Treasurer of
Broyhill Family Foundation Inc.; Member of the Board of Trustees of
Mars Hill College and Director or Trustee of 44 funds within the
Prudential Mutual Funds.
Delayne Dedrick Gold (60) Director Marketing and Management Consultant and Director or Trustee of 44 funds
within the Prudential Mutual Funds.
*Robert F. Gunia (52) Vice Vice President (since September 1997) of The Prudential Insurance Company
President of America (Prudential); Executive Vice President and Treasurer
and Director (since December 1996) of Prudential Investments Fund Management LLC
(PIFM); Senior Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential Securities); formerly Chief
Administrative Officer (July 1990-September 1996), Director (January
1989-September 1996) and Executive Vice President, Treasurer and
Chief Financial Officer (June 1987-September 1996) of Prudential
Mutual Fund Management, Inc. (PMF); Vice President and Director
(since May 1989) of The Asia Pacific Fund, Inc. and Director or
Trustee of 44 funds within the Prudential Mutual Funds.
Douglas H. McCorkindale (59) Director Vice Chairman (since March 1984) and President (since September 1997) of
Gannett Co. Inc. (publishing and media); Director of Continental
Airlines, Inc., Gannett Co. Inc. and Frontier Corporation and
Director or Trustee of 23 funds within the Prudential Mutual Funds.
*Mendel A. Melzer, CFA (38) Director Chief Investment Officer (since October 1998) of Prudential Investments;
751 Broad Street Chief Investment Officer (October 1996-October 1998) 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. and Director or Trustee
of 44 other funds within the Prudential Mutual Funds.
Thomas T. Mooney (57) 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, Executive Service Corps of
Rochester, Monroe County Water Authority, Inc., Monroe County
Industrial Development Corporation and Northeast Midwest Institute;
President, Director and Treasurer of First Financial Fund, Inc. and
The High Yield Plus Fund, Inc. and Director or Trustee of 33 other
funds within the Prudential Mutual Funds.
Stephen P. Munn (55) Director Chairman (since January 1994), Director and President (since 1988) and
Chief Executive Officer (1988-December 1993) of Carlisle Companies
Incorporated (manufacturer of industrial products) and Director or
Trustee of 18 funds within the Prudential Mutual Funds.
B-21
<PAGE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
- ------------------------ --------- ----------------------
<S> <C> <C>
*Richard A. Redeker (55) Director Formerly President, Chief 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.; Senior Executive Vice
President and Director (September 1978-September 1993) of Kemper
Financial Services, Inc. and Director or Trustee of 30 funds within
the Prudential Mutual Funds.
Robin B. Smith (59) Director Chairman and Chief Executive Officer (since August 1996), formerly
President and Chief Executive Officer (January 1989-August 1996) and
President and Chief Operating Officer (September 1981-December 1988)
of Publishers Clearing House; Director of BellSouth Corporation,
Texaco Inc., Spring Industries Inc. and Kmart Corporation and
Director or Trustee of 32 funds within the Prudential Mutual Funds.
Brian M. Storms (44) President and President (since October 1998) of Prudential Investments; formerly
Director President (September 1996-October 1998) of Prudential Mutual Funds,
Annuities and Investment Management Services; Managing Director (July
1991-September 1996) of Fidelity Investment Institutional Services
Company, Inc.; President, (October 1989-September 1991) of J.K.
Schofield; Senior Vice President (September 1982-October 1989) of
INVEST Financial Corporation and President and Director or Trustee of
47 funds within the Prudential Mutual Funds.
Louis A. Weil, III (57) Director Chairman (since January 1999), President and Chief Executive Officer
(since January 1996) and Director (since September 1991) of Central
Newspapers, Inc.; Chairman of the Board (since January 1996),
Publisher and Chief Executive Officer (August 1991-December 1995) of
Phoenix Newspapers, Inc.; formerly Publisher (May 1989-March 1991) of
Time Magazine, President, Publisher and Chief Executive Officer
(February 1986-August 1989) of The Detroit News and member of the
Advisory Board, Chase Manhattan Bank-Westchester and Director or
Trustee of 30 funds within the Prudential Mutual Funds.
Clay T. Whitehead (60) Director President (since May 1983) of National Exchange Inc. (new business
development firm) and Director or Trustee of 18 funds within the
Prudential Mutual Funds.
Grace C. Torres (39) Treasurer First Vice President (since December 1996) of PIFM; First Vice President
and Principal (since March 1993) of Prudential Securities; formerly First Vice
Financial and President (March 1994-September 1996) of PMF and Vice President (July
Accounting 1989-March 1994) of Bankers Trust Corporation.
Officer
Marguerite E. H. Morrison (42) Secretary Vice President and Associate General Counsel (since December 1996) of
PIFM, Vice President and Associate General Counsel (since September
1987) of Prudential Securities; formerly Vice President and Associate
General Counsel (June 1991-September 1996) of PMF.
Stephen M. Ungerman (45) Assistant Tax Director (since March 1996) of Prudential Investments; formerly First
Treasurer Vice President (February 1993-September 1996) of PMF.
</TABLE>
- ----------------
* "Interested" Director, as defined in the Investment Company Act, by reason
of affiliation with Prudential Securities. The
Prudential Insurance Company of America or the Manager.
** Unless otherwise stated, the address of the Directors and officers is c/o
Prudential Investments Fund Management LLC, Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.
B-22
<PAGE>
The Fund has Directors who, in addition to overseeing the actions of the
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Fund's officers, who
conduct and supervise the daily business operations of the Fund.
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.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund currently pays each of its Directors who is not an affiliated person of
PIFM or the investment adviser annual compensation of $2000, in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Director may change as a result of the introduction of additional funds on the
boards of which the Directors will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Directors' fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at
the beginning of each calendar quarter or, pursuant to a Commission exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Fund's obligation to make payments of deferred Directors' fees,
together with interest thereon, is a general obligation of the Fund.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1998 and the aggregate compensation paid to such Directors
for service on the Fund's Board and the boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
TOTAL 1998
COMPENSATION
FROM FUND
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF DIRECTOR FROM FUND TO DIRECTORS
---------------- --------- --------------
<S> <C> <C>
Edward D. Beach .......................... $2,250 $135,000(44/71)**
Delayne Dedrick Gold ..................... $2,250 $135,000(44/71)**
Robert F. Gunia+ ......................... -- None
Douglas H. McCorkindale* ................. $2,250 $ 70,000(23/40)**
Mendel A. Melzer+ ........................ -- None
Thomas T. Mooney* ........................ $2,250 $115,000(35/70)**
Stephen P. Munn .......................... $2,250 $ 45,000(18/24)**
Richard A. Redeker+ ...................... -- None
Robin B. Smith* .......................... $2,250 $ 99,000(32/41)**
Brian M. Storms+ ......................... -- None
Louis A. Weil III ........................ $2,250 $ 90,000(30/54)**
Clay T. Whitehead ........................ $2,250 $ 45,000(18/24)**
</TABLE>
- ----------
+ Directors who are "interested" do not receive compensation from the Fund or
any fund in the Fund Complex. Mr. Redeker is no longer an interested
director.
* Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1998 includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to approximately
$71,145, $119,740 and $116,225 for Messrs. McCorkindale and Mooney and Ms.
Smith, respectively.
** Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
B-23
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund
which are sold without either an initial sales charge or contingent deferred
sales charge to a limited group of investors. As of February 5, 1999, 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 5, 1999, Prudential Securities was record holder of
4,349,865 Class A shares (22.26%), 318,671 Class B shares (69.66%), 21,374 Class
C shares (59.8%) and 274 Class Z shares (31%) of the Fund. In the event of any
meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy materials to the beneficial owners for which it is the
record holder.
As of February 5, 1999 the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of shares of the Fund were:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS CLASS OF SHARES (% OF CLASS)
- ---- ------- --------------- --------------
<S> <C> <C> <C>
Smith Barney Inc. 333 West 34th St Class A 1,285,985(6.5%)
New York, NY 10001-2483
Mr. Marcelo Klysch & Rua Inconfidentes, 900 Savassi Class C 3,690(10.3%)
Mrs. Fania Klysch JTTEN Belo Horizonte, Brazil MG 30140
Donaldson, Lufkin & P.O. Box 2052, Class C 2,730(7.6%)
Jenrette Securities Corporation Jersey City, NJ 07303-2052
Richard Headley 2045 N. Green Bay Rd. Class C 2,175(6.1%)
Racine, WI 53405-1503
Prudential Bank and Trust Co., 53 W. Shore Dr., Class C 2,482(6.9%)
C/F The IRA of Leona N. Murphy Arcadia, OK 73007-7107
Mrs. Mildred Weintraub TTEE, 274 Running Springs Dr. Class C 4,241(11.8%)
Mildred Weintraub Trust, Palm Desert, CA 92211-3200
UA DTD 07/30/89
Brookie Rosenkrantz, 3725 S. Ocean Dr. Class C 3,105(8.6%)
Irwin Pechman & Apt. 1206
William Elstein CO-TTEES Hollywood, Fl 33019
Brookie Rosenkrantz
Rev. Liv. Tr. Va DTD 09/17/87
</TABLE>
B-24
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (the
Manager or PIFM), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. The Manager serves as manager to all of the other investment
companies that, together with the Fund, comprise the "Prudential Mutual Funds."
See "How the Fund is Managed--Manager" in the Prospectus. As of January 31,
1999, the Manager managed and/or administered open-end and closed-end management
investment companies with assets of approximately $71.5 billion. According to
the Investment Company Institute, as of December 31, 1998, the Prudential Mutual
Funds were the 18th largest family of mutual funds in the United States.
The Manager is a subsidiary of Prudential Securities and The Prudential
Insurance Company of America (Prudential). Prudential Mutual Fund Services LLC
(the Transfer Agent), a wholly-owned subsidiary of the Manager, serves as the
transfer agent for the Prudential Mutual Funds and in addition, provides
customer service, recordkeeping and management and administration services to
qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), the Manager, subject to the supervision of the Fund's Board and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, the Manager is obligated to keep certain books and records of the
Fund. The Manager also administers the Fund's corporate affairs and, in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Fund's custodian (the Custodian) and
the Fund's Transfer Agent. The management services of the Manager for the Fund
are not exclusive under the terms of the Management Agreement and the Manager is
free to, and does, render management services to others.
For its services, the Manager receives, pursuant to the Management
Agreement, a fee at an annual rate of .75 of 1% of the Fund's average daily net
assets up to $500 million, .70 of 1% of such assets between $500 million and $1
billion and .65 of 1% of such assets in excess of $1 billion. The fee is
computed daily and payable monthly. The Management Agreement also provides that,
in the event the expenses of the Fund (including the fees of the Manager, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to the Manager
will be reduced by the amount of such excess. No jurisdiction currently limits
the Fund's expenses.
In connection with its management of the business affairs of the Fund, the
Manager bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's investment adviser;
(b) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation, doing business as Prudential Investments (the Subadviser, PI or the
investment adviser), pursuant to the subadvisory agreement between the Manager
and the Subadviser (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Fund and of pricing the Fund's shares, (d) the charges and expenses of legal
counsel and independent accountants for the Fund, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Fund in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade associations of which the Fund
may be a member, (h) the cost of stock certificates representing shares of the
Fund, (i) the cost of fidelity and liability insurance, (j) certain organization
expenses of the Fund and the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Commission and
the states, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
B-25
<PAGE>
The Management Agreement provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Fund in connection with
the matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor 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.
For the fiscal years ended December 31, 1998, 1997 and 1996, the Manager
received management fees of $1,323,490, $1,549,812 and $2,317,938, respectively,
from the Fund.
The Manager has entered into a Subadvisory Agreement with the Subadviser, a
wholly-owned subsidiary of Prudential. The PI Subadvisory Agreement provides
that the Subadviser will furnish investment advisory services in connection with
the management of the Fund. In connection therewith, the Subadviser is obligated
to keep certain books and records of the Fund. The Subadviser has entered into
an agreement with PRICOA Asset Management Ltd. (PRICOA or the investment
adviser) under which PRICOA provides investment advisory services to the Fund.
The Manager continues to have responsibility for all investment advisory
services pursuant to the Management Agreement and supervises the investment
adviser's performance of such services. The Subadviser is reimbursed by the
Manager for the reasonable costs and expenses incurred by the Subadviser in
furnishing those services and PRICOA is reimbursed for its reasonable costs and
expenses incurred in furnishing advisory services.
The PI Subadvisory Agreement provides that it will terminate in the event
of its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The PI Subadvisory Agreement may be
terminated by the Fund, the Manager or the Subadviser upon not more than 60
days', nor less than 30 days', written notice. The PI Subadvisory Agreement
provides that it will continue in effect for a period of more than two years
from its execution only so long as such continuance is specifically approved at
least annually in accordance with the requirements of the Investment Company
Act. The PRICOA Subadvisory Agreement provides that PRICOA can terminate it on
60 days' written notice and that the Subadviser can terminate it 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).
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (the Distributor), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts as the
distributor of the shares of the Fund. Prior to June 1, 1998 Prudential
Securities Incorporated (Prudential Securities) was the Fund's Distributor. The
Distributor and Prudential Securities are subsidiaries of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
also incurs the expenses of distributing the Fund's Class Z shares under a
Distribution Agreement, none of which are reimbursed or paid for by the Fund.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of brokers or financial institutions which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A. PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of .30 of 1% of the average daily net assets of the Class A shares. The
Class A Plan provides that (1) .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 (2) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of
B-26
<PAGE>
1%. The Distributor has contractually limited its distribution related fees
payable under the Class A Plan to .25 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending December 31, 1999. Prior to
January 1, 1999, the Distributor limited its distribution related fees under the
Class A Plan to .15 of 1%.
For the fiscal year ended December 31, 1998, the Distributor and Prudential
Securities received payments of approximately $257,141, under the Class A Plan.
These amounts were primarily expended for payments of account servicing fees to
financial advisers and other persons who sell Class A shares. For the fiscal
year ended December 31, 1998, the Distributor and Prudential Securities also
received approximately $12,200 in initial sales charges.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
may pay the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of 1% of the average daily net
assets of each of the Class B and Class C shares. The Class B and Class C Plans
provides that (1) .25 of 1% of the average daily net assets of the shares may be
paid as a service fee and (2) .75 of 1% (not including the service fee) of the
average daily net assets of the shares (asset based sales charge) may be paid
for distribution-related expenses with respect to the Class B shares. The
service fee (.25 of 1% of average daily net assets) is used to pay for personal
service and/or the maintenance of shareholder accounts. The Distributor has
contractually limited its distribution related fees payable under both the Class
B and Class C Plan to .75 of 1% of the average daily net assets of the shares of
each class for the fiscal year ending December 31, 1999. The Distributor also
receives contingent deferred sales charges from certain redeeming shareholders.
CLASS B PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities collectively received $22,860, from the Fund under the
Class B Plan and spent $71,953 in distributing the Fund's Class B shares. It is
estimated that of the latter total amount, 7.0% ($5,061), was spent on printing
and mailing of prospectuses to other than current shareholders; 22.7% ($16,331)
was spent on compensation to broker-dealers for commissions to their
representatives and other expenses, including an allocation of overhead and
other branch office distribution-related expenses, incurred for distribution of
Fund shares; and 70.3% ($50,561) in the aggregate for (1) payments of
commissions and account servicing fees to financial advisers 23.5% ($16,865) and
(2) an allocation of overhead and other branch office distribution-related
expenses for payments of related expenses 46.8% ($33,696). The term "overhead
and other branch office distribution-related expenses" represents (a) the
expenses of operating Prudential Securities' and Pruco Securities Corporation's
(Prusec's) branch offices in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies, (b) the costs of client sales seminars, (c) expenses of mutual fund
sales coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
The Distributor (and Prudential Securities as its predecessor) also
receives the proceeds of contingent deferred sales charges paid by investors
upon certain redemptions of Class B shares. For the fiscal year ended December
31, 1998, the Distributor and Prudential Securities received approximately
$27,800 in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities collectively received $1,647, under the Class C Plan
and spent $2,134 in distributing Class C shares. It is estimated that of the
latter total amount, 8.9% ($189) was spent on printing and mailing of
prospectuses to other than current shareholders; 9.7% ($207) on compensation to
broker-dealers for commissions to representatives and other expenses, including
an allocation of overhead and other branch office distribution related expenses
incurred for distribution of Fund shares and 81.4% ($1,738) in the aggregate of
(1) payments of commissions and account servicing fees to financial advisers
51.2% ($1,092) and (2) an allocation of overhead and other branch office
distribution-related expenses 30.2% ($646).
The Distributor (and Prudential Securities as its predecessor) also
receives the proceeds of contingent deferred sales charges paid by investors
upon certain redemptions of Class C shares. For the fiscal year ended December
31, 1998, the Distributor and Prudential Securities collectively received
approximately $800 in contingent deferred sales charges attributable to Class C
shares. For the fiscal year ended December 31, 1998, the Distributor received
approximately $300 in initial sales charges attributable to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Directors, including a vote of the Directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
Class A, Class B or Class C Plan or in any agreement related to the Plans (Rule
12b-1 Directors), cast in person at a meeting called for the purpose of voting
on such continuance. A Plan may be terminated at
B-27
<PAGE>
any time, without penalty, by the vote of a majority of the Rule 12b-1 Directors
or by the vote of the holders of a majority of the outstanding shares of the
applicable class of the Fund on not more than 30 days' written notice to any
other party to the Plan. The Plans may not be amended to increase materially the
amounts to be spent for the services described therein without approval by the
shareholders of the applicable class (by both Class A and Class B shareholders,
voting separately, in the case of material amendments to the Class A Plan), and
all material amendments are required to be approved by the Directors in the
manner described above. Each Plan will automatically terminate in the event of
its assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Directors will review at least quarterly a
written report of the distribution expenses incurred on behalf of each class of
shares of the Fund by the Distributor. The report will include an itemization of
the distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons
which distribute shares of the Fund (including Class Z shares). Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has waived a portion of its distribution fees for the Class A,
Class B and Class C shares as described above. These voluntary waivers may be
terminated at any time without notice. Fee waivers and subsidies will increase
the Fund's total return.
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.
(C) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash, and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
The Transfer Agent, Raritan Plaza One, Edison, New Jersey 08837, serves as
the transfer and dividend disbursing agent of the Fund. The Transfer Agent is a
wholly-owned subsidiary of the Manager. The Transfer Agent provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, the Transfer Agent receives an annual fee
of $13.00 per shareholder account, a new account set-up fee of $2.00 for each
manually-established account and a monthly inactive zero balance account fee of
$.20 per shareholder account. The Transfer Agent is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications expenses and other costs.
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-28
<PAGE>
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund, the
selection of brokers, dealers and futures commission merchants to effect the
transactions and the negotiation of brokerage commissions, if any. (For purposes
of this section, the term "Manager" includes the investment adviser.) On a
national securities exchange, broker-dealers may receive negotiated brokerage
commissions on Fund portfolio transactions, including options, futures, and
options on futures transactions and the purchase and sale of underlying
securities upon the exercise of options. On a foreign securities exchange,
commissions may be fixed. Orders may be directed to any broker or futures
commission merchant including, to the extent and in the manner permitted by
applicable law, Prudential Securities and its affiliates.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments and U.S. government agency securities may be purchased
directly from the issuer, in which case no commissions or discounts are paid.
The Fund will not deal with Prudential Securities or any affiliate in any
transaction in which Prudential Securities or any affiliate acts as principal
except in accordance with the rules of the Commission. Thus, it will not deal in
the over-the-counter market with Prudential Securities acting as market maker,
and it will not execute a negotiated trade with Prudential Securities if
execution involves Prudential Securities' acting as principal with respect to
any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of price and
execution. The Manager seeks to effect such transaction at a price and
commission that provides the most favorable total cost of proceeds reasonably
attainable in the circumstances.
The factors that the Manager may consider in selecting a particular broker,
dealer of futures commission merchant (firms) are the Manager's knowledge of
negotiated commission rates currently available and other current transaction
costs; the nature of the portfolio transaction; the size of the transaction; the
desired timing of the trade; the activity existing and expected in the market
for the particular transaction; confidentiality; the execution, clearance and
settlement capabilities of the firms; the availability of research and research
related services provided through such firms; the Manager's knowledge of the
financial stability of the firms; the Manager's knowledge of actual or apparent
operational problems of firms; and the amount of capital, if any, that would be
contributed by firms executing the transaction. Given these factors, the Fund
may pay transactions costs in excess of that which another firm might have
charged for effecting the same transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or services,
such as research reports, research compilations, statistical and economic data,
computer data bases, quotation equipment and services, research oriented
computer software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultations. Such services are used
in connection with some or all of the Manager's investment activities; some of
such services, obtained in connection with the execution of transactions for one
investment account, may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct sufficient
commissions to them to ensure the continued receipt of those services that the
Manager believes provides a benefit to the Fund and its other clients. The
Manager makes a good faith determination that the research and/or service is
reasonable in light of the type of service provided and the price and execution
of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to its clients. The allocation of orders among firms and the commission rates
paid are reviewed periodically by the Fund's Directors. Portfolio securities may
not be purchased from any underwriting or selling syndicate of which Prudential
Securities or any affiliate, during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the Commission. This limitation, in the opinion of the
Fund, will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.
B-29
<PAGE>
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities or any affiliate to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities or
any affiliate must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other firms in connection with comparable
transactions involving similar securities or futures being purchased or sold on
an exchange or board of trade during a comparable period of time. This standard
would allow Prudential Securities or any affiliate to receive no more than the
remuneration which would be expected to be received by an unaffiliated firm in a
commensurate arm's-length transaction. Furthermore, the Directors of the Fund,
including a majority of the non-interested Directors, have adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities or any affiliate are consistent with
the foregoing standard. In accordance with Section 11(a) of the Securities
Exchange Act of 1934, as amended, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage transactions with Prudential Securities or any
affiliate are also subject to such fiduciary standards as may be imposed upon
Prudential Securities or such affiliates by applicable law.
The Fund paid no brokerage commissions, including none to Prudential
Securities or any affiliate, for the fiscal years ended December 31, 1998, 1997
and 1996.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at December 31, 1998. As of December 31, 1998, the Fund did
not hold any securities of its regular brokers or dealers.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 2 billion shares of common stock, $.01 per
share divided equally into four classes, designated Class A, Class B, Class C
and Class Z shares, initially all of one series. Each class of common stock
represents an interest in the same assets of the Fund and is identical in all
respects except that (1) each class is subject to different sales charges and
distribution and/or service fees (except for Class Z shares, which are not
subject to any sales charges and distribution and/or service fees), which may
affect performance, (2) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature and (5) Class Z shares are offered exclusively for sale to a
limited group of investors. In accordance with the Fund's Articles of
Incorporation, the Directors may authorize the creation of additional series and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Directors may determine. The voting rights of
the shareholders of a series or class can be modified only by the majority vote
of shareholders of that series or class.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share
class is equal as to earnings, assets and voting privileges, except as noted
above, and each class of shares (with the exception of Class Z shares, which are
not subject to any distribution or service fees) bears the expenses related to
the distribution of its shares. Except for the conversion feature applicable to
the Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of the Fund is entitled to its
portion of all of the Fund's assets after all debt and expenses of the Fund have
been paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon the vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business.
Under the Articles of Incorporation, the Directors may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. All consideration received by
the Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Under the Investment Company Act, shareholders of any
additional series of
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<PAGE>
shares would normally have to approve the adoption of any advisory contract
relating to such series and of any changes in the investment policies related
thereto. The Directors do not intend to authorize additional series at the
present time.
The Directors have the power to alter the number and the terms of office of
the Directors and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Directors have been elected by the
shareholders of the Fund. The voting rights of shareholders are not cumulative,
so that holders of more than 50 percent of the shares voting can, if they
choose, elect all Directors being selected, while the holders of the remaining
shares would be unable to elect any Directors.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) and/or (2) on a deferred basis (Class B or Class C shares).
Class Z shares of the Fund are offered to a limited group of investors at NAV
without any sales charge. See "How to Buy, Sell and Exchange Shares of the Fund"
in the Prospectus.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, an
investor must complete an application and telephone the Transfer Agent at (800)
225-1852 (toll-free) to receive an account number. The following information
will be requested: the investor's name, address, tax identification number,
class election, dividend distribution election, amount being wired and wiring
bank. Instructions should then be given by the investor to his/her bank to
transfer funds by wire to the Fund's Custodian, State Street Bank and Trust
Company, Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: The Global Total Return Fund, Inc., specifying on the wire the
account number assigned by the Transfer Agent and the investor's name and
identifying the class in which the investor is eligible to invest (Class A,
Class B, Class C or Class Z shares).
If an investor arranges for receipt by the Custodian of Federal Funds prior
to the calculation of NAV (4:15 P.M., New York time), on a business day, the
investor may purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, an investor should wire the
Custodian directly and should be sure that the wire specifies The Global Total
Return Fund, Inc. Class A, Class B, Class C or Class Z shares and the investor's
name and individual account number. It is not necessary to call the Transfer
Agent to make subsequent purchase orders utilizing Federal Funds. The minimum
amount which may be invested by wire is $1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations,(2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
B-31
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A* shares of the Fund are sold at a maximum sales charge of
4%, Class C* shares are sold with a 1% sales charge and Class B* and Class Z
shares are sold at NAV. Using the Fund's NAV at December 31, 1998, the maximum
offering price of the Fund's shares is as follows:
<TABLE>
<CAPTION>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share ....................................................... $8.03
Maximum sales charge (4% of offering price) .................................................................. .33
Maximum offering price to public ............................................................................. $8.36
-----
-----
CLASS B
Net asset value, offering price and redemption price to public per Class B share* ............................ $8.03
-----
-----
CLASS C
Net asset value and redemption price per Class C share* ...................................................... $8.03
Sales charge (1% of offering price) .......................................................................... .08
-----
Offering price to public ..................................................................................... $8.11
-----
-----
CLASS Z
Net asset value, redemption price and offering price to public per Class Z share ............................. $8.03
-----
-----
</TABLE>
- ----------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist investors in determining which method
of purchase best suits their individual circumstances and is based on current
fees and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, the
sales charges and cumulative annual distribution-related fees would be
approximately the same for Class A, Class B and Class C shares. However, you
should consider purchasing Class B shares over Class A shares or Class C shares
because all of your money would be invested initially in the case of Class B
shares.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B and Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus cumulative annual distribution-related
fees on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation or annuity plans under Sections 401(a), 403(b)(7) and 457 of the
Internal Revenue Code, "rabbi" trusts and non-qualified deferred compensation
plans that are sponsored by any employer that has a tax-qualified plan with
Prudential (collectively, Benefit Plans),
B-32
<PAGE>
provided that the Benefit Plan has existing assets of at least $1 million
invested in shares of Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) or 250 eligible
employees or participants. In the case of Benefit Plans whose accounts are held
directly with the Transfer Agent or Prudential Securities and for which the
Transfer Agent or Prudential Securities does individual account recordkeeping
(Direct Account Benefit Plans) and Benefit Plans sponsored by Prudential,
Prudential Securities or its subsidiaries (Prudential Securities or subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential provides
administrative or recordkeeping services, provided that (1) the plan has at
least $1 million in existing assets or 250 eligible employees and (2) the Fund
is an available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code and plans that participate in a PruArray
Program (benefit plan recordkeeping service) (hereafter referred to as a
PruArray Plan). All Benefit Plans of a company (or affiliated companies under
common control) for which Prudential serves as plan administrator or
recordkeeper are aggregated in meeting the $1 million threshold provided that
Prudential has been notified in advance of the entitlement to the waiver of the
sales charge based on the aggregated assets. The term "existing assets" includes
stock issued by a plan sponsor, shares of Prudential Mutual Funds and shares of
certain unaffiliated mutual funds that participate in a PruArray Plan
(Participating Funds). "Existing assets" also include monies invested in The
Guaranteed Investment Account (GIA), a group annuity insurance product issued by
Prudential, The Guaranteed Insulated Separate Account, a separate account
operated by Prudential, and units of The Stable Value Fund (SVF), an
unaffiliated bank collective fund. Class A shares may also be purchased at NAV
by plans that have monies invested in GIA and SVF, provided (1) the purchase is
made with the proceeds of a redemption from either GIA or SVF and (2) Class A
shares are an investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares also offered at NAV to
Benefit Plans or non-qualified plans sponsored by employers which are members of
a common trade, professional or membership association (Association) that
participate in a PruArray Plan provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified Plan(s) or non-qualified
plans so long as the employers in the Association (1) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (2) maintain their accounts with the Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (1) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (2) spouses
of employees who open an IRA account with the Transfer Agent. The program is
offered to companies that have at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
- officers of the Prudential Mutual Funds (including the Fund),
- employees of the Distributor, Prudential Securities, the Manager and
their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the
Transfer Agent,
- employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,
- 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,
- registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer,
- investors who have a business relationship with a financial adviser
who joined Prudential Securities from another investment firm,
provided that (1) 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, (2) 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 (3) the financial adviser served
as the client's broker on the previous purchase,
B-33
<PAGE>
- investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such Individual Retirement Account or
with the proceeds of a tax-free rollover of assets from a Benefit Plan
for which Prudential provides administrative or recordkeeping services
and further provided that such purchase is made within 60 days of
receipt of the Benefit Plan distribution,
- orders placed by broker-dealers, investment advisers or financial
planners who have entered into a agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients
and who charge a management, consulting or other fee for their
services (for example, mutual fund "wrap" or asset allocation
programs), and
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the
accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker-dealer,
investment adviser or financial planner charges its clients a separate
fee for its services (for example, mutual fund "supermarket
programs").
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial charges are imposed upon Class A shares acquired
upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the Fund--How to
Buy Shares--Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual,
- the individual's spouse, their children and their parents,
- the individual's and spouse's Individual Retirement Account (IRA),
- 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),
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children,
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse and
- one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through your broker will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of determining
the reduced sales charge is calculated using the maximum offering price (NAV
plus maximum sales charge) as of the previous business day. The Distributor or
the Transfer Agent 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.
LETTERS OF INTENT. Reduced sales charges also 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).
B-34
<PAGE>
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent,
Prudential or its affiliates, and through your broker will not be aggregated to
determine the reduced sales charge.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. If the goal
is exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of he
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, a broker or the Distributor.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B shares may be subject to a CDSC. See "Sale of Shares--Contingent
Deferred Sales Charge", below.
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Class C shares may be purchased at NAV, without payment of
an initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential, Prudential Securities or its subsidiaries
(Prudential Securities or Subsidiary Prototype Benefit Plans). Class C shares
may be purchased at NAV by participants who are repaying the loans made from
such plans to the participant.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified retirement
and deferred compensation plans participating in a PruArray Plan and other plans
for which Prudential provides administrative or recordkeeping services.
B-35
<PAGE>
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchases Class C shares at NAV, without the initial sales charge,
with the proceeds from the redemption of shares of any unaffiliated registered
investment company which were not held through an account with any Prudential
affiliate. Such purchases must be made within 60 days of the redemption.
Investors eligible for this waiver include: (1) investors purchasing shares
through an account at Prudential Securities; (2) investors purchasing shares
through an ADVANTAGE Account or an Investor Account with Prusec; and (3)
investors purchasing shares through other brokers. This waiver is not available
to investors who purchase shares directly from the Transfer Agent. You must
notify the Transfer Agent directly or through you broker if you are entitled to
this waiver and provide the Transfer Agent with such supporting documents as it
may deem appropriate.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by the
following categories of investors:
- 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,
- participants in any fee-based program or trust program sponsored by an
affiliate of the Distributor which includes mutual funds as investment
options and for which the Fund is an available investment option,
- 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,
- Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996
(1) were Class Z shareholders of the Prudential Mutual Funds or (2)
executed a letter of intent to purchase Class Z shares of the
Prudential Mutual Funds,
- current and former Directors/Trustees of he Prudential Mutual Funds
(including the Fund),
- employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan, and
- Prudential with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finder's fee from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
Class Z shares of the Fund may also be purchased by certain savings,
retirement and deferred compensation plans, qualified or non-qualified under the
Internal Revenue Code of 1986, as amended (the Internal Revenue Code), provided
that (1) the plan purchases shares of the Fund pursuant to an investment
management agreement with The Prudential Insurance Company of America or its
affiliates, (2) the Fund is an available investment option under the agreement
and (3) the plan will participate in the PruArray Plan (benefit plan
recordkeeping services) sponsored by Prudential Mutual Fund Services LLC. These
plans include pension, profit-sharing, stock-bonus or other employee benefit
plans under Section 401 of the Internal Revenue Code and deferred compensation
and annuity plans under Sections 457 or 403(b)(7) of the Internal Revenue Code.
SALE OF SHARES
An investor can redeem shares at any time for cash at the NAV next
determined after the redemption request is received in proper form (in
accordance with procedures established by the Transfer Agent in connection with
investors' accounts) by the Transfer Agent, the Distributor or the investor's
broker. In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable CDSC, as described below. See "Contingent Deferred
Sales Charge" below. If an investor is redeeming shares through a broker, the
broker must receive the sell order before the Fund computes its NAV for that day
(that is, 4:15 P.M., New York time) in order to receive that day's NAV. The
investor's broker will be responsible for furnishing all necessary documentation
to the Distributor and may charge the investor for its services in connection
with redeeming shares of the Fund.
If an investor holds shares of the Fund through Prudential Securities, he
or she must redeem the shares through Prudential Securities. Please contact your
Prudential Securities financial adviser.
If an investor holds shares in non-certificate form, a written request for
redemption signed by the investor exactly as the account is registered is
required. If an investor holds certificates, the certificates, signed in the
name(s) shown on the face of the
B-36
<PAGE>
certificates, must be received by the Transfer Agent, the Distributor or the
investor's broker in order for the redemption request to be processed. If
redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to the
investor's broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, and your shares
are held directly with the Transfer Agent, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker. dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices. In the case of redemptions
from a PruArray Plan, if the proceeds of the redemption are invested in another
investment option of the plan in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or the broker of
the certificate and/or written request, except as indicated below. If an
investor holds shares through Prudential Securities, payment for shares
presented for redemption will be credited to the investor's account at his or
her broker, unless the investor indicates otherwise. Such payment may be
postponed or the right of redemption suspended at times (1) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (2)
when trading on such Exchange is restricted, (3) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (4) during any other period when the Commission,
by order, so permits; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions prescribed in (2), (3) or
(4) exist.
REDEMPTION IN KIND. If the Directors determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If a shareholder redeems his or her shares and
has not previously exercised the repurchase privilege, the shareholder may
reinvest any portion or all of the proceeds of such redemption in shares of the
Fund at the NAV next determined after the order is received, which must be
within 90 days after the date of the redemption. Any CDSC paid in connection
with such redemption will be credited (in shares) to the shareholder's account.
(If less than a full repurchase is made, the credit will be on a pro rata
basis.) The shareholder must notify the Transfer Agent, either directly or
through the Distributor or the shareholder's broker, at the time the repurchase
privilege is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charge" below. Exercise of the
repurchase privilege will generally not affect federal tax treatment of any gain
realized upon redemption. However, if the redemption was made within a 30 day
period of the repurchase and if the redemption resulted in a loss, some or all
of the loss, depending on the amount reinvested, may not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 4% to zero over a seven year period. Class C
shares redeemed within 18 months of purchase (one year for Class C shares
purchased before November 2, 1998) will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to the
shareholder. The CDSC will be imposed on any redemption by a shareholder which
reduces the current value of your Class B or Class C shares to an amount which
is lower than the amount of all payments by the shareholders for shares during
B-37
<PAGE>
the preceding six years, in the case of Class B shares, and 18 months, in the
case of Class C shares (one year for Class C shares purchased before November 2,
1998). A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of shares
or shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any CDSC will be paid to and retained by the
Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEARS' SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENTS MADE REDEMPTION PROCEEDS
- --------------------- ------------------------
<S> <C>
First .................................................. 5.0%
Second ................................................. 4.0%
Third .................................................. 3.0%
Fourth ................................................. 2.0%
Fifth .................................................. 1.0%
Sixth .................................................. 1.0%
Seventh and thereafter ................................. None
</TABLE>
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
payment for the purchase of Fund shares made during the preceding six years for
Class B shares and 18 months for Class C shares (one year for Class C shares
bought before November 2, 1998); then of amounts representing the cost of shares
held beyond the applicable CDSC period; and finally, of amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder in, or the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59-1/2 or a periodic distribution based on life
expectancy;
(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59-1/2; and
(4) a tax-free return of an excess contribution or plan distributions
following the death or disability of the shareholder, provided that the shares
were purchased prior to death or disability.
B-38
<PAGE>
The waiver does not apply in the case of a tax-free rollover or transfer of
assets, other than one following a separation from service (that is, following
voluntary or involuntary termination of employment or following retirement).
Under no circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan, unless such redemptions otherwise
qualify for a waiver as described above. In the case of Direct Account and
Prudential Securities or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential Mutual Funds, the Guaranteed
Investment Account, the Guaranteed Insulated Separate Account or units of The
Stable Value Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
Shareholders must notify the Fund's Transfer Agent either directly or
through the brokers, at the time of redemption, that they are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
CATEGORY OF WAIVER
Death
Disability--An individual will be considered disabled if he or she is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long-continued and indefinite duration.
Distribution from an IRA or 403(b) Custodial Account
Distribution from Retirement Plan
Excess Contributions
REQUIRED DOCUMENTATION
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.
A copy of the Social Security Administration award letter or a letter from a
physician on the physician's letterhead stating that the shareholder (or, in the
case of a trust, the grantor) is permanently disabled. The letter must also
indicate the date of disability.
A copy of the distribution form 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.
A letter signed by the plan administrator/trustee indicating the reason for the
distribution.
A letter from the shareholder (for an IRA) or the plan administrator/trustee on
company letterhead indicating the amount of the excess and whether or not taxes
have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in a PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to the
extent that the redemption proceeds are invested in The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account and units of The Stable Value
Fund.
B-39
<PAGE>
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a broker not affiliated with Prudential and for
which the broker provides administrative or recordkeeping services.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (1)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (2) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.60%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A Shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B Shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value on the record date. An investor may direct the Transfer Agent in writing
not less than five (5) full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
In the case of recently purchased shares for which registration instructions
have not been received on the record date, cash payment will be made directly to
the broker. Any shareholder who receives a cash payment representing a dividend
or distribution may
B-40
<PAGE>
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. For retirement and group plans having a limited menu of Prudential
Mutual Funds, the exchange privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, an investor must authorize
telephone exchanges on his or her initial application form or by written notice
to the Transfer Agent and hold shares in non-certificate form. Thereafter, the
investor may call the Fund at (800) 225-1852 to execute a telephone exchange of
shares, on weekdays, except holidays, between the hours of 8:00 A.M. and 6:00
P.M., New York time. For the investor's protection and to prevent fraudulent
exchanges, telephone calls will be recorded and the investor will be asked to
provide his or her personal identification number. A written confirmation of the
exchange transaction will be sent to the investor. Neither the Fund nor its
agents will be liable for any loss, liability or cost which results from acting
upon instructions reasonably believed to be genuine under the foregoing
procedures. All exchanges will be made on the basis of the relative NAV of the
two funds next determined after the request is received in good order.
If an investor holds shares through Prudential Securities, the shares must
be exchanged by contacting the investor's Prudential Securities financial
adviser.
If an investor holds certificates, the certificates, signed in the name(s)
shown on the face of the certificates, must be returned in order for the shares
to be exchanged.
An investor may also exchange shares by mail by writing to the Fund's
Transfer Agent, Prudential Mutual Fund Services LLC, Attention: Exchange
Processing, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange
of shares may be difficult to implement and investors should make exchanges by
mail by writing to the Transfer Agent, at the address noted above.
CLASS A. Shareholders of the Fund will be able to exchange their Class A
shares for Class A shares of certain other Prudential Mutual Funds, 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.
B-41
<PAGE>
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 Class B
and Class C shares, respectively, of Prudential Special Money Market Fund, Inc.
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 without regard to the time such
shares were held in the money market fund. In order to minimize the period of
time in which shares are subject to a CDSC, shares exchanged out of the money
market fund will be exchanged on the basis of their remaining holding periods,
with the longest remaining holding periods being transferred first. In measuring
the time period shares are held in a money market fund and "tolled" for purposes
of calculating the CDSC holding period, exchanges are deemed to have been made
on the last day of the month. Thus, if shares are exchanged into the Fund from a
money market fund during the month (and are held in the Fund at the end of the
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares, respectively of other funds without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C Shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
Additional details about the exchange privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or the investor's broker. The exchange privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
B-42
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years .................................. $ 105 $ 158 $ 210 $ 263
20 Years .................................. 170 255 340 424
15 Years .................................. 289 433 578 722
10 Years .................................. 547 820 1,093 1,366
5 Years .................................. 1,361 2,041 2,721 3,402
See "Automatic Investment Plan."
</TABLE>
- ----------
(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 for the 1993-94 academic years.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The investor's
bank must be a member of the Automatic Clearing House System. Share certificates
are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or an investor's broker. Such withdrawal plan
provides for monthly or quarterly checks in any amount, except as provided
below, up to the value of the shares in the shareholder's account. Withdrawals
of Class B or Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan.
The Transfer Agent, the Distributor or an investor's broker acts as an
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the periodic withdrawal payment. The systematic withdrawal
plan may be terminated at any time, and the Distributor reserves the right to
initiate a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the applicable sales charges to (1) the purchase of Class
A and Class C shares and (2) the redemption of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly used in connection with a retirement
plan.
B-43
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, the administration, custodial fees and other details are available
from the Distributor 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.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ----------- --------- -------
<S> <C> <C>
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
</TABLE>
- ----------
(1)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial adviser
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting
its liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Directors have fixed the specific time of day for the computation of the Fund's
NAV to be as of 4:15 p.m., New York time. The Fund will compute its NAV at 4:15
P.M., New York time, on each day the New York Stock Exchange is open for trading
except days on which no orders to purchase, sell or redeem Fund shares have been
received or on days on which changes in the value of the Fund's portfolio
investments do not affect NAV. In the event the New York Stock Exchange closes
early on any business day, the NAV of the Fund's
B-44
<PAGE>
shares will be determined at a time between such closing and 4:15 P.M., New York
time. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Under the Investment Company Act, the Directors are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Directors, the value of investments
listed on a securities exchange and NASDAQ National Market System securities
(other than options on stock and stock indices) are valued at the last sale
price of such exchange system on the day of valuation or, if there was no sale
on such day, the mean between the last bid and asked prices on such day, or at
the bid price on such day in the absence of an asked price. Corporate bonds
(other than convertible debt securities) and U.S. Government securities that are
actively traded in the over-the-counter market, including listed securities for
which the primary market is believed by the Manager in consultation with the
Subadviser to be over-the-counter, are valued on the basis of valuations
provided by an independent pricing agent or principal market maker which uses
information with respect to transactions in bonds, quotations from bond dealers,
agency ratings, market transactions in comparable securities and various
relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of trading on the applicable commodities exchange or
board of trade or, if there was no sale on the applicable commodities exchange
or board of trade on such day, at the mean between the most recently quoted bid
and asked prices on such exchange or board of trade. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
current rate obtained from a recognized bank or dealer, and foreign currency
forward contracts are valued at the current cost of covering or offsetting such
contracts. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser,
including its portfolio manager, traders, and its research and credit analysts,
on the basis of the following factors: cost of the security, transactions in
comparable securities, relationships among various securities and such other
factors as may be determined by the Manager, Subadviser, Board of Directors or
Valuation Committee to materially affect the value of the security. Short-term
debt securities are valued at cost, with interest accrued or discount amortized
to the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Directors not to represent fair value. Short-term
securities with remaining maturities of more than 60 days, for which market
quotations are readily available, are valued at their current market quotations
as supplied by an independent pricing agent or principal market maker.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of Class A, Class B
or Class C shares as a result of the fact that the Class Z shares are not
subject to any distribution or service fee. it is expected, however, that the
NAV of the four classes will tend to converge immediately after the recording of
dividends, if any, which will differ by approximately the amount of the
distribution and/or service fee expense accrual differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income tax
on income and capital gains which are distributed to shareholders, and permits
net capital gains of the Fund (i.e., the excess of net long-term capital gains
over net short-term capital losses) to be treated as long-term capital gains of
the shareholders, regardless of how long shareholders have held their shares in
the Fund. Net capital gains of the Fund which are available for distribution to
shareholders will be computed by taking into account any capital loss
carryforward of the Fund.
Qualification of the Fund as a regulated investment company requires, among
other things, that (a) the Fund derive at least 90% of its annual gross income
(without reduction for losses from the sale or other disposition of securities
or foreign
B-45
<PAGE>
currencies) from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or options thereon or
foreign currencies, or other income (including but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) the Fund diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of the
value of the Fund's assets is represented by cash, U.S. Government securities
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the value of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities); and (c) the Fund distribute to its shareholders at least
90% of its net investment income and net short-term gains (i.e., the excess of
net short-term capital gains over net long-term capital losses) in each year.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds on offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Fund on securities lapses or
is terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize short-term capital
gain or loss. If securities are sold by the Fund pursuant to the exercise of a
call option written by it, the Fund will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. Certain of the Fund's transactions may be subject to wash
sale, short sale, constructive sale, anti-conversion and straddle provisions of
the Internal Revenue Code which may, among other things, require the Fund to
defer recognition of losses. In addition, debt securities acquired by the Fund
may be subject to original issue discount and market discount rules which,
respectively, may cause the Fund to accrue income in advance of the receipt of
cash with respect to interest or cause gains to be treated as ordinary income.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward currency exchange contracts in which the Fund may
invest. See "Description of the Fund, Its Investments and Its Risks." These
investments will generally constitute Section 1256 contracts and will be
required to be "marked to market" for federal income tax purposes at the end of
the Fund's taxable year; that is, treated as having been sold at market value.
Except with respect to certain foreign currency forward contracts, sixty percent
of any gain or loss recognized on such deemed sales and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock
and on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending on the holding period of the option. In
addition, positions which are part of a "straddle" 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.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on foreign currency
forward contracts or dispositions of debt securities dominated in a foreign
currency attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition also
are treated as ordinary gain or loss. These gains, referred to under the
Internal Revenue Code as "Section 988" gains or losses, increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary dividend, reducing each
shareholder's basis in his or her Fund shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of the
Fund, the investor should carefully consider the impact of dividends or capital
gains distributions which are expected to be or have been announced.
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.
B-46
<PAGE>
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.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Net capital gain distributions paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividends and capital
gain distributions which are effectively connected with a U.S. trade or business
of the foreign shareholder.
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 attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts (described above) and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are not eligible for the dividends-received deduction.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B, Class C and Class Z shares. See "Net Asset Value."
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
twelve months ending on October 31 of such calendar year. In addition, the Fund
must distribute during the calendar year all undistributed ordinary income and
undistributed capital gain net income from the prior year or the twelve-month
period ending on October 31 of such prior calendar year, respectively. To the
extent it does not meet these distribution requirements, the Fund will be
subject to a non-deductible 4% excise tax on the undistributed amount. For
purposes of this excise tax, income on which the Fund pays income tax is treated
as distributed.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations that, in general, meet 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 a 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. A 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 amounts of gains, if any, as ordinary income with
respect to PFIC stock. No loss will be recognized on PFIC stock, except to the
extent of gains recognized in prior years. Alternatively, a 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.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary, The Fund does not expect
to pass through to its shareholders any foreign income taxes paid.
Dividends and distributions may also be subject to state and local taxes.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.
B-47
<PAGE>
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.
Average annual total return is computed according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
Below are the average annual total returns for the Fund's share classes for
the periods ended December 31, 1998.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
------ ------- -------- ---------
<S> <C> <C> <C> <C>
Class A 4.56% 7.67% 9.03% 10.05% (7-7-86)
Class B 3.13 N/A N/A 7.22 (1-15-96)
Class C 6.05 N/A N/A 7.73 (1-15-96)
Class Z 9.07 N/A N/A 8.19 (3-17-97)
</TABLE>
Before January 15, 1996, the Fund was a closed-end investment
company.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for the Class A, Class
B, Class C and Class Z shares.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV-P
-----
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value at the end of the one, five
or ten year periods of a hypothetical $1,000 payment made at the beginning of
the 1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
Below are the aggregate total returns for the Fund's share classes for the
periods ended December 31, 1998.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
------ ------- -------- ---------
<S> <C> <C> <C> <C>
Class A 8.92% 50.69% 147.21% 244.44% (7-7-86)
Class B 8.13 N/A N/A 25.91 (1-15-96)
Class C 8.13 N/A N/A 25.92 (1-15-96)
Class Z 9.07 N/A N/A 15.13 (3-17-97)
</TABLE>
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:
_ _
| 6 |
| ( a - b ) |
2 | ( ----- + 1 ) - 1 |
|_ ( cd ) _|
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.
B-48
<PAGE>
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund's 30-day yields for the 30 days ended December 31, 1998, were
4.75%, 4.34%, 4.31% and 5.11% for the Class A, Class B, Class C and Class Z
shares, respectively.
The Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper, Inc., Morningstar Publication, Inc., other industry
publications, business periodicals and market indices. Set forth below is a
chart which compares the performance of different types of investments over the
long term and the rate of inflation.(1)
<TABLE>
<CAPTION>
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(1/1926 - 9/1998)
<S> <C>
Common Stocks 11.0%
Long-Term
Govt. Bonds 5.1%
Inflation 3.1%
</TABLE>
(1)Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Stock Index, a
market-weighted, unmanaged index of 500 common stocks in a variety of industry
sectors. It is a commonly used indicator of broad stock price movements. This
chart is for illustrative purposes only, and is not intended to represent the
performance of any particular investment or fund. Investors cannot invest
directly in an index. Past Performance is not a guarantee of future results.
B-49
<PAGE>
Portfolio of Investments as of
December 31, 1998 THE GLOBAL TOTAL RETURN FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount US$
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--85.9%
- ------------------------------------------------------------
Australia--6.5%
A$ 2,750 Federal National Mortgage
Association,
6.375%, 8/15/07 $ 1,774,722
13,700 New South Wales Treasury
Corporation,
6.50%, 5/1/06 8,960,622
------------
10,735,344
- ------------------------------------------------------------
Canada--3.3%
C$ 3,250 British Columbia Provincial
Bond,
6.00%, 6/9/08 2,233,543
4,500 Province of Quebec,
6.50%, 10/1/07 3,149,678
------------
5,383,221
- ------------------------------------------------------------
Denmark--6.0%
Danish Government Bonds,
DKr 20,000 7.00%, 12/15/04 3,620,752
32,750 8.00%, 3/15/06 6,343,850
------------
9,964,602
- ------------------------------------------------------------
Germany--19.6%
German Government Bonds,
DM 18,000 7.375%, 1/3/05 12,910,983
7,700 6.00%, 1/5/06 5,225,921
15,500 6.25%, 1/4/24 11,261,516
5,000 Republic of Colombia,
7.25%, 12/21/00 3,052,465
------------
32,450,885
- ------------------------------------------------------------
Greece--3.3%
Hellenic Republic, FRN,
GRD 350,000 9.20%, 3/21/02 1,285,914
680,000 12.70%, 12/31/03 2,437,973
GRD 430,000 Republic of Greece,
8.60%, 3/26/08 $ 1,695,138
------------
5,419,025
- ------------------------------------------------------------
Hungary--0.8%
HUF 300,000 Hungarian Government Bonds,
16.00%, 4/12/00 1,402,700
- ------------------------------------------------------------
Netherlands--4.0%
Dutch Government Bonds,
NLG 6,000 7.00%, 6/15/05 3,764,500
3,750 7.50%, 1/15/23 2,767,957
------------
6,532,457
- ------------------------------------------------------------
New Zealand--4.4%
NZ$ 6,700 Federal National Mortgage
Association,
7.25%, 6/20/02 3,656,473
3,300 International Bank of
Reconstruction Development,
7.25%, 5/27/03 1,807,909
3,100 New Zealand Government Bond,
8.00%, 4/15/04 1,825,837
------------
7,290,219
- ------------------------------------------------------------
Russia--0.1%
European Bank of Reconstruction
Development,
RUB 5,300 31.00%, 5/5/00 61,485
8,600 Zero Coupon, 5/28/02 23,944
------------
85,429
- ------------------------------------------------------------
Spain--3.3%
Pts 650,000 Spanish Government Bond,
6.15%, 1/31/13 5,406,026
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
Portfolio of Investments as of
December 31, 1998 THE GLOBAL TOTAL RETURN FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount US$
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Sweden--2.4%
SEK 29,000 Swedish Government Bond,
6.00%, 2/9/05 $ 3,965,962
- ------------------------------------------------------------
United Kingdom--4.3%
BP 9,100 United Kingdom Treasury Strip,
Zero Coupon, 12/7/15 7,176,140
- ------------------------------------------------------------
United States--27.9%
Corporate Bonds--1.8%
1,200 General Motors Acceptance
Corp.,
5.75%, 11/10/03 1,209,312
1,700 Household Finance Corporation,
6.40%, 6/17/08 1,755,335
------------
2,964,647
- ------------------------------------------------------------
Sovereign Bonds--4.3%
3,500 Ministry Of Finance (Russia),
10.00%, 6/26/07 997,500
1,000 Oman Sultanate (India),
7.125%, 3/20/02 1,020,000
1,000 Republic of Colombia,
7.25%, 2/23/04 896,000
2,000 Republic of Croatia, FRN,
6.56%, 7/31/06 1,429,551
960 Republic of Croatia,
6.5625%, 7/31/10 758,400
1,400 Republic of Peru,
4.00%, 3/7/17 878,500
800 Republic of Lithuania,
7.125%, 7/22/02 748,000
1,675 Russian Federation,
11.00%, 7/24/18 414,563
------------
7,142,514
- ------------------------------------------------------------
Supranational Bonds--2.9%
4,800 Corporacion Andina de Fomento,
7.375%, 7/21/00 4,847,664
- ------------------------------------------------------------
U.S. Government Obligations--18.9%
US$ 9,250 United States Treasury Bond,
6.625%, 2/15/27 $ 10,940,992
United States Treasury Notes,
5,000 6.125%, 9/30/00 5,122,650
13,810 6.25%, 2/15/07 15,147,775
------------
31,211,417
------------
46,166,242
Total long-term investments
(cost US$141,404,772) 141,978,252
------------
SHORT-TERM INVESTMENTS--10.4%
- ------------------------------------------------------------
Hungary--0.7%
HUF 250,000 Hungarian Government Bonds,
16.50%, 7/24/99 1,160,737
- ------------------------------------------------------------
Poland--1.2%
Polish Treasury Bills,
PLZ 3,800 14.00%(a), 2/17/99 1,057,221
1,200 18.55%(a), 3/3/99 333,344
2,000 13.57%(a), 4/28/99 543,912
------------
1,934,477
- ------------------------------------------------------------
United States--8.5%
Corporate Bonds--3.0%
US$ 1,000 Banco Ganadero Colombian Bond
(Colombia),
9.75%, 8/26/99 1,006,250
2,900 Financiera Energetica Nacional
(Colombia),
9.00%, 11/8/99 2,900,000
1,000 Petroleas Mexicano (Mexico),
FRN,
6.20%, 3/8/99 987,300
------------
4,893,550
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51
<PAGE>
Portfolio of Investments as of
December 31, 1998 THE GLOBAL TOTAL RETURN FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount US$
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Repurchase Agreement--1.8%
US$ 3,061 Joint Repurchase Agreement
Account,
4.69% 1/4/99 (Note 5) $ 3,061,000
- ------------------------------------------------------------
U.S. Government Obligations--3.7%
6,000 United States Treasury Notes,
6.75%, 6/30/99 6,063,720
------------
14,018,270
------------
Total short-term Investments
(cost US$17,281,427) 17,113,484
------------
- ------------------------------------------------------------
Total Investments--96.3%
(cost $158,686,199) 159,091,736
Other assets in excess of
liabilities--3.7% 6,175,538
------------
Net Assets--100% $165,267,274
------------
------------
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-52
<PAGE>
Statement of Assets and Liabilities THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1998
<S> <C>
Investments, at value (cost $158,686,199)................................................................... $159,091,736
Foreign currency, at value (cost $1,767,880)................................................................ 1,757,476
Interest receivable......................................................................................... 4,747,224
Forward currency contracts--amount receivable from counterparties........................................... 355,541
Receivable for investments sold............................................................................. 253,165
Receivable for Fund shares sold............................................................................. 22,770
Other assets................................................................................................ 5,231
-------------
Total assets............................................................................................. 166,233,143
-------------
Liabilities
Payable for Fund shares reacquired.......................................................................... 404,297
Accrued expenses and other liabilities...................................................................... 192,405
Forward currency contracts--amount payable to counterparties................................................ 151,267
Management fee payable...................................................................................... 106,493
Bank overdraft.............................................................................................. 88,425
Distribution fee payable.................................................................................... 22,982
-------------
Total liabilities........................................................................................ 965,869
-------------
Net Assets.................................................................................................. $165,267,274
-------------
-------------
Net assets were comprised of:
Common stock, at par..................................................................................... $ 205,901
Paid-in capital in excess of par......................................................................... 164,988,534
-------------
165,194,435
Accumulated net realized loss on investments............................................................. (600,027)
Net unrealized appreciation on investments and foreign currencies........................................ 672,866
-------------
Net assets, December 31, 1998............................................................................... $165,267,274
-------------
-------------
Class A:
Net asset value and redemption price per share
($158,932,007 / 19,800,984 shares of common stock issued and outstanding)............................. $8.03
Maximum sales charge (4% of offering price)................................................................. .33
-------------
Maximum offering price to public............................................................................ $8.36
-------------
-------------
Class B:
Net asset value and redemption price per share
($3,625,180 / 451,664 shares of common stock issued and outstanding).................................. $8.03
-------------
-------------
Class C:
Net asset value, offering price and redemption price per share
($274,811 / 34,209 shares of common stock issued and outstanding)..................................... $8.03
Maximum sales charge (1% of offering price).............................................................. .08
-------------
Maximum offering price to public......................................................................... $8.11
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per share
($2,435,276 / 303,197 shares of common stock issued and outstanding).................................. $8.03
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-53
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1998
<S> <C>
Income
Interest and discount earned (net of
foreign withholding taxes of
$16,405)........................... $13,687,048
-----------------
Expenses
Management fee........................ 1,323,490
Distribution fee--Class A............. 257,141
Distribution fee--Class B............. 22,860
Distribution fee--Class C............. 1,647
Transfer agent's fees and expenses.... 320,000
Custodian's fees and expenses......... 225,000
Reports to shareholders............... 50,000
Registration fees..................... 50,000
Legal fees and expenses............... 45,000
Audit fee and expenses................ 36,000
Directors' fees....................... 18,000
Insurance............................. 4,000
Miscellaneous......................... 12,608
-----------------
Total expenses..................... 2,365,746
-----------------
Net investment income.................... 11,321,302
-----------------
Realized and Unrealized Gain
(Loss) on Investments and Foreign
Currency Transactions
Net realized gain (loss) on:
Investment transactions............... 2,920,023
Foreign currency transactions......... (1,349,135)
-----------------
1,570,888
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments........................... 2,767,090
Foreign currencies.................... (909,628)
-----------------
1,857,462
-----------------
Net gain on investments and foreign
currencies............................ 3,428,350
-----------------
Net Increase in Net Assets
Resulting from Operations................ $14,749,652
-----------------
-----------------
</TABLE>
THE GLOBAL TOTAL RETURN FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1998 1997
<S> <C> <C>
Operations:
Net investment income.......... $ 11,321,302 $ 13,903,963
Net realized gain on investment
and foreign currency
transactions................ 1,570,888 7,846,372
Net change in unrealized
appreciation (depreciation)
on investments and foreign
currencies.................. 1,857,462 (12,590,843)
------------ ------------
Net increase in net assets
resulting from operations... 14,749,652 9,159,492
------------ ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (7,425,915) (16,523,696)
Class B..................... (127,509) (108,586)
Class C..................... (8,896) (32,330)
Class Z..................... (83,453) (23,135)
------------ ------------
(7,645,773) (16,687,747)
------------ ------------
Distributions in excess of net
investment income
Class A..................... (432,992) (4,744,012)
Class B..................... (7,435) (44,626)
Class C..................... (519) (14,046)
Class Z..................... (4,866) (11,622)
------------ ------------
(445,812) (4,814,306)
------------ ------------
Distributions from net realized
gains
Class A..................... (3,221,486) --
Class B..................... (55,316) --
Class C..................... (3,859) --
Class Z..................... (36,203) --
------------ ------------
(3,316,864) --
------------ ------------
Fund share transactions (net of
conversions) (Note 6)
Net proceeds from shares
sold........................ 8,184,792 6,921,618
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 2,953,974 4,960,184
Cost of shares reacquired...... (35,442,667) (43,255,074)
------------ ------------
Net decrease in net assets from
Fund share transactions..... (24,303,901) (31,373,272)
------------ ------------
Total decrease.................... (20,962,698) (43,715,833)
------------ ------------
Net Assets
Beginning of year................. 186,229,972 229,945,805
------------ ------------
End of year(a).................... $165,267,274 $186,229,972
------------ ------------
------------ ------------
- ---------------
(a) Includes undistributed net
investment income of $ -- $ 785,449
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54
<PAGE>
Notes to Financial Statements THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
The Global Total Return Fund, Inc., (the 'Fund') is an open-end, nondiversified
management investment company whose investment objective is to seek total
return, the components of which are current income and capital appreciation. The
Fund invests primarily in governmental (including supranational),
semi-governmental or governmental agency debt securities or in short-term bank
debt securities or deposits in the United States and in foreign countries
denominated in U.S. dollars or in foreign currencies, including debt securities
issued or guaranteed by the U.S. Government and foreign governments, their
agencies, authorities or instrumentalities (U.S. Government Securities and
Foreign Government Securities, respectively). The remainder is generally
invested in corporate debt securities or longer term bank debt securities. The
bonds are primarily of investment grade, i.e., bonds rated within the four
highest quality grades as determined by Moody's Investor's Service or Standard &
Poor's Rating's Group, or in unrated securities of equivalent quality. In
addition the Fund is permitted to invest up to 10% of the Fund's total assets in
bonds rated below investment grade with a minimum rating of B, or on unrated
securities of equivalent quality. The ability of the issuers of debt securities
held by the Fund to meet their obligations may be affected by economic and
political developments in a specific country or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current currency value. Portfolio securities that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by principal market makers.
Any security for which the primary market is on an exchange is valued at the
last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the last bid price quoted on such day. Forward currency
exchange contracts are valued at the current cost of covering or offsetting the
contract on the day of valuation. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians under triparty repurchase agreements as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in United States dollars. Foreign currency amounts are translated into United
States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the 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
- --------------------------------------------------------------------------------
B-55
<PAGE>
Notes to Financial Statements THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
instability and the level of governmental supervision and regulation of foreign
securities markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments and foreign currencies. Gain or loss is realized on
the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currency
transactions. Risks may arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
Security Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income, which is comprised of three elements: stated coupon, original
issue discount and market discount, is recorded on the accrual basis. Expenses
are recorded on the accrual basis, which may require the use of certain
estimates by management.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income or excise tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Dividends and Distributions: Dividends are declared quarterly. Distributions of
capital gains, if any, will be declared at least annually. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease undistributed net investment income by
$4,015,166, decrease accumulated net realized loss on investments by $4,460,978,
and decrease paid in capital in excess of par by $445,812 for foreign currency
losses realized and recognized during the year ended December 31, 1998. Net
investment income, net realized gains and net assets were not affected by this
change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC, through an agreement with PRICOA Asset
Management Ltd. ("PRICOA"), furnishes investment advisory services in connection
with the management of the Fund. PIFM pays for the cost of the subadviser's
services, compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .75 of 1% of the Fund's average daily net assets up to $500 million, .70
of 1% of such assets between $500 million and $1 billion, and .65 of 1% of such
assets in excess of $1 billion.
The Fund had a distribution agreement with Prudential Securities Incorporated
("PSI"), which acted as the distributor of the Class A, B, C and Z shares of the
Fund through May 31, 1998. Prudential Investment Management Services LLC
("PIMS") became the distributor of the Fund effective June 1, 1998 and is
serving the Fund under the same terms and conditions as under the arrangement
with PSI. The Fund compensated PSI and PIMS 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
them. The distribution fees were accrued daily and payable monthly. No
distribution or service fees were paid to PSI or PIMS as distributor of the
Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI and PIMS 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
- --------------------------------------------------------------------------------
B-56
<PAGE>
Notes to Financial Statements THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
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, 1998. Effective January 1, 1999
the expense under the Class A plan is .25 of 1% of the average daily net assets
of the Class A shares.
PSI and PIMS have advised the Fund that they have received approximately $12,200
and $300 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended December 31, 1998. From these fees,
PSI and PIMS paid such sales charges to dealers, which in turn paid commissions
to salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended December 31, 1998,
they received approximately $27,800 and $800 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM, PIC, PIMS and PRICOA are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
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, 1998. The Funds pay a commitment fee at an
annual rate of .055 of 1% on the unused portion of the credit facility. The
commitment fee is accrued and paid quarterly on a pro rata basis by the Funds.
The Agreement expired on December 29, 1998 and has been extended through
February 28, 1999 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, 1998,
the Fund incurred fees of approximately $256,500 for the services of PMFS. As of
December 31, 1998, approximately $21,300 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, 1998, aggregated $73,159,908 and $90,689,180,
respectively.
At December 31, 1998, the Fund had outstanding forward currency contracts to
sell foreign currencies as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Current Settlement Date Appreciation/
Sale Contracts Value Receivable (Depreciation)
- ---------------------- ----------- ---------------- --------------
<S> <C> <C> <C>
Canadian Dollars,
expiring 1/28/99..... $ 4,978,172 $ 4,969,156 $ (9,016)
French Francs,
expiring 1/28/99..... 3,186,794 3,211,230 24,436
Japanese Yen,
expiring 1/28/99..... 2,103,532 2,042,829 (60,703)
New Zealand Dollars,
expiring 1/28/99..... 16,119,414 16,037,866 (81,548)
Swiss Francs,
expiring 1/28/99..... 12,224,948 12,556,053 331,105
----------- ---------------- --------------
$38,612,860 $ 38,817,134 $ 204,274
----------- ---------------- --------------
----------- ---------------- --------------
</TABLE>
The United States federal income tax basis of the Fund's investments at December
31, 1998 was $158,716,497 and, accordingly, net unrealized depreciation for
United States federal income tax purposes was $375,239 (gross unrealized
appreciation--$7,265,530; gross unrealized depreciation--$(6,890,291).
The Fund utilized its capital loss carryforward of approximately $2,165,900 to
offset net taxable gains realized and recognized during the fiscal year ended
December 31, 1998.
The Fund has elected to treat approximately $283,907 of net currency losses
incurred in the two month period ended December 31, 1998 as having been incurred
in the following fiscal year.
- ------------------------------------------------------------
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, 1998, the
Fund had a .44% undivided interest in the joint account. The undivided interest
for the Fund represents $3,061,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:
Bear, Stearns & Co. Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $169,478,699.
Deutsche Bank Securities Inc., 4.80%, in the principal amount of $100,000,000,
repurchase price $100,053,333, due 1/4/99. The value of the collateral including
accrued interest was $102,001,052.
Goldman Sachs & Co. Inc., 4.25%, in the principal amount of $93,088,000,
repurchase price $93,131,958, due 1/4/99. The value of the collateral including
accrued interest was $94,950,662.
- --------------------------------------------------------------------------------
B-57
<PAGE>
Notes to Financial Statements THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
Morgan (J.P.) Securities Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $168,300,696.
Warburg Dillon Read Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $168,529,699.
- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Prior to November 2, 1998, Class C shares were sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. Class
Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
There are 2 billion authorized shares of common stock at $.01 par value per
share, divided equally into Class A, B, C and Z shares. As of December 31, 1998
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, 1998:
Shares sold......................... 339,598 $ 2,730,063
Shares issued in reinvestment of
dividends and distributions....... 333,052 2,661,857
Shares reacquired................... (4,101,283) (32,833,746)
---------- ------------
Net decrease in shares outstanding
before conversion................. (3,428,633) (27,441,826)
Shares issued upon conversion from
Class B........................... 3,881 31,322
---------- ------------
Net decrease in shares
outstanding....................... (3,424,752) $(27,410,504)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold......................... 237,833 $ 1,906,388
Shares issued in reinvestment of
dividends and distributions....... 20,064 160,430
Shares reacquired................... (94,011) (752,207)
---------- ------------
Net increase in shares outstanding
before conversion................. 163,886 1,314,611
Shares reacquired upon conversion
into Class A...................... (3,884) (31,322)
---------- ------------
Net increase in shares
outstanding....................... 160,002 $ 1,283,289
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold......................... 11,948 $ 95,300
Shares issued in reinvestment of
dividends and distributions....... 1,404 11,227
Shares reacquired................... (3,185) (25,475)
---------- ------------
Net increase in shares
outstanding....................... 10,167 $ 81,052
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
<CAPTION>
Class Z
- ------------------------------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold......................... 429,296 $ 3,453,041
Shares issued in reinvestment of
dividends and distributions....... 15,060 120,460
Shares reacquired................... (228,142) (1,831,239)
---------- ------------
Net increase in shares
outstanding....................... 216,214 $ 1,742,262
---------- ------------
---------- ------------
March 17, 1997(a) through
December 31, 1997:
Shares sold......................... 85,634 $ 698,886
Shares issued in reinvestment of
dividends and distributions....... 4,243 33,646
Shares reacquired................... (2,894) (23,565)
---------- ------------
Net increase in shares
outstanding....................... 86,983 $ 708,967
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-58
<PAGE>
Financial Highlights THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A (b)
---------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------
1998(c) 1997(c) 1996 1995 1994
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 7.88 $ 8.38 $ 8.44 $ 7.46 $ 8.76
----------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .52 .55 .62 .54 .52
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .16 (.18) .32 1.25 (1.22)
----------- -------- -------- -------- --------
Total from investment operations........... .68 .37 .94 1.79 (.70)
----------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.35) (.68) (.62) (.54) (.17)
Distributions in excess of net investment
income..................................... (.02) (.19) (.50) (.27) --
Distributions from net realized capital
gains...................................... (.16) -- -- -- (.13)
Tax return of capital distributions........... -- -- -- -- (.30)
----------- -------- -------- -------- --------
Total distributions........................ (.53) (.87) (1.12) (.81) (.60)
----------- -------- -------- -------- --------
Redemption fee retained by Fund............... -- -- .12 -- --
----------- -------- -------- -------- --------
Net asset value, end of year.................. $ 8.03 $ 7.88 $ 8.38 $ 8.44 $ 7.46
----------- -------- -------- -------- --------
----------- -------- -------- -------- --------
Per share market price, end of year........... N/A N/A N/A $ 8.25 $ 6.13
-------- --------
-------- --------
TOTAL INVESTMENT RETURN BASED ON (a):
Market price............................... N/A N/A N/A 49.23% (16.12)%
Net asset value............................ 8.92% 4.55% 13.15% 25.45% (8.10)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $ 158,932 $183,054 $229,770 $559,071 $493,645
Average net assets (000)...................... $ 171,427 $204,795 $299,026 $549,407 $536,230
Ratios to average net assets:
Expenses, including distribution fees...... 1.33% 1.39% 1.33% 1.02% 1.04%
Expenses, excluding distribution fees...... 1.18% 1.24% 1.18% 1.02% 1.04%
Net investment income...................... 6.42% 6.73% 7.01% 6.50% 6.45%
For Class A, B, C, and Z shares:
Portfolio turnover rate.................... 46% 43% 32% 256% 583%
</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-59
<PAGE>
Financial Highlights THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------- ------------------------
January 15,
1996(d)
Year Ended Through Year Ended
December 31, December 31, December 31,
1998(f) 1997(f) 1996 1998(f) 1997(f)
---------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 7.89 $ 8.39 $ 8.51 $ 7.89 $ 8.39
----- --------- ----- --------- -----
Income from investment operations
Net investment income......................... .46 .49 .57 .46 .49
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .16 (.16) .26 .16 (.16)
----- --------- ----- --------- -----
Total from investment operations........... .62 .33 .83 .62 .33
----- --------- ----- --------- -----
Less distributions
Dividends from net investment income.......... (.30) (.64) (.57) (.30) (.64)
Distributions in excess of net investment
income..................................... (.02) (.19) (.50) (.02) (.19)
Distributions from net realized capital
gains...................................... (.16) -- -- (.16) --
----- --------- ----- --------- -----
Total distributions........................ (.48) (.83) (1.07) (.48) (.83)
----- --------- ----- --------- -----
Redemption fee retained by Fund............... -- -- .12 -- --
----- --------- ----- --------- -----
Net asset value, end of period................ $ 8.03 $ 7.89 $ 8.39 $ 8.03 $ 7.89
----- --------- ----- --------- -----
----- --------- ----- --------- -----
TOTAL INVESTMENT RETURN(a):................... 8.13% 3.98% 11.99% 8.13% 3.98%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $3,625 $ 2,300 $ 175 $ 275 $ 190
Average net assets (000)...................... $3,048 $ 1,246 $ 52 $ 220 $ 397
Ratios to average net assets:
Expenses, including distribution fees...... 1.93% 1.99% 1.93%(c) 1.93% 1.99%
Expenses, excluding distribution fees...... 1.18% 1.24% 1.18%(c) 1.18% 1.24%
Net investment income...................... 5.86% 6.13% 6.41%(c) 5.84% 6.05%
<CAPTION>
Class Z
-----------------------------
January 15, March 17,
1996(d) 1997(e)
Through Year Ended through
December 31, December 31, December 31,
1996 1998(f) 1997(f)
------------ ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.51 $ 7.88 $ 8.32
----- ----- -----
Income from investment operations
Net investment income......................... .57 .52 .39
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .26 .17 .05
----- ----- -----
Total from investment operations........... .83 .69 .44
----- ----- -----
Less distributions
Dividends from net investment income.......... (.57) (.36) (.69)
Distributions in excess of net investment
income..................................... (.50) (.02) (.19)
Distributions from net realized capital
gains...................................... -- (.16) --
----- ----- -----
Total distributions........................ (1.07) (.54) (.88)
----- ----- -----
Redemption fee retained by Fund............... .12 -- --
----- ----- -----
Net asset value, end of period................ $ 8.39 $ 8.03 $ 7.88
----- ----- -----
----- ----- -----
TOTAL INVESTMENT RETURN(a):................... 11.99% 9.07% 5.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 210(b) $2,435 $ 686
Average net assets (000)...................... $ 204(b) $1,771 $ 257
Ratios to average net assets:
Expenses, including distribution fees...... 1.93%(c) 1.18% 1.24%(c)
Expenses, excluding distribution fees...... 1.18%(c) 1.18% 1.24%(c)
Net investment income...................... 6.41%(c) 6.65% 5.41%(c)
</TABLE>
- ---------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than a full year are not annualized.
(b) Figure is actual and not rounded to nearest thousand.
(c) Annualized.
(d) Commencement of offering of Class B and Class C shares.
(e) Commencement of offering of Class Z shares.
(f) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60
<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, 1998, the results of its operations for the year
then ended, and the changes in its net assets and the financial highlights for
each of the two years in the period 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 audits. We conducted our
audits 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
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying Financial Highlights for each of
the three years in the period ended December 31, 1996 were audited by other
independent accountants, whose opinion dated February 14, 1997 was unqualified.
1177 Avenue of the Americas
New York, New York
February 16, 1999
- --------------------------------------------------------------------------------
B-61
<PAGE>
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
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 some time 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.
SHORT-TERM DEBT RATINGS
Moody's short-term debt 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-1 repayment
ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally will
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC: OBLIGATIONS rated BB, B, CCC and CC are regarded as having
significant speculative characteristics. BB indicates the least degree of
speculation and CC the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This designation 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 sign (+) 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>
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>
<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.
[GRAPHICAL REPRESENTATION OF LINE CHART]
<TABLE>
<CAPTION>
VALUE OF $1.00 INVESTED ON 1/1/26 THROUGH 12/31/98
<S> <C>
Small Stocks $5,116.95
Common Stocks $2,350.89
Long-Term Bonds $44.18
Treasury Bills $14.94
Inflation $9.16
</TABLE>
Source: Ibbotson Associates. Used with permission. 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
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary--Fees and Expenses" in the prospectus.
The net effect of the deduction of the operating expenses of a mutual fund on
these historical total returns, including the compounded effect over time, could
be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
YEAR 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury
Bonds(1) 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
- -------------------------------------------------------------------------------------------------------------
U.S. Government
Mortgage
Securities(2) 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
- -------------------------------------------------------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds(3) 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
- -------------------------------------------------------------------------------------------------------------
U.S. High Yield
Bonds(4) 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- -------------------------------------------------------------------------------------------------------------
World Government
Bonds(5) 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3%
- -------------------------------------------------------------------------------------------------------------
Difference between
highest and lowest
returns percent 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4%
- -------------------------------------------------------------------------------------------------------------
</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.
Source: Lipper Inc.
(5) SALOMON SMITH BARNEY BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes
over 800 bonds issued by various foreign governments or agencies, excluding
those in the U.S., but including those in Japan, Germany, France, the U.K.,
Canada, Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 12/31/85 through 12/31/98. It does not represent the performance of
any Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK
MARKETS 12/31/85-12/31/98 (IN U.S. DOLLARS)
<TABLE>
<S> <C>
Belgium 22.7%
Spain 22.5%
The Netherlands 20.8%
Sweden 19.9%
Switzerland 18.3%
USA 18.1%
Hong Kong 17.8%
France 17.4%
UK 16.7%
Germany 13.4%
Austria 8.9%
Japan 6.5%
</TABLE>
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/98. Used with permission. Morgan Stanley Country indices are unmanaged
indices which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Return reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
<TABLE>
<S> <C> <C>
450000
400000
350000 Capital Appreciation and Reinvesting Dividends $391,707
300000 Capital Appreciation only $133,525
250000
200000
150000
100000
50000
0
</TABLE>
1969 1973 1977 1980 1984 1988 1991 1994 1998
Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential Mutual Fund. Common stock total
return is based on the Standard & Poor's 500 Stock Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indices.
WORLD STOCK MARKET CAPITALIZATION BY REGION
<TABLE>
World Total: $15.8 Trillion
<S> <C>
Canada 1.8%
Pacific Basin 12.5%
U.S. 51.0%
Europe 34.7%
</TABLE>
Source: Morgan Stanley Capital International December 31, 1998. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.
II-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1998)
[GRAPHICAL REPRESENTATION OF LINE CHART]
Source: Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson
and Rex A. 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-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance
Company of America (Prudential) and its subsidiaries as well as information
relating to the Prudential Mutual Funds. See "How the Fund is Managed--Manager"
in the Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1997 and is subject to change thereafter. All information relies on
data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs more than 81,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, the Prudential has
25 million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
more than 1.5 million cars and insures more than 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
As of December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $211 billion in assets of
institutions and individuals. In INSTITUTIONAL INVESTOR, JULY 1998, Prudential
was ranked eighth in terms of total assets under management as of December 31,
1997.
REAL ESTATE. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents with over 1,100 offices
across the United States.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.(3)
FINANCIAL SERVICES. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves nearly
1.5 million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of October 30, 1997 Prudential Investments Fund Management was the 18th
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 one of the
subadvisers to The Prudential Investment Portfolios, Inc. and Mercator Asset
Management LP, as the subadviser to International Stock Series, a portfolio
of Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.
(2) As of December 31, 1996.
(3) On December 10, 1998 Prudential announced its intention to sell Prudential
Health Care to Aetna Inc. for $1 billion.
III-1
<PAGE>
EQUITY FUNDS. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth 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 (one of the
largest funds of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(4) 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. 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 billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers have 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.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(5)
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 and financial
planning areas.
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 ArchitectsSM, 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.
- ----------
(4) As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
(5) As of December 31, 1998.
III-2
<PAGE>
ANNUAL REPORT OF
TOTAL RETURN FUND
FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998
<PAGE>
(ICON)
The Global
Total Return
Fund, Inc.
ANNUAL
REPORT
Dec. 31, 1998
(LOGO)
<PAGE>
The Global Total Return Fund, Inc.
Performance At A Glance.
A financial crisis that simmered in Asia early in 1998 finally spread to
Russia and Latin America in the second half of the year. Investors responded
by fleeing to the government securities of major developed Western economies
and by selling assets that carried greater credit risk. The Global Total
Return Fund provided higher returns than the average comparable fund, as
measured by Lipper Analytical Services, primarily because we invested heavily
in long-term German government bonds, U.S. Treasuries, and other "safe haven"
debt securities that rallied sharply.
<TABLE>
<CAPTION>
Cumulative Total Returns1 As of 12/31/98
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 8.92% 50.69% 147.21% 244.44%
Class B 8.13 N/A N/A 25.91
Class C 8.13 N/A N/A 25.92
Class Z 9.07 N/A N/A 15.13
Lipper Global
Income Fund Avg.3 6.23 31.79 108.57 ***
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1 As of 12/31/98
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 4.56% 7.67% 9.03% 10.05%
Class B 3.13 N/A N/A 7.22
Class C 6.05 N/A N/A 7.73
Class Z 9.07 N/A N/A 8.19
</TABLE>
<TABLE>
Distributions & Yields As of 12/31/98
<CAPTION>
Total Distributions 30-Day
Paid for 12 Mos. SEC Yield
<S> <C> <C>
Class A $0.53 4.75%
Class B $0.48 4.34
Class C $0.48 4.31
Class Z $0.54 5.11
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Past performance numbers, with
the exception of one-year returns, do not fully reflect the higher operating
expenses incurred since the Fund commenced operations as an open-end mutual
fund on January 15, 1996. If these expenses had been applied since the Fund's
inception, past performance returns would have been lower. Prior to January
15, 1996, the Fund operated as a closed-end fund, with shares being traded on
the New York Stock Exchange.
1 Source: Prudential Investments Fund Management and Lipper, Inc. The
cumulative total returns do not take into account sales charges. The average
annual total returns do take into account applicable sales charges. The Fund
charges a maximum front-end sales load of 4% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically
convert to Class A shares, on a quarterly basis, approximately seven years
after purchase. Class C shares are subject to a front-end sales load of 1%
and a CDSC of 1% for 18 months. Class C shares bought before November 2, 1998
have a 1% CDSC if sold within one year. Class Z shares are not subject to a
sales charge or distribution fee.
2 Inception dates: Class A, 7/7/86; Class B and Class C, 1/15/96; and Class Z,
3/17/97.
3 Lipper average returns are for all funds in each share class for the one-,
five-, and ten-year periods in the Global Income Fund category.
***Lipper Since Inception returns are 190.10% for Class A; 18.66% for Class B
and Class C; and 12.10% for Class Z based on all funds in each share class.
How Investments Compared.
(As of 12/31/98)
(Graph)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
Source: Lipper, Inc. Financial markets change, so a mutual fund's past
performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month
total returns for several Lipper mutual fund categories to show you that
reaching for higher yields means tolerating more risk. The greater the risk,
the larger the potential reward or loss. In addition, we've included
historical 20-year average annual returns. These returns assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help
smooth out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments,
state agencies and/or municipalities. This investment provides income that is
usually exempt from federal and state income taxes.
U.S. Taxable Money Funds attempt to preserve a constant share value; they
don't fluctuate much in price but, historically, their returns have been
generally among the lowest of the major investment categories.
<PAGE>
Gabriel Irwin and Simon Wells, Fund Managers
(PHOTOS)
Portfolio
Managers'Report
Your Fund seeks total return, which is current income plus any capital
appreciation of its underlying bonds. The Fund invests primarily in
intermediate-term investment-grade debt securities issued around the world.
The Fund may also invest up to 10% of total assets in bonds rated below
investment grade with a minimum rating of "B" by Standard & Poor's or Moody's
or of comparable quality. Lower-rated securities carry a greater risk of loss
of principal and interest than higher-rated securities. There are special
risks associated with foreign investing, including social, political and
currency risks as well as potential illiquidity. There can be no assurance
that the Fund's investment objective will be achieved.
New Year Brings New Currency.
The new single European currency, the euro, debuted on January 1, 1999. The
individual currencies of the 11 member nations will continue to exist at
fixed exchange rates until euro bills and coins are introduced into
circulation in 2002.
Strategy Session.
Thriving Despite Global Turmoil.
Global economic growth was bound to slow, and commodity prices were set to
decline in 1998 as struggling Asian nations imported fewer goods and services
from abroad. In this deflationary environment, we expected interest rates to
fall and bond prices to rise. Therefore, we positioned the Fund to take
advantage of this anticipated rally by extending its duration, which is a
measure of sensitivity to interest rate fluctuations. A longer duration
enables Fund shares to gain more rapidly when interest rates decline.
The Fund's duration lengthened to 6.1 years as of December 31, 1998 from 5.1
years at the end of 1997. We accomplished this through buying European debt
securities such as German bonds, which comprised 20.4% of the Fund's total
investments as of December 31, 1998, up from 13.3% a year earlier. Most of
these purchases took place in the summer both before and while the spreading
global financial crisis spurred increased demand for German government
securities.
While we added to certain European bond holdings, we reduced others. U.K.
government bonds and currency fell to 4.5% of the Fund's total investments
as of December 31, 1998 from 8.6% at the end of 1997. We took profits because
we anticipated the decline in sterling that occurred as the economy weakened
and the Bank of England cut its benchmark interest rate to stimulate growth.
Exposure to both Norwegian bonds and currency was eliminated early on amid
concern that declining crude prices would hurt the nation's oil-based economy.
We also began to cut the Fund's emerging market exposure before the deepening
global financial turmoil battered the bonds of most developing countries. By
the end of the year, our exposure to below-investment-grade emerging market
debt fell to 2.0% from 5.9%.
What Went Well.
The Flight to Quality.
In August, the Russian government devalued the ruble and defaulted on some
ruble-denominated debt. Latin America also fell prey to the financial
contagion. Investors took refuge in U.S. Treasuries and the government
securities of major Western European nations and dumped riskier assets. A
lack of liquidity was the greatest concern in the bond markets. There was
little trading, except in the most popular securities such as Treasuries and
German government bonds, which rallied to record levels in early October.
This trend benefited the Fund as it was heavily invested in both.
In order to calm financial markets and restore confidence in the U.S. economy,
the Federal Reserve cut the Federal funds rate (the rate banks charge each
other for overnight loans) by a quarter percentage point on September 29,
October 15, and November 17, leaving the key rate at 4.75%. Some other
central banks also eased monetary policy, and the flight to quality began to
reverse.
Bonds of Greece, Hungary and Poland rallied nicely in 1998 as the three
countries are expected to become part of the European Union and adopt the
euro currency early in the next century. Our exposure to these government
securities rose to 6.2% by the end of 1998 from 1.9% a year earlier.
And Not So Well.
Lack of Japanese Yen Exposure.
The Fund's lack of exposure to the Japanese yen hurt its performance in the
fourth quarter.
The Japanese yen gained more than 17% against the U.S. dollar in the final
three months of 1998. Hedge fund managers began purchasing yen to repay
low-cost yen loans that were used partly to finance investments in higher-
yielding U.S. dollar assets. Renewed hope that Japan would heal its ailing
banking system and revitalize its economy also helped boost the nation's
currency.
Looking Ahead.
The Fund began 1999 with a 27.4% exposure to the euro that will probably
decrease by a slight amount in coming months. Because of slowing economic
growth in Europe, there is political pressure in the short term to allow the
euro to soften versus the U.S. dollar. This would enhance the competitiveness
of European exports, which would strengthen the economy there. On a longer-
term basis, Euroland (the 11 founding members of the new currency) boasts a
large current account surplus that could help support the value of the euro.
Five Largest Issuers.
22.6% U.S.Treasury Obligations
17.8% German Government Bonds
6.0% Danish Government Bonds
5.4% New South Wales
Treasury Corporation
4.3% United Kingdom
Treasury Strip
Expressed as a percentage of net assets as of 12/31/98.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 12/31/98.
(PIE CHART)
- -------------------------------------------------------------------------------
1
<PAGE>
President's Letter February 16, 1999
(PHOTO)
Dear Shareholder:
Many major equity market indexes ended 1998 on the upswing -- posting an
unprecedented fourth consecutive year of double-digit returns -- as many
stocks rebounded off their early October lows. Bond investors were also
cheered by healthy returns on U.S. Treasuries and investment-grade corporate
debt, as well as certain Western European bonds.
Unfortunately, the equity market's advance was neither broad nor deep. It was
limited primarily to stocks of larger companies with established records of
growth. Investors ignored the stocks of both undervalued companies and smaller
companies in a "flight to quality" stemming from financial turmoil in Asia and
fears of a recession in the United States. Accordingly, growth-style investors
in large-company stocks outperformed value-style investors by the widest
margins in nearly 24 years -- and not since the Great Depression have large-
company stocks so outperformed stocks of small companies.
The rally in bonds was not universal either. While government bonds --
especially Treasuries -- enjoyed strong appeal, investors were cool toward
lower-rated issues. High yield bonds, therefore, saw yields rise while prices
fell.
What We Can Learn From '98
The volatility of 1998 underscores points all investors should keep in mind:
Financial markets will rise and fall, sometimes dramatically. Because asset
classes seldom move in lockstep, owning a mix of value- and growth-oriented
mutual funds in addition to bond and money market funds can help lessen the
effects of market volatility.
Generally speaking, long-term success in investment management comes from
remaining true to an investment discipline -- even when it is out of favor.
Investors who maintain a long-term perspective and don't sell during market
lows are more likely to regain lost ground, and while past events cannot
foretell future performance, stocks and bonds have produced attractive returns
ahead of inflation over time.
Thank you for your continued confidence in Prudential mutual funds.
Sincerely,
Brian M. Storms
President
- -------------------------------------------------------------------------------
2
<PAGE>
Portfolio of Investments as of Deccember 31, 1998 THE GLOBAL TOTAL RETURN FUND,
INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount US$
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--85.9%
- ------------------------------------------------------------
Australia--6.5%
A$ 2,750 Federal National Mortgage
Association,
6.375%, 8/15/07 $ 1,774,722
13,700 New South Wales Treasury
Corporation,
6.50%, 5/1/06 8,960,622
------------
10,735,344
- ------------------------------------------------------------
Canada--3.3%
C$ 3,250 British Columbia Provincial
Bond,
6.00%, 6/9/08 2,233,543
4,500 Province of Quebec,
6.50%, 10/1/07 3,149,678
------------
5,383,221
- ------------------------------------------------------------
Denmark--6.0%
Danish Government Bonds,
DKr 20,000 7.00%, 12/15/04 3,620,752
32,750 8.00%, 3/15/06 6,343,850
------------
9,964,602
- ------------------------------------------------------------
Germany--19.6%
German Government Bonds,
DM 18,000 7.375%, 1/3/05 12,910,983
7,700 6.00%, 1/5/06 5,225,921
15,500 6.25%, 1/4/24 11,261,516
5,000 Republic of Colombia,
7.25%, 12/21/00 3,052,465
------------
32,450,885
- ------------------------------------------------------------
Greece--3.3%
Hellenic Republic, FRN,
GRD 350,000 9.20%, 3/21/02 1,285,914
680,000 12.70%, 12/31/03 2,437,973
GRD 430,000 Republic of Greece,
8.60%, 3/26/08 $ 1,695,138
------------
5,419,025
- ------------------------------------------------------------
Hungary--0.8%
HUF 300,000 Hungarian Government Bonds,
16.00%, 4/12/00 1,402,700
- ------------------------------------------------------------
Netherlands--4.0%
Dutch Government Bonds,
NLG 6,000 7.00%, 6/15/05 3,764,500
3,750 7.50%, 1/15/23 2,767,957
------------
6,532,457
- ------------------------------------------------------------
New Zealand--4.4%
NZ$ 6,700 Federal National Mortgage
Association,
7.25%, 6/20/02 3,656,473
3,300 International Bank of
Reconstruction Development,
7.25%, 5/27/03 1,807,909
3,100 New Zealand Government Bond,
8.00%, 4/15/04 1,825,837
------------
7,290,219
- ------------------------------------------------------------
Russia--0.1%
European Bank of Reconstruction
Development,
RUB 5,300 31.00%, 5/5/00 61,485
8,600 Zero Coupon, 5/28/02 23,944
------------
85,429
- ------------------------------------------------------------
Spain--3.3%
Pts 650,000 Spanish Government Bond,
6.15%, 1/31/13 5,406,026
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount US$
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Sweden--2.4%
SEK 29,000 Swedish Government Bond,
6.00%, 2/9/05 $ 3,965,962
- ------------------------------------------------------------
United Kingdom--4.3%
BP 9,100 United Kingdom Treasury Strip,
Zero Coupon, 12/7/15 7,176,140
- ------------------------------------------------------------
United States--27.9%
Corporate Bonds--1.8%
1,200 General Motors Acceptance
Corp.,
5.75%, 11/10/03 1,209,312
1,700 Household Finance Corporation,
6.40%, 6/17/08 1,755,335
------------
2,964,647
- ------------------------------------------------------------
Sovereign Bonds--4.3%
3,500 Ministry Of Finance (Russia),
10.00%, 6/26/07 997,500
1,000 Oman Sultanate (India),
7.125%, 3/20/02 1,020,000
1,000 Republic of Colombia,
7.25%, 2/23/04 896,000
2,000 Republic of Croatia, FRN,
6.56%, 7/31/06 1,429,551
960 Republic of Croatia,
6.5625%, 7/31/10 758,400
1,400 Republic of Peru,
4.00%, 3/7/17 878,500
800 Republic of Lithuania,
7.125%, 7/22/02 748,000
1,675 Russian Federation,
11.00%, 7/24/18 414,563
------------
7,142,514
- ------------------------------------------------------------
Supranational Bonds--2.9%
4,800 Corporacion Andina de Fomento,
7.375%, 7/21/00 4,847,664
U.S. Government Obligations--18.9%
US$ 9,250 United States Treasury Bond,
6.625%, 2/15/27 $ 10,940,992
United States Treasury Notes,
5,000 6.125%, 9/30/00 5,122,650
13,810 6.25%, 2/15/07 15,147,775
------------
31,211,417
------------
46,166,242
Total long-term investments
(cost US$141,404,772) 141,978,252
------------
SHORT-TERM INVESTMENTS--10.4%
- ------------------------------------------------------------
Hungary--0.7%
HUF 250,000 Hungarian Government Bonds,
16.50%, 7/24/99 1,160,737
- ------------------------------------------------------------
Poland--1.2%
Polish Treasury Bills,
PLZ 3,800 14.00%(a), 2/17/99 1,057,221
1,200 18.55%(a), 3/3/99 333,344
2,000 13.57%(a), 4/28/99 543,912
------------
1,934,477
- ------------------------------------------------------------
United States--8.5%
Corporate Bonds--3.0%
US$ 1,000 Banco Ganadero Colombian Bond
(Colombia),
9.75%, 8/26/99 1,006,250
2,900 Financiera Energetica Nacional
(Colombia),
9.00%, 11/8/99 2,900,000
1,000 Petroleas Mexicano (Mexico),
FRN,
6.20%, 3/8/99 987,300
------------
4,893,550
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount US$
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Repurchase Agreement--1.8%
US$ 3,061 Joint Repurchase Agreement
Account,
4.69% 1/4/99 (Note 5) $ 3,061,000
- ------------------------------------------------------------
U.S. Government Obligations--3.7%
6,000 United States Treasury Notes,
6.75%, 6/30/99 6,063,720
------------
14,018,270
------------
Total short-term Investments
(cost US$17,281,427) 17,113,484
------------
- ------------------------------------------------------------
Total Investments--96.3%
(cost $158,686,199) 159,091,736
Other assets in excess of
liabilities--3.7% 6,175,538
------------
Net Assets--100% $165,267,274
------------
------------
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Statement of Assets and Liabilities THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
Assets December 31, 1998
<S> <C>
Investments, at value (cost $158,686,199)................................................................... $159,091,736
Foreign currency, at value (cost $1,767,880)................................................................ 1,757,476
Interest receivable......................................................................................... 4,747,224
Forward currency contracts--amount receivable from counterparties........................................... 355,541
Receivable for investments sold............................................................................. 253,165
Receivable for Fund shares sold............................................................................. 22,770
Other assets................................................................................................ 5,231
-------------
Total assets............................................................................................. 166,233,143
-------------
Liabilities
Payable for Fund shares reacquired.......................................................................... 404,297
Accrued expenses and other liabilities...................................................................... 192,405
Forward currency contracts--amount payable to counterparties................................................ 151,267
Management fee payable...................................................................................... 106,493
Bank overdraft.............................................................................................. 88,425
Distribution fee payable.................................................................................... 22,982
-------------
Total liabilities........................................................................................ 965,869
-------------
Net Assets.................................................................................................. $165,267,274
-------------
-------------
Net assets were comprised of:
Common stock, at par..................................................................................... $ 205,901
Paid-in capital in excess of par......................................................................... 164,988,534
-------------
165,194,435
Accumulated net realized loss on investments............................................................. (600,027 )
Net unrealized appreciation on investments and foreign currencies........................................ 672,866
-------------
Net assets, December 31, 1998............................................................................... $165,267,274
-------------
-------------
Class A:
Net asset value and redemption price per share
($158,932,007 / 19,800,984 shares of common stock issued and outstanding)............................. $8.03
Maximum sales charge (4% of offering price)................................................................. .33
-------------
Maximum offering price to public............................................................................ $8.36
-------------
-------------
Class B:
Net asset value and redemption price per share
($3,625,180 / 451,664 shares of common stock issued and outstanding).................................. $8.03
-------------
-------------
Class C:
Net asset value, offering price and redemption price per share
($274,811 / 34,209 shares of common stock issued and outstanding)..................................... $8.03
Maximum sales charge (1% of offering price).............................................................. .08
-------------
Maximum offering price to public......................................................................... $8.11
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per share
($2,435,276 / 303,197 shares of common stock issued and outstanding).................................. $8.03
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1998
<S> <C>
Income
Interest and discount earned (net of
foreign withholding taxes of
$16,405)........................... $13,687,048
-----------------
Expenses
Management fee........................ 1,323,490
Distribution fee--Class A............. 257,141
Distribution fee--Class B............. 22,860
Distribution fee--Class C............. 1,647
Transfer agent's fees and expenses.... 320,000
Custodian's fees and expenses......... 225,000
Reports to shareholders............... 50,000
Registration fees..................... 50,000
Legal fees and expenses............... 45,000
Audit fee and expenses................ 36,000
Directors' fees....................... 18,000
Insurance............................. 4,000
Miscellaneous......................... 12,608
-----------------
Total expenses..................... 2,365,746
-----------------
Net investment income.................... 11,321,302
-----------------
Realized and Unrealized Gain
(Loss) on Investments and Foreign
Currency Transactions
Net realized gain (loss) on:
Investment transactions............... 2,920,023
Foreign currency transactions......... (1,349,135)
-----------------
1,570,888
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments........................... 2,767,090
Foreign currencies.................... (909,628)
-----------------
1,857,462
-----------------
Net gain on investments and foreign
currencies............................ 3,428,350
-----------------
Net Increase in Net Assets
Resulting from Operations................ $14,749,652
-----------------
-----------------
</TABLE>
THE GLOBAL TOTAL RETURN FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1998 1997
<S> <C> <C>
Operations:
Net investment income.......... $ 11,321,302 $ 13,903,963
Net realized gain on investment
and foreign currency
transactions................ 1,570,888 7,846,372
Net change in unrealized
appreciation (depreciation)
on investments and foreign
currencies.................. 1,857,462 (12,590,843)
------------ ------------
Net increase in net assets
resulting from operations... 14,749,652 9,159,492
------------ ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (7,425,915) (16,523,696)
Class B..................... (127,509) (108,586)
Class C..................... (8,896) (32,330)
Class Z..................... (83,453) (23,135)
------------ ------------
(7,645,773) (16,687,747)
------------ ------------
Distributions in excess of net
investment income
Class A..................... (432,992) (4,744,012)
Class B..................... (7,435) (44,626)
Class C..................... (519) (14,046)
Class Z..................... (4,866) (11,622)
------------ ------------
(445,812) (4,814,306)
------------ ------------
Distributions from net realized
gains
Class A..................... (3,221,486) --
Class B..................... (55,316) --
Class C..................... (3,859) --
Class Z..................... (36,203) --
------------ ------------
(3,316,864) --
------------ ------------
Fund share transactions (net of
conversions) (Note 6)
Net proceeds from shares
sold........................ 8,184,792 6,921,618
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 2,953,974 4,960,184
Cost of shares reacquired...... (35,442,667) (43,255,074)
------------ ------------
Net decrease in net assets from
Fund share transactions..... (24,303,901) (31,373,272)
------------ ------------
Total decrease.................... (20,962,698) (43,715,833)
------------ ------------
Net Assets
Beginning of year................. 186,229,972 229,945,805
------------ ------------
End of year(a).................... $165,267,274 $186,229,972
------------ ------------
------------ ------------
- ---------------
(a) Includes undistributed net
investment income of $ -- $ 785,449
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Notes to Financial Statements THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
The Global Total Return Fund, Inc., (the 'Fund') is an open-end, nondiversified
management investment company whose investment objective is to seek total
return, the components of which are current income and capital appreciation. The
Fund invests primarily in governmental (including supranational),
semi-governmental or governmental agency debt securities or in short-term bank
debt securities or deposits in the United States and in foreign countries
denominated in U.S. dollars or in foreign currencies, including debt securities
issued or guaranteed by the U.S. Government and foreign governments, their
agencies, authorities or instrumentalities (U.S. Government Securities and
Foreign Government Securities, respectively). The remainder is generally
invested in corporate debt securities or longer term bank debt securities. The
bonds are primarily of investment grade, i.e., bonds rated within the four
highest quality grades as determined by Moody's Investor's Service or Standard &
Poor's Rating's Group, or in unrated securities of equivalent quality. In
addition the Fund is permitted to invest up to 10% of the Fund's total assets in
bonds rated below investment grade with a minimum rating of B, or on unrated
securities of equivalent quality. The ability of the issuers of debt securities
held by the Fund to meet their obligations may be affected by economic and
political developments in a specific country or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current currency value. Portfolio securities that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by principal market makers.
Any security for which the primary market is on an exchange is valued at the
last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the last bid price quoted on such day. Forward currency
exchange contracts are valued at the current cost of covering or offsetting the
contract on the day of valuation. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians under triparty repurchase agreements as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in United States dollars. Foreign currency amounts are translated into United
States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the 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
- --------------------------------------------------------------------------------
8
<PAGE>
Notes to Financial Statements THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
instability and the level of governmental supervision and regulation of foreign
securities markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments and foreign currencies. Gain or loss is realized on
the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currency
transactions. Risks may arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
Security Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income, which is comprised of three elements: stated coupon, original
issue discount and market discount, is recorded on the accrual basis. Expenses
are recorded on the accrual basis, which may require the use of certain
estimates by management.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income or excise tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Dividends and Distributions: Dividends are declared quarterly. Distributions of
capital gains, if any, will be declared at least annually. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease undistributed net investment income by
$4,015,166, decrease accumulated net realized loss on investments by $4,460,978,
and decrease paid in capital in excess of par by $445,812 for foreign currency
losses realized and recognized during the year ended December 31, 1998. Net
investment income, net realized gains and net assets were not affected by this
change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC, through an agreement with PRICOA Asset
Management Ltd. ('PRICOA'), furnishes investment advisory services in connection
with the management of the Fund. PIFM pays for the cost of the subadviser's
services, compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .75 of 1% of the Fund's average daily net assets up to $500 million, .70
of 1% of such assets between $500 million and $1 billion, and .65 of 1% of such
assets in excess of $1 billion.
The Fund had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, B, C and Z shares of the
Fund through May 31, 1998. Prudential Investment Management Services LLC
('PIMS') became the distributor of the Fund effective June 1, 1998 and is
serving the Fund under the same terms and conditions as under the arrangement
with PSI. The Fund compensated PSI and PIMS 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
them. The distribution fees were accrued daily and payable monthly. No
distribution or service fees were paid to PSI or PIMS as distributor of the
Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI and PIMS 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
- --------------------------------------------------------------------------------
9
<PAGE>
Notes to Financial Statements THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
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, 1998. Effective January 1, 1999
the expense under the Class A plan is .25 of 1% of the average daily net assets
of the Class A shares.
PSI and PIMS have advised the Fund that they have received approximately $12,200
and $300 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended December 31, 1998. From these fees,
PSI and PIMS paid such sales charges to dealers, which in turn paid commissions
to salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended December 31, 1998,
they received approximately $27,800 and $800 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM, PIC, PIMS and PRICOA are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
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, 1998. The Funds pay a commitment fee at an
annual rate of .055 of 1% on the unused portion of the credit facility. The
commitment fee is accrued and paid quarterly on a pro rata basis by the Funds.
The Agreement expired on December 29, 1998 and has been extended through
February 28, 1999 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, 1998,
the Fund incurred fees of approximately $256,500 for the services of PMFS. As of
December 31, 1998, approximately $21,300 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, 1998, aggregated $73,159,908 and $90,689,180,
respectively.
At December 31, 1998, the Fund had outstanding forward currency contracts to
sell foreign currencies as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Current Settlement Date Appreciation/
Sale Contracts Value Receivable (Depreciation)
- ---------------------- ----------- ---------------- --------------
<S> <C> <C> <C>
Canadian Dollars,
expiring 1/28/99..... $ 4,978,172 $ 4,969,156 $ (9,016)
French Francs,
expiring 1/28/99..... 3,186,794 3,211,230 24,436
Japanese Yen,
expiring 1/28/99..... 2,103,532 2,042,829 (60,703)
New Zealand Dollars,
expiring 1/28/99..... 16,119,414 16,037,866 (81,548)
Swiss Francs,
expiring 1/28/99..... 12,224,948 12,556,053 331,105
----------- ---------------- --------------
$38,612,860 $ 38,817,134 $ 204,274
----------- ---------------- --------------
----------- ---------------- --------------
</TABLE>
The United States federal income tax basis of the Fund's investments at December
31, 1998 was $158,716,497 and, accordingly, net unrealized depreciation for
United States federal income tax purposes was $375,239 (gross unrealized
appreciation--$7,265,530; gross unrealized depreciation--$(6,890,291).
The Fund utilized its capital loss carryforward of approximately $2,165,900 to
offset net taxable gains realized and recognized during the fiscal year ended
December 31, 1998.
The Fund has elected to treat approximately $283,907 of net currency losses
incurred in the two month period ended December 31, 1998 as having been incurred
in the following fiscal year.
- ------------------------------------------------------------
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, 1998, the
Fund had a .44% undivided interest in the joint account. The undivided interest
for the Fund represents $3,061,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:
Bear, Stearns & Co. Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $169,478,699.
Deutsche Bank Securities Inc., 4.80%, in the principal amount of $100,000,000,
repurchase price $100,053,333, due 1/4/99. The value of the collateral including
accrued interest was $102,001,052.
Goldman Sachs & Co. Inc., 4.25%, in the principal amount of $93,088,000,
repurchase price $93,131,958, due 1/4/99. The value of the collateral including
accrued interest was $94,950,662.
- --------------------------------------------------------------------------------
10
<PAGE>
Notes to Financial Statements THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
Morgan (J.P.) Securities Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $168,300,696.
Warburg Dillon Read Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $168,529,699.
- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Prior to November 2, 1998, Class C shares were sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. Class
Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
There are 2 billion authorized shares of common stock at $.01 par value per
share, divided equally into Class A, B, C and Z shares. As of December 31, 1998
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, 1998:
Shares sold......................... 339,598 $ 2,730,063
Shares issued in reinvestment of
dividends and distributions....... 333,052 2,661,857
Shares reacquired................... (4,101,283) (32,833,746)
---------- ------------
Net decrease in shares outstanding
before conversion................. (3,428,633) (27,441,826)
Shares issued upon conversion from
Class B........................... 3,881 31,322
---------- ------------
Net decrease in shares
outstanding....................... (3,424,752) $(27,410,504)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold......................... 237,833 $ 1,906,388
Shares issued in reinvestment of
dividends and distributions....... 20,064 160,430
Shares reacquired................... (94,011) (752,207)
---------- ------------
Net increase in shares outstanding
before conversion................. 163,886 1,314,611
Shares reacquired upon conversion
into Class A...................... (3,884) (31,322)
---------- ------------
Net increase in shares
outstanding....................... 160,002 $ 1,283,289
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold......................... 11,948 $ 95,300
Shares issued in reinvestment of
dividends and distributions....... 1,404 11,227
Shares reacquired................... (3,185) (25,475)
---------- ------------
Net increase in shares
outstanding....................... 10,167 $ 81,052
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
<CAPTION>
Class Z
- ------------------------------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold......................... 429,296 $ 3,453,041
Shares issued in reinvestment of
dividends and distributions....... 15,060 120,460
Shares reacquired................... (228,142) (1,831,239)
---------- ------------
Net increase in shares
outstanding....................... 216,214 $ 1,742,262
---------- ------------
---------- ------------
March 17, 1997(a) through
December 31, 1997:
Shares sold......................... 85,634 $ 698,886
Shares issued in reinvestment of
dividends and distributions....... 4,243 33,646
Shares reacquired................... (2,894) (23,565)
---------- ------------
Net increase in shares
outstanding....................... 86,983 $ 708,967
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
11
<PAGE>
Financial Highlights THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A (b)
---------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------
1998(c) 1997(c) 1996 1995 1994
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 7.88 $ 8.38 $ 8.44 $ 7.46 $ 8.76
----------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .52 .55 .62 .54 .52
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .16 (.18) .32 1.25 (1.22)
----------- -------- -------- -------- --------
Total from investment operations........... .68 .37 .94 1.79 (.70)
----------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.35) (.68) (.62) (.54) (.17)
Distributions in excess of net investment
income..................................... (.02) (.19) (.50) (.27) --
Distributions from net realized capital
gains...................................... (.16) -- -- -- (.13)
Tax return of capital distributions........... -- -- -- -- (.30)
----------- -------- -------- -------- --------
Total distributions........................ (.53) (.87) (1.12) (.81) (.60)
----------- -------- -------- -------- --------
Redemption fee retained by Fund............... -- -- .12 -- --
----------- -------- -------- -------- --------
Net asset value, end of year.................. $ 8.03 $ 7.88 $ 8.38 $ 8.44 $ 7.46
----------- -------- -------- -------- --------
----------- -------- -------- -------- --------
Per share market price, end of year........... N/A N/A N/A $ 8.25 $ 6.13
-------- --------
-------- --------
TOTAL INVESTMENT RETURN BASED ON (a):
Market price............................... N/A N/A N/A 49.23% (16.12)%
Net asset value............................ 8.92% 4.55% 13.15% 25.45% (8.10)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $ 158,932 $183,054 $229,770 $559,071 $493,645
Average net assets (000)...................... $ 171,427 $204,795 $299,026 $549,407 $536,230
Ratios to average net assets:
Expenses, including distribution fees...... 1.33% 1.39% 1.33% 1.02% 1.04%
Expenses, excluding distribution fees...... 1.18% 1.24% 1.18% 1.02% 1.04%
Net investment income...................... 6.42% 6.73% 7.01% 6.50% 6.45%
For Class A, B, C, and Z shares:
Portfolio turnover rate.................... 46% 43% 32% 256% 583%
</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. 12
<PAGE>
Financial Highlights THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------- ------------------------
January 15,
1996(d)
Year Ended Through Year Ended
December 31, December 31, December 31,
1998(f) 1997(f) 1996 1998(f) 1997(f)
---------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 7.89 $ 8.39 $ 8.51 $ 7.89 $ 8.39
----- --------- ----- --------- -----
Income from investment operations
Net investment income......................... .46 .49 .57 .46 .49
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .16 (.16) .26 .16 (.16)
----- --------- ----- --------- -----
Total from investment operations........... .62 .33 .83 .62 .33
----- --------- ----- --------- -----
Less distributions
Dividends from net investment income.......... (.30) (.64) (.57) (.30) (.64)
Distributions in excess of net investment
income..................................... (.02) (.19) (.50) (.02) (.19)
Distributions from net realized capital
gains...................................... (.16) -- -- (.16) --
----- --------- ----- --------- -----
Total distributions........................ (.48) (.83) (1.07) (.48) (.83)
----- --------- ----- --------- -----
Redemption fee retained by Fund............... -- -- .12 -- --
----- --------- ----- --------- -----
Net asset value, end of period................ $ 8.03 $ 7.89 $ 8.39 $ 8.03 $ 7.89
----- --------- ----- --------- -----
----- --------- ----- --------- -----
TOTAL INVESTMENT RETURN(a):................... 8.13% 3.98% 11.99% 8.13% 3.98%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $3,625 $ 2,300 $ 175 $ 275 $ 190
Average net assets (000)...................... $3,048 $ 1,246 $ 52 $ 220 $ 397
Ratios to average net assets:
Expenses, including distribution fees...... 1.93% 1.99% 1.93%(c) 1.93% 1.99%
Expenses, excluding distribution fees...... 1.18% 1.24% 1.18%(c) 1.18% 1.24%
Net investment income...................... 5.86% 6.13% 6.41%(c) 5.84% 6.05%
<CAPTION>
Class Z
-----------------------------
January 15, March 17,
1996(d) 1997(e)
Through Year Ended through
December 31, December 31, December 31,
1996 1998(f) 1997(f)
------------ ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.51 $ 7.88 $ 8.32
----- ----- -----
Income from investment operations
Net investment income......................... .57 .52 .39
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .26 .17 .05
----- ----- -----
Total from investment operations........... .83 .69 .44
----- ----- -----
Less distributions
Dividends from net investment income.......... (.57) (.36) (.69)
Distributions in excess of net investment
income..................................... (.50) (.02) (.19)
Distributions from net realized capital
gains...................................... -- (.16) --
----- ----- -----
Total distributions........................ (1.07) (.54) (.88)
----- ----- -----
Redemption fee retained by Fund............... .12 -- --
----- ----- -----
Net asset value, end of period................ $ 8.39 $ 8.03 $ 7.88
----- ----- -----
----- ----- -----
TOTAL INVESTMENT RETURN(a):................... 11.99% 9.07% 5.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 210(b) $2,435 $ 686
Average net assets (000)...................... $ 204(b) $1,771 $ 257
Ratios to average net assets:
Expenses, including distribution fees...... 1.93%(c) 1.18% 1.24%(c)
Expenses, excluding distribution fees...... 1.18%(c) 1.18% 1.24%(c)
Net investment income...................... 6.41%(c) 6.65% 5.41%(c)
</TABLE>
- ---------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than a full year are not annualized.
(b) Figure is actual and not rounded to nearest thousand.
(c) Annualized.
(d) Commencement of offering of Class B and Class C shares.
(e) Commencement of offering of Class Z shares.
(f) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<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, 1998, the results of its operations for the year
then ended, and the changes in its net assets and the financial highlights for
each of the two years in the period 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 audits. We conducted our
audits 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
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying Financial Highlights for each of
the three years in the period ended December 31, 1996 were audited by other
independent accountants, whose opinion dated February 14, 1997 was unqualified.
1177 Avenue of the Americas
New York, New York
February 16, 1999
- --------------------------------------------------------------------------------
14
<PAGE>
Federal Income Tax Information (Unaudited) THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (December 31, 1998) as to the federal tax status of
distributions paid by the Fund during such fiscal year. Accordingly, during its
fiscal year ended December 31, 1998, the Fund paid distributions of $.526 per
Class A share, $.478 per Class B share, $.478 per Class C share and $.538 per
Class Z share. Of these amounts, $.152 per Class A, B, C and Z shares represent
distributions from long-term capital gains. The remaining $.374 per Class A
share, $.326 per Class B share, $.326 per Class C share and $.386 per Class Z
share represents dividends from ordinary income (net investment income and
short-term capital gains).
We wish to advise you that the dividends received deduction for the Fund is
zero. Only funds that invest in U.S. equity securities are entitled to
pass-through a corporate dividends received deduction.
- --------------------------------------------------------------------------------
15
<PAGE>
Getting The Most From Your Prudential Mutual Fund.
When you invest through Prudential Mutual Funds, you receive financial advice
through a Prudential Securities financial advisor or Prudential/Pruco
Securities registered representative. Your advisor or representative can
provide you with the following services:
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help you match the
reward you seek with the risk you can tolerate. And risk can be difficult to
gauge --sometimes even the simplest investments bear surprising risks. The
educated investor knows that markets seldom move in just one direction --
there are times when a market sector or asset class will lose value or provide
little in the way of total return. Managing your own expectations is easier
with help from someone who understands the markets and who knows you!
Keeping Up With The Joneses.
A financial advisor or registered representative can help you wade through the
numerous mutual funds available to find the ones that fit your own individual
investment profile and risk tolerance. While the newspapers and popular
magazines are full of advice about investing, they are aimed at generic groups
of people or representative individuals, not at you personally. Your financial
advisor or registered representative will review your investment objectives
with you. This means you can make financial decisions based on the assets and
liabilities in your current portfolio and your risk tolerance -- not just
based on the current investment fad.
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the bottom are among the
most common investor mistakes. But sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or worried
about your investment, and remind you that you're investing for the long haul.
<PAGE>
Comparing A $10,000 Investment.
The Global Total Return Fund, Inc. vs. the
J.P. Morgan Government Bond Index Global (GBI).
// The Global Total Return Fund, Inc.
- -- J.P. Morgan Gov't Bond Index Global (GBI)
(Class A)
Average Annual
Total Returns - Class A
With Sales Load
10.05% Since Inception
9.03% for 10 Years
7.67% for 5 Years
4.56% for 1 Year
Without Sales Load
10.41% Since Inception
9.48% for 10 Years
8.55% for 5 Years
8.92% for 1 Year
(Class B)
Average Annual
Total Returns - Class B
With Sales Load
7.22% Since Inception
3.13% for 1 Year
Without Sales Load
8.10% Since Inception
8.13% for 1 Year
(Class C)
Average Annual
Total Returns - Class C
With Sales Load
7.73% Since Inception
6.05% for 1 Year
Without Sales Load
8.10% Since Inception
8.13% for 1 Year
(Class Z)
Average Annual
Total Returns - Class Z
8.19% Since Inception
9.07% for 1 Year
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in The Global Total Return Fund, Inc. (Class A,
B, C, and Z shares) with a similar investment in the J.P. Morgan Government
Bond Index Global (GBI) (the Index) by portraying the initial account values
at the commencement of operations of Class B, C, and Z shares, and for 10
years for Class A shares, and subsequent account values at the end of each
fiscal year (December 31), as measured on a quarterly basis, beginning in
1988 for Class A shares, 1996 for Class B and Class C shares, and 1997 for
Class Z shares. For purposes of the graphs, and unless otherwise indicated
in the accompanying tables, it has been assumed that (a) the maximum
applicable front-end sales load was deducted from the initial $10,000
investment in Class A shares; (b) the maximum applicable contingent deferred
sales charges were deducted from the value of the investment in Class B and
Class C shares, assuming full redemption on December 31, 1998; (c) Class C
shares are subject to a front-end sales load of 1% and a CDSC of 1% for 18
months. Class C shares bought before November 2, 1998 have a 1% CDSC if sold
within one year; (d) all recurring fees (including management fees) were
deducted; and (e) all dividends and distributions were reinvested. Class B
shares will automatically convert to Class A shares, on a quarterly basis,
approximately seven years after purchase. This conversion feature is not
reflected in the graphs. Class Z shares are not subject to a sales charge
or distribution fee.
The Index is traded, unhedged, and measured in U.S. dollars. The Index is
market weighted and represents the total return of government bonds from 13
countries, including Australia, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, the Netherlands, Spain, Sweden, the United Kingdom and the
United States. The Index provides a broad measure of market performance.
The Index is unmanaged and includes the reinvestment of all dividends, but
does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund. The Index is not the only
index that may be used to characterize performance of global bond funds,
and other indexes may portray different comparative performance. Investors
cannot invest directly in an index.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Mendel A. Melzer, CFA
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Brian M. Storms
Louis A. Weil, III
Clay T. Whitehead
Officers
Brian M. Storms, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Marguerite E.H. Morrison, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
PRICOA Asset Management, Ltd.
115 Houndstitch
London EC3A 7BU
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
37936L302 MF169E
37936L401
37936L500
37936L203
<PAGE>
ANNUAL REPORT OF INTERMEDIATE FUND
FOR FISCAL YEAR
ENDED DECEMBER 31, 1998
<PAGE>
(ICON)
Prudential
Intermediate
Global
Income
Fund, Inc.
ANNUAL REPORT
Dec. 31, 1998
(LOGO)
<PAGE>
Prudential Intermediate Global Income Fund, Inc.
Performance At A Glance.
A financial crisis that simmered in Asia early in 1998 finally spread
to Russia and Latin America in the second half of the year. Investors
responded by fleeing to the government securities of major developed
Western economies and selling assets that carried greater credit risk.
The Prudential Intermediate Global Income Fund provided higher
returns than the average comparable fund, as measured by Lipper
Analytical Services, primarily because we invested heavily in
long-term German government bonds, U.S. Treasuries, and other
"safe haven" debt securities that rallied sharply.
<TABLE>
Cumulative Total Returns(1) As of 12/31/98
<CAPTION>
One Five Ten Since
Year Years Years Inception(2)
<S> <C> <C> <C> <C>
Class A 8.91% 45.71% 120.43% 128.47%
Class B 8.39 41.25 N/A 68.21
Class C 8.39 N/A N/A 49.29
Class Z 9.07 N/A N/A 20.00
Lipper Global
Income Fund Avg.(3) 6.23 31.79 108.57 ***
</TABLE>
<TABLE>
Average Annual Total Returns(1) As of 12/31/98
<CAPTION>
One Five Ten Since
Year Years Years Inception(2)
<S> <C> <C> <C> <C>
Class A 5.64% 7.17% 7.90% 7.80%
Class B 5.39 7.15 N/A 7.76
Class C 6.31 N/A N/A 9.25
Class Z 9.07 N/A N/A 8.29
</TABLE>
<TABLE>
Distributions & Yields As of 12/31/98
<CAPTION>
Total Distributions 30-Day
Paid for 12 Mos. SEC Yield
<S> <C> <C>
Class A $0.50 5.32%
Class B $0.45 4.85
Class C $0.45 4.83
Class Z $0.51 5.63
</TABLE>
Past performance is not indicative of future results. Principal and
investment return will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
(1) Source: Prudential Investments Fund Management and Lipper, Inc.
The cumulative total returns do not take into account sales charges.
The average annual total returns do take into account applicable
sales charges. The Fund charges a maximum front-end sales load of
3% for Class A shares. Class B shares are subject to a declining
contingent deferred sales charge (CDSC) of 3%, 2%, 1%, and 1% for
four years. Class B shares will automatically convert to Class A
shares, on a quarterly basis, approximately five years after purchase.
Class C shares are subject to a front-end sales load of 1% and a
CDSC of 1% for 18 months. Class C shares bought before November 2,
1998 have a 1% CDSC if sold within one year. Class Z shares are
not subject to a sales charge or distribution fee.
(2) Inception dates: Class A, 5/26/88; Class B, 1/15/92; Class C,
8/1/94; and Class Z, 9/16/96.
(3) Lipper average returns are for all funds in each share class
for the one-, five-, and ten-year periods in the Global Income
Fund category.
***Lipper Since Inception returns are 116.27% for Class A; 55.51%
for Class B; 40.16% for Class C; and 16.11% for Class Z based on
all funds in each share class.
How Investments Compared.
(As of 12/31/98)
(GRAPH)
Source: Lipper, Inc. Financial markets change, so a mutual fund's
past performance should never be used to predict future results.
The risks to each of the investments listed above are different -- we
provide 12-month total returns for several Lipper mutual fund categories
to show you that reaching for higher yields means tolerating more
risk. The greater the risk, the larger the potential reward or loss.
In addition, we've included historical 20-year average annual returns.
These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received
higher historical total returns from stocks than from most other
investments. Smaller capitalization stocks offer greater potential
for long-term growth but may be more volatile than larger
capitalization stocks.
General Bond Funds provide more income than stock funds, which can
help smooth out their total returns year by year. But their prices
still fluctuate (sometimes significantly) and their returns have
been historically lower than those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state agencies and/or municipalities. This investment
provides income that is usually exempt from federal and state income
taxes.
U.S. Taxable Money Funds attempt to preserve a constant share value;
they don't fluctuate much in price but, historically, their returns
have been generally among the lowest of the major investment categories.
<PAGE>
Gabriel Irwin and Simon Wells, Fund Managers
(PICTURE) (PICTURE)
Portfolio
Managers'
Report
Your Fund seeks to maximize total return, which is current income
plus any capital appreciation of its underlying bonds. The Fund
invests primarily in intermediate-term, investment-grade debt
securities of issuers around the world. The Fund may also
invest up to 10% of total assets in bonds rated below investment
grade with a minimum rating of "B" by Standard & Poor's or Moody's
or of comparable quality. Lower-rated securities carry a greater
risk of loss of principal and interest than higher-rated securities.
There are special risks associated with foreign investing, including
social, political and currency risks as well as potential illiquidity.
There can be no assurance that the Fund's investment objective will
be achieved.
New Year Brings
New Currency.
The new single European currency, the euro, debuted on January
1, 1999. The individual currencies of the 11 member nations will
continue to exist at fixed exchange rates until euro bills and
coins are introduced into circulation in 2002.
Strategy Session.
Thriving Despite
Global Turmoil.
Global economic growth was bound to slow, and commodity prices
were sent to decline in 1998 as struggling Asian nations imported
fewer goods and services from abroad. In this deflationary
environment, we expected interest rates to fall and bond
prices to rise. Therefore, we positioned the Fund to take
advantage of this anticipated rally by extending its duration,
which is a measure of sensitivity to interest rate fluctuations.
A longer duration enables Fund shares to gain more rapidly when
interest rates decline.
The Fund's duration lengthened to 5.8 years as of December 31,
1998 from 5.1 years at the end of 1997. We accomplished this
through buying European debt securities such as German bonds,
which comprised 20.6% of the Fund's total investments as of
December 31, 1998, up from 13.7% a year earlier. Most of these
purchases took place in the summer both before and while the
spreading global financial crisis spurred increased demand for
German government securities.
While we added to certain European bond holdings, we reduced others.
U.K. bonds and currency fell to 4.1% of the Fund's total investments
as of December 31, 1998 from 8.7% at the end of 1997. We took profits
because we anticipated the decline in sterling that occurred as the
economy weakened and the Bank of England cut its benchmark interest
rate to stimulate growth. Exposure to both Norwegian bonds and currency
was eliminated early on amid concern that declining crude prices would
hurt the nation's oil-based economy.
We also began to cut the Fund's emerging market exposure before the
deepening global financial turmoil battered the bonds of most
developing countries. By the end of the year, our exposure to
below-investment-grade emerging market debt fell to 4.6% from 7.6%.
<PAGE>
What Went Well.
The Flight To Quality.
In August, the Russian government devalued the ruble and defaulted on
some ruble-denominated debt. Latin America also fell prey to the
financial contagion. Investors took refuge in U.S. Treasuries and
the government securities of major Western European nations and
dumped riskier assets. A lack of liquidity was the greatest concern
in the bond markets. There was little trading except in the most
popular securities such as Treasuries and German government bonds,
which rallied to record levels in early October. This trend
benefited the Fund as it was heavily invested in both.
In order to calm financial markets and restore confidence in the
U.S. economy, the Federal Reserve cut the Federal funds rate (the
rate banks charge each other for overnight loans) by a quarter
percentage point on September 29, October 15, and
November 17, leaving the key rate at 4.75%. Some other central
banks also eased monetary policy, and the flight to quality began
to reverse.
Bonds of Greece, Hungary, and Poland rallied nicely in 1998 as the
three countries are expected to become part of the European Union
and adopt the euro currency early in the next century. Our exposure
to these government securities rose to 6.1% by
the end of 1998 from 2.2% a year earlier.
And Not So Well.
Lack of Japanese Yen Exposure.
The Fund's lack of exposure to the Japanese yen hurt its performance
in the fourth quarter.
The Japanese yen gained more than 17% against the U.S. dollar in
the final three months of 1998. Hedge fund managers began purchasing
yen to repay low-cost yen loans that were used partly to finance
investments in higher-yielding U.S. dollar assets. Renewed hope that
Japan would heal its ailing banking system and revitalize its economy
also helped boost the nation's currency.
Looking Ahead.
The Fund began 1999 with a 27.2% exposure to the euro that will probably
decrease by a slight amount in coming months. Because of slowing economic
growth in Europe, there is political pressure in the short term
to allow the euro to soften versus the U.S. dollar. This would
enhance the competitiveness of European exports, which would
strengthen the economy there. On a longer-term basis, Euroland
(the 11 founding members of the new currency) boasts a large
current account surplus that could help support the value of
the euro.
Five Largest Issuers.
25.2% U.S.Treasury Obligations
14.8% German Government Bonds
6.0% Danish Government Bonds
5.2% New South Wales
Treasury Corp.
4.0% Dutch Government Bonds
Expressed as a percentage of net assets as of 12/31/98.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 12/31/98.
(PIE CHART)
1
<PAGE>
President's Letter February 16, 1999
(PICTURE)
Dear Shareholder:
Many major equity market indexes ended 1998 on the upswing -- posting
an unprecedented fourth consecutive year of double-digit returns -- as
many stocks rebounded off their early October lows. Bond investors
were also cheered by healthy returns on U.S. Treasuries and
investment-grade corporate debt, as well as certain Western
European bonds.
Unfortunately, the equity market's advance was neither broad nor
deep. It was limited primarily to stocks of larger companies with
established records of growth. Investors ignored the stocks of
both undervalued companies and smaller companies in a
"flight to quality" stemming from financial turmoil in Asia and
fears of a recession in the United States. Accordingly, growth-style
investors in large-company stocks outperformed value-style investors
by the widest margins in nearly 24 years -- and not since the Great
Depression have large-company stocks so outperformed stocks of
small companies.
The rally in bonds was not universal either. While government
bonds -- especially Treasuries -- enjoyed strong appeal, investors
were cool toward lower-rated issues. High yield bonds, therefore,
saw yields rise while prices fell.
What We Can Learn From '98
The volatility of 1998 underscores points all investors should keep
in mind: Financial markets will rise and fall, sometimes dramatically.
Because asset classes seldom move in lockstep, owning a mix of value-
and growth-oriented mutual funds in addition to bond and money market
funds can help lessen the effects of market volatility.
Generally speaking, long-term success in investment management comes
from remaining true to an investment discipline -- even when it is
out of favor. Investors who maintain a long-term perspective and
don't sell during market lows are more likely to regain lost ground,
and while past events cannot foretell future performance, stocks and
bonds have produced attractive returns ahead of inflation over time.
Thank you for your continued confidence in Prudential mutual funds.
Sincerely,
Brian M. Storms
President
2
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Portfolio of Investments as
of December 31, 1998 INCOME FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal US$
Amount Value
(000) Description (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--85.6%
------------------------------------------------------------
Australia--6.3%
A$ 2,250 Federal National Mortgage
Association,
6.375%, 8/15/07 $ 1,452,045
10,900 New South Wales Treasury
Corporation,
6.50%, 5/1/06 7,129,254
------------
8,581,299
- ------------------------------------------------------------
Canada--3.1%
C$ 1,750 British Columbia Provincial
Bond,
6.00%, 6/9/08 1,202,677
500 Canadian Government Bond,
9.00%, 12/1/04 394,100
3,800 Province of Quebec,
6.50%, 10/1/07 2,659,728
------------
4,256,505
- ------------------------------------------------------------
Denmark--6.0%
Danish Government Bonds,
DKr 17,000 7.00%, 12/15/04 3,077,639
26,500 8.00%, 3/15/06 5,133,192
------------
8,210,831
- ------------------------------------------------------------
Germany--19.5%
German Government Bonds,
DM 10,500 7.375%, 1/3/05 7,531,407
5,300 6.00%, 1/5/06 3,597,063
12,500 6.25%, 1/4/24 9,081,867
4,000 Republic of Colombia,
7.25%, 12/21/00 2,441,972
4,000 Tokyo Gas Co. Ltd.,
7.00%, 7/27/05 2,794,128
2,000 United Mexican States,
8.125%, 9/10/04 1,226,370
------------
26,672,807
Greece--3.2%
Hellenic Republic,
GRD 285,000 9.20%, 3/21/02, FRN $ 1,047,102
545,000 11.90%, 12/31/03 1,953,964
360,000 8.60%, 3/26/08 1,419,185
------------
4,420,251
- ------------------------------------------------------------
Hungary--0.4%
Hungarian Government Bonds,
HUF 130,000 16.00%, 4/12/00 607,836
- ------------------------------------------------------------
Netherlands--4.0%
Dutch Government Bonds,
NLG 5,600 7.00%, 6/15/05 3,513,534
2,600 7.50%, 1/15/23 1,919,116
------------
5,432,650
- ------------------------------------------------------------
New Zealand--4.3%
NZ$ 5,400 Federal National Mortgage
Association,
7.25%, 6/20/02 2,947,008
2,700 International Bank of
Reconstruction Development
7.25%, 5/27/03 1,479,198
2,500 New Zealand Government Bonds,
8.00%, 4/15/04 1,472,449
------------
5,898,655
- ------------------------------------------------------------
Russia--0.1%
European Bank of Reconstruction
Development
RUB 4,100 31.00%, 5/5/00 47,564
6,800 Zero Coupon, 5/28/02 18,933
------------
66,497
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Portfolio of Investments as
of December 31, 1998 INCOME FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal US$
Amount Value
(000) Description (Note 1)
<C> <S> <C>
------------------------------------------------------------
Spain--3.4%
Pts 550,000 Spanish Government Bond,
6.15%, 1/31/13 $ 4,574,330
- ------------------------------------------------------------
Sweden--2.4%
SEK 24,000 Swedish Government Bond,
6.00%, 2/9/05 3,282,175
- ------------------------------------------------------------
United Kingdom--4.1%
BP 6,100 United Kingdom Treasury
Principal Strip,
Zero Coupon, 12/7/15 4,810,380
400 Powergen PLC,
8.875%, 3/26/03 734,261
------------
5,544,641
- ------------------------------------------------------------
United States--28.8%
Corporate Bonds--1.7%
US$ 1,000 General Motors Acceptance
Corp.,
5.75%, 11/10/03 1,007,760
1,300 Household Finance Corp.,
6.40%, 6/17/08 1,342,315
------------
2,350,075
- ------------------------------------------------------------
Sovereign Bonds--5.8%
1,500 Ministry of Finance, (Russia),
10.00%, 6/26/07 427,500
2,300 Republic of Colombia,
7.25%, 2/23/04 2,060,800
Republic of Croatia, FRN,
1,357 6.5625%, 7/31/06 1,072,164
770 6.5625%, 7/31/10 608,300
500 Republic of Lithuania,
7.125%, 7/22/02 467,500
1,100 Republic of Peru,
4.00%, 3/7/17 690,250
1,345 Russian Federation,
11.00%, 7/24/18 332,888
750 Sultan of Oman,
7.125%, 3/20/02 765,000
US$ 500 Trinidad & Tobago Republic,
9.75%, 11/3/00 $ 500,000
1,000 United Mexican States,
9.75%, 2/6/01 1,032,500
------------
7,956,902
- ------------------------------------------------------------
Supranational Bond--1.0%
1,350 Corporacion Andina de Fomento,
7.375%, 7/21/00 1,363,406
- ------------------------------------------------------------
U.S. Government Obligations--20.3%
United States Treasury Bonds,
7,000 6.125%, 9/30/00 7,171,710
3,100 7.875%, 11/15/04 3,591,629
1,700 6.25%, 2/15/07 1,864,679
7,500 6.625%, 2/15/27 8,871,075
United States Treasury Notes,
6,000 5.75%, 8/15/03 6,265,320
------------
27,764,413
------------
39,434,796
------------
Total long-term investments
(cost US$114,909,005) 116,983,273
------------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--10.8%
- ------------------------------------------------------------
Hungary--1.1%
Hungarian Government Bonds,
HUF 120,000 16.50%, 4/12/99 555,853
200,000 16.50%, 7/24/99 928,590
------------
1,484,443
- ------------------------------------------------------------
Poland--1.1%
Polish Treasury Bills,
PLZ 3,000 13.50%(a), 2/17/99 839,297
1,000 13.50%(a), 3/3/99 278,345
1,600 13.50%(a), 4/28/99 435,129
------------
1,552,771
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
Portfolio of Investments as of December 31, 1998
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal US$
Amount Value
(000) Description (Note 1)
<C> <S> <C>
------------------------------------------------------------
United States--8.6%
Repurchase Agreement--1.2%
US$ 1,609 Joint Repurchase Agreement
Account,
4.69%, 1/4/99, (Note 5) $ 1,609,000
------------
Sovereign Bonds--2.5%
350 Banco Ganadero Colombian Bond
(Colombia),
9.75%, 8/26/99 352,187
1,100 Financiera Energetica National
(Colombia)
9.00%, 11/8/99 1,100,000
2,000 Petroleas (Mexicano), FRN,
6.71875%, 3/8/99 1,974,600
------------
3,426,787
- ------------------------------------------------------------
U.S. Government Securities--4.9%
United States Treasury Bonds,
6,600 6.75%, 6/30/99 6,670,092
------------
11,705,879
------------
Total short-term investments
(cost US$14,992,990) 14,743,093
------------
- ------------------------------------------------------------
Total Investments--96.4%
(cost US$129,901,995; Note 4) 131,726,366
Other assets in excess of
liabilities--3.6% 4,982,338
------------
Net Assets--100% $136,708,704
------------
------------
</TABLE>
- ---------------
Portfolio securities are classified according to the securities
currency denomination.
(a) Percentages quoted represent yield to maturity as of purchase date.
FRN-Floating Rate Note.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Statement of Assets and Liabilities INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1998
<S> <C>
Investments, at value (cost $129,901,995)............................................................... $ 131,726,366
Foreign currency, at value (cost $1,518,767)............................................................ 1,509,832
Cash.................................................................................................... 586
Interest receivable..................................................................................... 3,736,615
Forward currency contracts - net amount receivable from counterparties.................................. 283,708
Receivable for investments sold......................................................................... 253,164
Receivable for Fund shares sold......................................................................... 45,396
Other assets............................................................................................ 3,205
-----------------
Total assets......................................................................................... 137,558,872
-----------------
Liabilities
Accrued expenses........................................................................................ 302,167
Payable for Fund shares reacquired...................................................................... 282,581
Forward currency contracts - net amount payable to counterparties....................................... 120,639
Management fee payable.................................................................................. 87,527
Dividends payable....................................................................................... 23,150
Distribution fee payable................................................................................ 20,516
Withholding tax payable................................................................................. 13,588
-----------------
Total liabilities.................................................................................... 850,168
-----------------
Net Assets.............................................................................................. $ 136,708,704
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 16,896
Paid-in capital in excess of par..................................................................... 181,785,195
-----------------
181,802,091
Distribution in excess of net investment income...................................................... (472,762)
Accumulated net realized loss on investments and foreign currency transactions....................... (46,655,394)
Net unrealized appreciation on investments and foreign currencies.................................... 2,034,769
-----------------
Net assets, December 31, 1998........................................................................... $ 136,708,704
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($126,190,943 / 15,596,925 shares of common stock issued and outstanding)......................... $8.09
Maximum sales charge (3.00% of offering price)....................................................... .25
-----------------
Maximum offering price to public..................................................................... $8.34
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($5,950,360 / 734,966 shares of common stock issued and outstanding).............................. $8.10
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($316,355 / 39,076 shares of common stock issued and outstanding)................................. $8.10
Sales charge (1.00% of offering price)............................................................... .08
-----------------
Offering price to public............................................................................. $8.18
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($4,251,046 / 525,474 shares of common stock issued and outstanding).............................. $8.09
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1998
<S> <C>
Income
Interest and discount earned (net of
foreign withholding taxes of
$13,588)........................... $10,842,233
-----------------
Expenses
Management fee........................ 1,066,593
Distribution fee--Class A............. 196,029
Distribution fee--Class B............. 59,041
Distribution fee--Class C............. 1,886
Transfer agent's fees and expenses.... 363,000
Custodian's fees and expenses......... 206,000
Reports to shareholders............... 112,000
Registration fees..................... 66,000
Legal fees and expenses............... 58,000
Audit fee............................. 36,000
Directors' fees....................... 20,000
Insurance............................. 3,000
Miscellaneous......................... 10,370
-----------------
Total expenses..................... 2,197,919
-----------------
Net investment income.................... 8,644,314
-----------------
Net Realized and Unrealized Gain
(Loss) on Investments and Foreign
Currency Transactions
Net realized gain (loss) on:
Investment transactions............... 1,649,210
Foreign currency transactions......... (2,048,387)
-----------------
(399,177)
-----------------
Net change in unrealized appreciation
(depreciation) of:
Investments........................... 4,951,096
Foreign currencies.................... (1,084,378)
-----------------
3,866,718
-----------------
Net gain on investments and foreign
currencies............................ 3,467,541
-----------------
Net Increase in Net Assets
Resulting from Operations................ $12,111,855
-----------------
-----------------
</TABLE>
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income.......... $ 8,644,314 $ 10,957,986
Net realized gain (loss) on
investment and foreign
currency transactions....... (399,177) 6,474,761
Net change in unrealized
appreciation (depreciation)
on investments and foreign
currencies.................. 3,866,718 (10,226,220)
------------ ------------
Net increase in net assets
resulting from operations... 12,111,855 7,206,527
------------ ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (8,245,704) (10,144,701)
Class B..................... (449,178) (687,169)
Class C..................... (14,329) (13,331)
Class Z..................... (219,705) (112,785)
------------ ------------
(8,928,916) (10,957,986)
------------ ------------
Distributions in excess of net
investment income
Class A..................... -- (4,226,324)
Class B..................... -- (259,200)
Class C..................... -- (6,585)
Class Z..................... -- (77,678)
------------ ------------
-- (4,569,787)
------------ ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
sold........................ 8,175,064 9,602,565
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 3,801,592 6,097,113
Cost of shares reacquired...... (27,862,529) (37,313,110)
------------ ------------
Net decrease in net assets from
Fund share transactions..... (15,885,873) (21,613,432)
------------ ------------
Total decrease.................... (12,702,934) (29,934,678)
Net Assets
Beginning of year................. 149,411,638 179,346,316
------------ ------------
End of year(a).................... $136,708,704 $149,411,638
------------ ------------
------------ ------------
- ---------------
(a) Includes undistributed net
investment income of........... $ -- $ 1,577,820
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- --------------------------------------------------------------------------------
Prudential Intermediate Global Income Fund, Inc., (the 'Fund') was organized in
Maryland as a closed-end, nondiversified management investment company and
commenced investment operations on May 26, 1988. On October 4, 1991 the Fund
concluded operations as a closed-end investment company and effective October 7,
1991, commenced operations as an open-end, nondiversified investment company.
The Fund's investment objective is to maximize total return, the components of
which are current income and capital appreciation, by investing in a portfolio
consisting primarily of U.S. and foreign government securities. The Fund will
also engage in certain hedging strategies to meet its investment objective. The
ability of 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.
Security 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 rate. 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 an independent pricing
service or by principal market makers. 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 which approximates market value.
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 U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period-end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term debt securities sold
during the period. Accordingly, such realized foreign currency gains and losses
are included in the reported net realized gains/losses on investment
transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains and losses from sales and maturities of short-term securities and
forward currency contracts, holding 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 and foreign
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net currency gains and losses from valuing foreign
currency denominated assets (excluding investments) and liabilities at
period-end exchange rates are reflected as a component of net unrealized
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
- --------------------------------------------------------------------------------
8
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME 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. 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 gains and losses from security and currency
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Fund amortizes discounts on purchases of debt
securities as adjustments to income. 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 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: The Fund declares dividends of net investment
income daily and pays such dividends monthly and makes distributions at least
annually of any net capital gains. 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 AICPA 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 of Position was to decrease undistributed net
investment income by $1,765,981, decrease accumulated net realized losses by
$32,994,923 and decrease paid-in capital in excess of par by $31,228,942. This
was primarily the result of net foreign currency losses, an overdistribution of
taxable income for the year ended December 31, 1998, and the inability to
utilize a portion of the capital loss carryforward. 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 services of PIC (which in
turn pays PRICOA), the cost of 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.
The Fund had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, B, C and Z shares of the
Fund through May 31, 1998. Prudential Investment Management Services LLC
('PIMS') became the distributor of the Fund effective June 1, 1998 under the
same terms. The Fund compensated PSI and PIMS for distributing and servicing the
Fund's Class A, Class B and Class C shares, pursuant to a plan of distribution,
(the 'Class A, B and C Plans'), regardless of expenses actually incurred by
them. The distribution fees were accrued daily and payable monthly. The Fund
compensated PSI and PIMS for distributing and servicing the Fund's Class A,
Class B and Class C shares, pursuant to a plan of distribution, (the 'Class A, B
and C Plans'), regardless of expenses actually incurred by them. The
distribution fees were accrued daily and payable monthly. No distribution or
service fees were paid to PSI or PIMS as distributor of the Class Z shares of
the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI and PIMS 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
- --------------------------------------------------------------------------------
9
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- --------------------------------------------------------------------------------
shares, respectively, for the year ended December 31, 1998. Effective January 1,
1999, the annual rate for Class A shares was increased to .25 of 1%.
PSI and PIMS have advised the Fund that they have received approximately $18,900
in front-end sales charges resulting from sales of Class A and after November 2,
1998 Class C shares during the year ended December 31, 1998. From these fees,
PSI and PIMS 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 and PIMS have advised the Fund that for the year ended December 31, 1998,
they received approximately $13,600 and $700 in contingent deferred sales
charges imposed upon certain redemptions by Class B and C shareholders,
respectively.
PSI, PIFM, PIC, PIMS and PRICOA are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has 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 purposes of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement during the year
ended December 31, 1998. The Funds pay a commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro rata basis by the Funds. The Agreement
expired on December 29, 1998, and has been extended through February 28, 1999
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, 1998,
the Fund incurred fees of approximately $304,000 for the services of PMFS. As of
December 31, 1998, fees of approximately $24,000 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, 1998, aggregated $46,448,101 and $62,958,831,
respectively.
At December 31, 1998, the Fund had outstanding forward currency contracts to
sell foreign currencies as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current Appreciation
Sale Contracts Payable Value (Depreciation)
- ------------------------------ --------------- ----------- ---------------
<S> <C> <C> <C>
Canadian Dollars,
expiring 1/29/99............. $ 3,879,870 $ 3,886,909 $ (7,039)
Swiss Francs,
expiring 1/29/99............. 9,940,209 9,678,083 262,126
French Francs,
expiring 1/29/99............. 2,836,262 2,814,680 21,582
Japanese Yen,
expiring 1/29/99............. 1,609,501 1,657,328 (47,827)
New Zealand Dollar,
expiring 1/29/99............. 12,935,382 13,001,155 (65,773)
--------------- ----------- ---------------
$31,201,224 $31,038,155 $ 163,069
--------------- ----------- ---------------
--------------- ----------- ---------------
</TABLE>
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of December
31, 1998 net unrealized appreciation for federal income tax purposes was
$1,824,371 (gross unrealized appreciation--$6,612,566 gross unrealized
depreciation--$4,788,195).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1998, of approximately $46,655,300 of which $14,010,600 expires in
1999, $14,010,600 expires in 2000 and $18,634,100 expires in 2002. Such
carryforward is after utilization of approximately $2,937,900 of net taxable
gains realized and recognized during the year ended December 31, 1998 and
$29,658,000 which the Fund is unable to utilize, due to Internal Revenue Code
limitations. The Fund is electing to treat net currency losses of approximately
$207,000 incurred in the two month period ended December 31, 1998 as having been
incurred in the next year. Accordingly, no capital gains distribution is
expected to be paid to shareholders until net gains have been realized in excess
of the aggregate of such amounts.
- ------------------------------------------------------------
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, 1998, the
Fund has a 0.23% undivided interest in the joint account. The undivided interest
for the Fund represents $1,609,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:
- --------------------------------------------------------------------------------
10
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- --------------------------------------------------------------------------------
Bear Stearns & Co. Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest is $169,478,699.
Deutsche Bank Securities Inc., 4.80%, in the principal amount of $100,000,000,
repurchase price $100,053,333, due 1/4/99. The value of the collateral including
accrued interest is $102,001,052.
Goldman Sachs & Co., 4.25%, in the principal amount of $93,088,000, repurchase
price $93,131,958, due 1/4/99. The value of the collateral including accrued
interest is $94,950,662.
Morgan (J.P.) Securities Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest is $168,300,696.
Warburg Dillon Read, Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest is $168,529,699.
- ------------------------------------------------------------
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 3.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 3% to zero depending on the
period of time the shares are held. Class C shares were sold with a contingent
deferred sales charge of 1% during the first year. Effective November 2, 1998,
Class C shares are sold with a front-end sales charge of 1% and a contingent
deferred sales charge of 1% during the first 18 months. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately five
years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors. There are 2 billion
authorized shares of $.001 par value common stock divided equally into Class A,
B, C and Z shares. Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold....................... 449,484 $ 3,607,243
Shares issued in reinvestment of
dividends and distributions..... 409,532 3,282,668
Shares reacquired................. (2,955,367) (23,662,310)
---------- ------------
Net decrease in shares outstanding
before conversion............... (2,096,351) (16,772,399)
Shares issued upon conversion from
Class B......................... 277,954 2,245,059
---------- ------------
Net decrease in shares
outstanding..................... (1,818,397) $(14,527,340)
---------- ------------
---------- ------------
<CAPTION>
Class A Shares Amount
- ---------------------------------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold....................... 542,213 $ 4,459,760
Shares issued in reinvestment of
dividends and distributions..... 653,586 5,300,167
Shares reacquired................. (4,062,149) (33,299,580)
---------- ------------
Net decrease in shares outstanding
before conversion............... (2,866,350) (23,539,653)
Shares issued upon conversion from
Class B......................... 389,219 3,195,679
---------- ------------
Net decrease in shares
outstanding..................... (2,477,131) $(20,343,974)
---------- ------------
---------- ------------
<CAPTION>
Class B
- ----------------------------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold....................... 193,771 $ 1,556,311
Shares issued in reinvestment of
dividends and distributions..... 36,859 295,629
Shares reacquired................. (341,422) (2,738,243)
---------- ------------
Net decrease in shares outstanding
before conversion............... (110,792) (886,303)
Shares reacquired upon conversion
into
Class A......................... (277,683) (2,245,059)
---------- ------------
Net decrease in shares
outstanding..................... (388,475) $(3,131,362)
---------- ------------
---------- ------------
Year ended December 31, 1997:
Shares sold....................... 279,325 $ 2,295,924
Shares issued in reinvestment of
dividends and distributions..... 73,534 596,963
Shares reacquired................. (397,198) (3,261,753)
---------- ------------
Net decrease in shares outstanding
before conversion............... (44,339) (368,866)
Shares reacquired upon conversion
into
Class A......................... (388,827) (3,195,679)
---------- ------------
Net decrease in shares
outstanding..................... (433,166) $(3,564,545)
---------- ------------
---------- ------------
Class C
- ----------------------------------
Year ended December 31, 1998:
Shares sold....................... 25,390 $ 203,275
Shares issued in reinvestment of
dividends and distributions..... 1,548 12,421
Shares reacquired................. (12,925) (103,859)
---------- ------------
Net increase in shares
outstanding..................... 14,013 $ 111,837
---------- ------------
---------- ------------
Year ended December 31, 1997:
Shares sold....................... 19,602 $ 161,438
Shares issued in reinvestment of
dividends and distributions..... 2,366 19,170
Shares reacquired................. (19,641) (160,753)
---------- ------------
Net increase in shares
outstanding..................... 2,327 $ 19,855
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z Shares Amount
- ---------------------------------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold....................... 350,457 $ 2,808,235
Shares issued in reinvestment of
dividends and distributions..... 26,304 210,874
Shares reacquired................. (169,535) (1,358,117)
---------- ------------
Net increase in shares
outstanding..................... 207,226 $ 1,660,992
---------- ------------
---------- ------------
Year ended December 31, 1997:
Shares sold....................... 327,070 $ 2,685,443
Shares issued in reinvestment of
dividends and distributions..... 22,388 180,813
Shares reacquired................. (72,134) (591,024)
---------- ------------
Net increase in shares
outstanding..................... 277,324 $ 2,275,232
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Financial Highlights INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1998(b) 1997(b) 1996 1995(b) 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.......................... $ 7.91 $ 8.34 $ 8.30 $ 7.32 $ 8.43
-------- -------- -------- -------- --------
Income from investment operations
Net investment income............ .49 .54 .56 .52 .50
Net realized and unrealized gain
(loss) on investment and
foreign currency
transactions.................. .19 (.18) .33 1.20 (1.09)
-------- -------- -------- -------- --------
Total from investment
operations................. .68 .36 .89 1.72 (.59)
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income........................ (.50) (.54) (.56) (.52) (.29)
Distributions in excess of net
investment income............. -- (.25) (.29) (.22) --
Distributions from capital
gains......................... -- -- -- -- (.01)
Tax return of capital
distributions................. -- -- -- -- (.22)
-------- -------- -------- -------- --------
Total distributions........... (.50) (.79) (.85) (.74) (.52)
-------- -------- -------- -------- --------
Net asset value, end of year..... $ 8.09 $ 7.91 $ 8.34 $ 8.30 $ 7.32
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):................. 8.91% 4.42% 11.13% 24.01% (7.02)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).... $126,191 $137,799 $165,829 $181,985 $207,153
Average net assets (000)......... $130,686 $153,168 $169,219 $200,759 $262,882
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.51% 1.41% 1.40% 1.40% 1.46%
Expenses, excluding
distribution fees.......... 1.36% 1.26% 1.25% 1.25% 1.31%
Net investment income......... 6.11% 6.62% 6.55% 6.09% 6.04%
For Class A, B, C and Z shares:
Portfolio turnover rate....... 35% 40% 45% 220% 554%
</TABLE>
- ---------------
(a) 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 year reported and includes reinvestment of dividends and
distributions.
(b) Calculated based upon average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Financial Highlights INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
1998(b) 1997(b) 1996 1995(b) 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year............................. $ 7.92 $ 8.34 $ 8.31 $ 7.33 $ 8.44
------- ------- ------- ------- -------
Income from investment operations
Net investment income............... .44 .50 .53 .47 .45
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions............ .19 (.18) .30 1.20 (1.09)
------- ------- ------- ------- -------
Total from investment
operations.................... .63 .32 .83 1.67 (.64)
------- ------- ------- ------- -------
Less distributions
Dividends from net investment
income........................... (.45) (.50) (.53) (.47) (.26)
Distributions in excess of net
investment income................ -- (.24) (.27) (.22) --
Distributions from capital gains.... -- -- -- -- (.01)
Tax return of capital
distributions.................... -- -- -- -- (.20)
------- ------- ------- ------- -------
Total distributions.............. (.45) (.74) (.80) (.69) (.47)
------- ------- ------- ------- -------
Net asset value, end of year........ $ 8.10 $ 7.92 $ 8.34 $ 8.31 $ 7.33
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(a):.................... 8.39% 3.80% 10.36% 23.25% (7.69)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....... $ 5,950 $ 8,896 $12,987 $17,317 $22,906
Average net assets (000)............ $ 7,872 $11,377 $15,491 $19,336 $31,835
Ratios to average net assets:
Expenses, including distribution
fees.......................... 2.11% 2.01% 2.00% 2.00% 2.07%
Expenses, excluding distribution
fees.......................... 1.36% 1.26% 1.25% 1.25% 1.31%
Net investment income............ 5.51% 6.04% 5.94% 5.49% 5.44%
</TABLE>
- ---------------
(a) 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 year reported and includes reinvestment of dividends and
distributions.
(b) Calculated based upon average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 14
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Financial Highlights INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------------------- -------------------
August 1,
1994(e) Year Ended
Year Ended December 31, Through December 31,
----------------------------------------------- December 31, -------------------
1998(b) 1997(b) 1996 1995(b) 1994 1998(b) 1997(b)
------- ------- --------- --------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 7.92 $ 8.34 $ 8.31 $ 7.33 $ 7.69 $ 7.91 $ 8.34
------- ------- --------- --------- ----- ------- -------
Income from investment operations
Net investment income............ .44 .50 .53 .47 .14 .50 .55
Net realized and unrealized gain
(loss) on investment and
foreign currency
transactions.................. .19 (.18) .30 1.20 (.32) .19 (.18)
------- ------- --------- --------- ----- ------- -------
Total from investment
operations................. .63 .32 .83 1.67 (.18) .69 .37
------- ------- --------- --------- ----- ------- -------
Less distributions
Dividends from net investment
income........................ (.45) (.50) (.53) (.47) (.10) (.51) (.55)
Distributions in excess of net
investment income............. -- (.24) (.27) (.22) -- -- (.25)
Tax return of capital
distributions................. -- -- -- -- (.08) -- --
------- ------- --------- --------- ----- ------- -------
Total distributions........... (.45) (.74) (.80) (.69) (.18) (.51) (.80)
------- ------- --------- --------- ----- ------- -------
Net asset value, end of period... $ 8.10 $ 7.92 $ 8.34 $ 8.31 $ 7.33 $ 8.09 $ 7.91
------- ------- --------- --------- ----- ------- -------
------- ------- --------- --------- ----- ------- -------
TOTAL RETURN(a):................. 8.39% 3.80% 10.36% 23.25% (2.44)% 9.07% 4.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $ 316 $ 198 $ 190 $ 13 $ 193(d) $4,251 $2,518
Average net assets (000)......... $ 251 $ 213 $ 110 $ 11 $ 197(d) $3,403 $1,668
Ratios to average net assets:
Expenses, including
distribution fees.......... 2.11% 2.01% 2.00% 2.00% 1.05%(c) 1.36% 1.26%
Expenses, excluding
distribution fees.......... 1.36% 1.26% 1.25% 1.25% .30%(c) 1.36% 1.26%
Net investment income......... 5.51% 6.25% 6.02% 5.49% 3.30%(c) 6.26% 6.76%
<CAPTION>
September 16,
1996(f)
Through
December 31,
1996
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 8.39
-----
Income from investment operations
Net investment income............ .32
Net realized and unrealized gain
(loss) on investment and
foreign currency
transactions.................. .12
-----
Total from investment
operations................. .44
-----
Less distributions
Dividends from net investment
income........................ (.32)
Distributions in excess of net
investment income............. (.17)
Tax return of capital
distributions................. --
-----
Total distributions........... (.49)
-----
Net asset value, end of period... $ 8.34
-----
-----
TOTAL RETURN(a):................. 5.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $ 341
Average net assets (000)......... $ 142
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.11%(c)
Expenses, excluding
distribution fees.......... 1.11%(c)
Net investment income......... 6.94%(c)
</TABLE>
- ---------------
(a) 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.
(b) Calculated based upon average shares outstanding during the period.
(c) Annualized.
(d) Figures are actual and not rounded to the nearest thousand.
(e) Commencement of offering of Class C shares.
(f) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 15
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Report of Independent Accountants INCOME FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and the Board of Directors of
Prudential Intermediate Global Income 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 Prudential Intermediate Global
Income Fund, Inc. (the 'Fund') at December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods presented, 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 audits. We conducted our audits 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 audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
1177 Avenue of the Americas
New York, New York
February 16, 1999
- --------------------------------------------------------------------------------
16
<PAGE>
Comparing A $10,000 Investment.
- ----------------------------------------------------
Prudential Intermediate Global Income Fund, Inc. vs.
the J.P. Morgan Government Bond Index Global (GBI).
// Prudential Intermediate
Global Income Fund, Inc.
- -- J.P. Morgan Gov't
Bond Index Global (GBI)
Past performance is not indicative of future results. Principal
and investment return will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The boxes on top of the graphs are designed to give you an idea of
how much the Fund's returns can fluctuate from year to year by
measuring the best and worst calendar years in terms of total annual
return since inception of each share class.
These graphs are furnished to you in accordance with SEC regulations.
They compare a $10,000 investment in the Prudential Intermediate
Global Income Fund, Inc.(Class A, B, C, and Z shares) with a similar
investment in the J.P. Morgan Government Bond Index Global (GBI) (the
Index) by portraying the initial account values at the commencement
of operations of Class B, C, and Z shares, and for 10 years for Class
A shares, and subsequent account values at the end of each fiscal year
(December 31), as measured on a quarterly basis, beginning in 1988 for
Class A shares, 1992 for Class B shares, 1994 for Class C shares, and
1996 for Class Z shares. For purposes of the graphs, and unless
otherwise indicated in the accompanying tables, it has been
assumed that (a) the maximum applicable front-end sales load was
deducted from the initial $10,000 investment in Class A shares; (b)
the maximum applicable contingent deferred sales charges were deducted
from the value of the investment in Class B and Class C shares, assuming
full redemption on December 31, 1998; (c) Class C shares are subject
to a front-end sales load of 1% and a CDSC of 1% for 18 months. Class
C shares bought before November 2, 1998 have a 1% CDSC if sold within
one year; (d) all recurring fees (including management fees) were
deducted; and (e) all dividends and distributions were reinvested.
Class B shares will automatically convert to Class A shares, on a
quarterly basis, approximately five years after purchase.
This conversion feature is not reflected in the graphs. Class Z
shares are not subject to a sales charge or distribution fee.
The Index is traded, unhedged, and measured in U.S. dollars. The
Index is market weighted and represents the total return of government
bonds from 13 countries, including Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, the
United Kingdom and the United States. The Index provides a broad
measure of market performance. The Index is unmanaged and includes
the reinvestment of all dividends, but does not reflect the payment
of transaction costs and advisory fees associated with an investment
in the Fund. The Index is not the only index that may be used to
characterize performance of global bond funds, and other indexes
may portray different comparative performance. Investors cannot
invest directly in an index.
Class A (GRAPH)
Average Annual
Total Returns - Class A
- -------------------------
With Sales Load
7.80% Since Inception
7.90% for 10 Years
7.17% for 5 Years
5.64% for 1 Year
Without Sales Load
8.11% Since Inception
8.23% for 10 Years
7.82% for 5 Years
8.91% for 1 Year
Class B (GRAPH)
Average Annual
Total Returns - Class B
- -------------------------
With Sales Load
7.76% Since Inception
7.15% for 5 Years
5.39% for 1 Year
Without Sales Load
7.76% Since Inception
7.15% for 5 Years
8.39% for 1 Year
Class C (GRAPH)
Average Annual
Total Returns - Class C
- -------------------------
With Sales Load
9.25% Since Inception
6.31% for 1 Year
Without Sales Load
9.50% Since Inception
8.39% for 1 Year
Class Z (GRAPH)
Average Annual
Total Returns - Class Z
- -------------------------
8.29% Since Inception
9.07% for 1 Year
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Mendel A. Melzer, CFA
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Brian M. Storms
Louis A. Weil, III
Clay T. Whitehead
Officers
Brian M. Storms, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Marguerite E.H. Morrison, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
PRICOA Asset Management, Ltd.
115 Houndsditch
London EC3A 7BU
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Fund's portfolio holdings are for the period covered by this
report and are subject to change thereafter.
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current prospectus.
74435G203 MF155E
74435G302
74435G401
74435G500
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of the Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit 7 to the
Registration Statement), the Distributor of the Registrant may be indemnified
against liabilities which it may incur, except liabilities arising from bad
faith, gross negligence, willful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provision or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of successful defense of any action, suit or proceeding) is asserted
against the Registrant by such director, officer or controlling person in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1940 Act and
will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 6(a))to the Registration
Statement), Section 4 of the Subadvisory Agreement (Exhibit 6(b)) to the
Registration Statement) and Section of the Sub-Investment Management Agreement
(Exhibit 6(c)) limit the liability of Prudential Investments Fund Management LLC
(PIFM) and The Prudential Investment Corporation (PIC), respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
The Registrants hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as that interpretation of Section 17(h) and 17(i) of such Act
remains in effect and is consistently applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either the
C-1
<PAGE>
Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange Commission
staff's position on Section 17(h), advances will be limited in the following
respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including
cost connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the
amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance and;
(4) Such surety bond or other insurance must be paid for by the recipient or
such advance
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1. (a) Amended and Restated Articles of Incorporation.(1)
(b) Amendment to Articles of Incorporation.(1)
(c) Articles Supplementary.(2)
(d) Articles Supplementary.(3)
2. Amended and Restated By-Laws.(1)
4. Agreement and Plan of Reorganization and Liquidation filed herewith as Appendix A to
the Proxy Statement and Prospectus.*
5. Instruments defining rights of shareholders.(1)
6. (a) Form of Amended Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc.(1)
(b) Form of Amended Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.(1)
(c) Sub-Investment Management Agreement between The Prudential Investment Corporation
and PRICOA Asset Management Limited.(4)
(d) First Amendment to Sub-Investment Management Agreement between The Prudential
Investment Corporation and PRICOA Asset Management Limited.(4)
(e) Second Amendment to Sub-Investment Management Agreement between The Prudential
Investment Corporation and PRICOA Asset Management Limited.(4)
(f) Third Amendment to Sub-Investment Management Agreement between The Prudential
Investment Corporation and PRICOA Asset Management Limited.(4)
7. (a) Distribution Agreement between the Registrant and Prudential Investment Management
Services LLC.(3)
(b) Form of Selected Dealer Agreement.(3)
9. Form of Custodian Contract between the Registrant and State Street Bank and Trust
Company.(1)
10. (a) Amended and Restated Distribution and Service plan for Class A Shares.(4)
(b) Amended and Restated Distribution and Service Plan for Class B Shares.(4)
(c) Amended and Restated Distribution and Service Plan for Class C Shares.(4)
(d) Amended Rule 18f-3 Plan.(3)
11. Opinion and Consent of counsel.**
12. Tax Opinion and Consent.**
</TABLE>
C-2
<PAGE>
<TABLE>
<C> <S>
13. Transfer Agency and Service Agreement.(1)
14. Consent of Independent Accountants.**
17. (a) Proxy*
(b) Copy of Registrant's declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940.*
(c) Prospectus of Prudential Intermediate Global Income Fund, dated March 16, 1999.*
(d) Prospectus of The Global Total Return Fund, Inc. dated March 1, 1999.*
(e) President's Letter.*
</TABLE>
- ------------------------
(1) Incorporated by reference to Registration Statement on Form N-1A filed on or
about November 3, 1995 (File No. 33-63943).
(2) Incorporated by reference to Registrant's Post-Effective Amendment No. 2 to
its Registration Statement on Form N-1A filed on or about February 28, 1997
(File No. 33-63943).
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on or about December 31, 1998
(File No. 33-63943).
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 5 to
the Registration Statement on Form N-1A filed on or about March 1, 1999
(File No. 33-63943).
* Filed herewith.
** To be filed by future amendment.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering of the
securities through the use of a prospectus which is a part of this statement
by any person or party who is deemed to be an underwriter within the meaning
of Rule 145(c) of the Securities Act, the reoffering prospectus will contain
the information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the 1933 Act, each
post-effective amendment shall be deemed to be a new registration statement
for the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of them.
C-3
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of Newark, and the State of
New Jersey, on the 8th day of July, 1999.
<TABLE>
<S> <C> <C>
THE GLOBAL TOTAL RETURN FUND, INC.
By: /s/ JOHN R. STRANGFELD, JR.
-----------------------------------------
(John R. Strangfeld, Jr., President)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dated indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ EDWARD D. BEACH
- ------------------------------ Director July 8, 1999
Edward D. Beach
/s/ DELAYNE D. GOLD
- ------------------------------ Director July 8, 1999
Delayne D. Gold
/s/ ROBERT F. GUNIA
- ------------------------------ Director July 8, 1999
Robert F. Gunia
/s/ DOUGLAS H. MCCORKINDALE
- ------------------------------ Director July 8, 1999
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY
- ------------------------------ Director July 8, 1999
Thomas T. Mooney
/s/ STEPHEN P. MUNN
- ------------------------------ Director July 8, 1999
Stephen P. Munn
/s/ RICHARD A. REDEKER
- ------------------------------ Director July 8, 1999
Richard A. Redeker
/s/ ROBIN E. SMITH
- ------------------------------ Director July 8, 1999
Robin E. Smith
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JOHN R. STRANGFELD. JR.
- ------------------------------ President and Director July 8, 1999
John R. Strangfeld, Jr.
/s/ LOUIS A. WEIL, III
- ------------------------------ Director July 8, 1999
Louis A. Weil, III
/s/ CLAY T. WHITEHEAD
- ------------------------------ Director July 8, 1999
Clay T. Whitehead
/s/ GRACE C. TORRES Treasurer and Principal
- ------------------------------ Financial and Accounting July 8, 1999
Grace C. Torres Officer
</TABLE>
C-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1. (a) Amended and Restated Articles of Incorporation.(1)
(b) Amendment to Articles of Incorporation.(1)
(c) Articles Supplementary.(2)
(d) Articles Supplementary.(3)
2. Amended and Restated By-Laws.(1)
4. Agreement and Plan of Reorganization and Liquidation filed herewith as Appendix A to
the Proxy Statement and Prospectus.*
5. Instruments defining rights of shareholders.(1)
6. (a) Form of Amended Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc.(1)
(b) Form of Amended Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.(1)
(c) Sub-Investment Management Agreement between The Prudential Investment Corporation
and PRICOA Asset Management Limited.(4)
(d) First Amendment to Sub-Investment Management Agreement between The Prudential
Investment Corporation and PRICOA Asset Management Limited.(4)
(e) Second Amendment to Sub-Investment Management Agreement between The Prudential
Investment Corporation and PRICOA Asset Management Limited.(4)
(f) Third Amendment to Sub-Investment Management Agreement between The Prudential
Investment Corporation and PRICOA Asset Management Limited.(4)
7. (a) Distribution Agreement between the Registrant and Prudential Investment Management
Services LLC.(3)
(b) Form of Selected Dealer Agreement.(3)
9. Form of Custodian Contract between the Registrant and State Street Bank and Trust
Company.(1)
10. (a) Amended and Restated Distribution and Service plan for Class A Shares.(4)
(b) Amended and Restated Distribution and Service Plan for Class B Shares.(4)
(c) Amended and Restated Distribution and Service Plan for Class C Shares.(4)
(d) Amended Rule 18f-3 Plan.(3)
11. Opinion and Consent of counsel.**
12. Tax Opinion.**
13. Transfer Agency and Service Agreement.(1)
14. Consent of Independent Accountants.**
17. (a) Proxy*
(b) Copy of Registrant's declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940.*
(c) Prospectus of Prudential Intermediate Global Income Fund, dated March 16, 1999.*
(d) Prospectus of The Global Total Return Fund, Inc. dated March 1, 1999.*
(e) President's Letter.*
</TABLE>
- ------------------------
(1) Incorporated by reference to Registration Statement on Form N-1A filed on or
about November 3, 1995 (File No. 33-63943).
(2) Incorporated by reference to Registrant's Post-Effective Amendment No. 2 to
its Registration Statement on Form N-1A filed on or about February 28, 1997
(File No. 33-63943).
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on or about December 31, 1998
(File No. 33-63943).
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 5 to
the Registration Statement on Form N-1A filed on or about March 1, 1999
(File No. 33-63943).
* Filed herewith.
** To be filed by future amendment.
<PAGE>
EXHIBIT 17(a)
ATTACHMENT II
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE THE EXPENSE OF ADDITIONAL MAILINGS.
Return the proxy card in the enclosed envelope or mail to:
PLEASE DETACH AT PERFORATION BEFORE MAILING.
- --------------------------------------------------------------------------------
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned, revoking previous proxies, hereby appoint(s) Robert F. Gunia,
Marguerite E. H. Morrison and Grace C. Torres, or any one or more of them, with
full power of substitution, to vote all shares of Prudential Intermediate Global
Income Fund, Inc., which the undersigned is entitled to vote at the Special
Meeting of Shareholders of the Fund to be held at 751 Broad Street, 24th Floor,
Newark, New Jersey 07102, on September 8, 1999 at 9:00 a.m. Eastern time and at
any adjournments thereof. All powers may be exercised by a majority of said
proxy holders or substitutes voting or acting or, if only one votes and acts,
then by that one. This Proxy shall be voted on the proposal described in the
Proxy Statement as specified on the reverse side. Receipt of the Notice of the
Meeting and the accompanying Proxy Statement is hereby acknowledged.
NOTE: Please sign exactly as your name appears on this Proxy. When signing in a
fiduciary capacity, such as executor, administrator, trustee, attorney,
guardian, etc., please so indicate. Corporate and partnership proxies should be
signed by an authorized person indicating the person's title.
Date: __________, 1999
Signature(s) (Title(s), if applicable)
PLEASE SIGN, DATE, AND RETURN
PROMPTLY IN ENCLOSED ENVELOPE
Please refer to the enclosed Proxy Statement for a complete discussion of this
matter.
IF NO SPECIFICATION IS MADE, THE PROXY
SHALL BE VOTED FOR THE PROPOSAL
As to any other matter, said attorneys shall vote in accordance with their best
judgment.
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING:
PLEASE DETACH AT PERFORATION BEFORE MAILING.
PLEASE VOTE BY FILLING IN THE APPROPRIATE BOX BELOW.
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
1. To approve an Agreement and [ ] [ ] [ ]
Plan of Reorganization between
Prudential Intermediate Global
Income Fund, Inc. and The
Global Total Return Fund, Inc.
providing for the transfer of all
of the assets of Prudential
Intermediate Global Income
Fund, Inc. to The Global Total
Return Fund, Inc. in exchange
solely for shares of common
stock of The Global Total
Return Fund, Inc. and the
assumption by The Global Total
Return Fund, Inc. of Prudential
Intermediate Global Income
Fund, Inc.'s liabilities, followed
by the distribution of The Global
Total Return Fund, Inc.'s shares
to shareholders of Prudential
Intermediate Global Income
Fund, Inc. in liquidation of
Prudential Intermediate Global
Income Fund, Inc.
<PAGE>
_______, 1999
YOUR VOTE IS IMPORTANT -
PLEASE RETURN YOUR PROXY CARD PROMPTLY.
SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ANY SHAREHOLDER WHO
DOES NOT EXPECT TO ATTEND THE MEETING IS URGED TO COMPLETE THE ENCLOSED PROXY
CARD, DATE AND SIGN IT, AND RETURN IT IN THE ENVELOPE PROVIDED, WHICH NEEDS NO
POSTAGE IF MAILED IN THE UNITED STATES. IN ORDER TO AVOID UNNECESSARY EXPENSE,
WE ASK YOUR COOPERATION IN MAILING YOUR PROXY CARD PROMPTLY, NO MATTER HOW LARGE
OR SMALL YOUR HOLDINGS MAY BE.
INSTRUCTIONS FOR EXECUTING PROXY CARD
The following general rules for executing proxy cards may be of assistance to
you and may help avoid the time and expense involved in validating your vote if
you fail to execute your proxy card properly.
1. INDIVIDUAL ACCOUNTS: Your name should be signed exactly as it appears on the
account registration shown on the proxy card.
2. JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.
3. ALL OTHER ACCOUNTS should show the capacity of the individual signing. This
can be shown either in the form of the account registration itself or by the
individual executing the proxy card. For example:
REGISTRATION VALID SIGNATURE
-------------------------------------------------------------------
A. 1. XYZ Corporation John Smith, President
2. XYZ Corporation John Smith, President
c/o John Smith, President
B. 1. ABC Company Profit Sharing Jane Doe, Trustee
Plan
2. Jones Family Trust Charles Jones, Trustee
3. Sarah Clark, Trustee Sarah Clark, Trustee
u/t/d 7/1/85
C. 1. Thomas Wilson, Custodian Thomas Wilson, Custodian
f/b/o Jessica Wilson UTMA
New Jersey
<PAGE>
As filed with the Securities and Exchange Commission on November 3, 1995
Securities Act File No. 33-63943
Investment Company Act File No. 811-4661
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7 /X/
(Check appropriate box or boxes)
-----------------------------
THE GLOBAL TOTAL RETURN FUND, INC.
(Formerly, the Global Yield Fund, Inc.)
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
-----------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292
(Name and Address of Agent for Service of Process)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
-----------------------------
Registrant hereby elects, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, to register an indefinite number of shares by this
Registration Statement. In accordance with Rule 24f-2, a registration fee, in
the amount of $500, is being paid herewith.
-----------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FUND TYPE:
- ----------------------------------------
Global debt
INVESTMENT OBJECTIVE:
- ----------------------------------------
Total return, made up of
current income and capital
appreciation
[GRAPHIC OMITTED]
Prudential
Intermediate Global
Income Fund, Inc.
- ----------------------------------------
PROSPECTUS: MARCH 16, 1999
As with all mutual funds, the
Securities and Exchange Commission has not approved or disapproved the Fund's
shares, nor has the SEC determined that this prospectus
is complete or accurate. It is a [LOGO] Prudential
criminal offense to state otherwise. Investments
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 How the Fund Invests
6 Investment Objective and Policies
8 Other Investments
9 Derivative Strategies
10 Additional Strategies
11 Investment Risks
14 How the Fund is Managed
14 Board of Directors
14 Manager
14 Investment Adviser
15 Portfolio Managers
15 Distributor
15 Year 2000 Readiness Disclosure
17 Fund Distributions and Tax Issues
17 Distributions
18 Tax Issues
19 If You Sell or Exchange Your Shares
21 How to Buy, Sell and Exchange Shares of the Fund
21 How to Buy Shares
29 How to Sell Your Shares
32 How to Exchange Your Shares
35 Financial Highlights
35 Class A Shares
36 Class B Shares
37 Class C Shares
38 Class Z Shares
40 The Prudential Mutual Fund Family
For More Information (Back Cover)
- --------------------------------------------------------------------------------
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
- ------------------------------------------
DID YOU KNOW...
A SUPRANATIONAL ORGANIZATION is formed by the governments of different countries
to promote economic development. The World Bank, the European Investment Bank
and the Asian Development Bank are supranational entities. Securities of
SEMI-GOVERNMENTAL ENTITIES are issued by organizations owned by a national or
state government or are debts of a political unit that are not backed by the
national government's credit and taxing power. The Province of Ontario and the
City of Stockholm are examples of semi-governmental entities.
- ------------------------------------------
This section highlights key information about PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC., which we refer to as "the Fund." Additional information
follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to seek to MAXIMIZE TOTAL RETURN, made up of CURRENT
INCOME and CAPITAL APPRECIATION. We invest primarily in income-producing debt
securities issued or guaranteed by U.S. and foreign governments, supranational
organizations, semi-governmental entities or government agencies or any of their
political subdivisions or instrumentalities. As an "intermediate" fund, the Fund
has a dollar-weighted average maturity of between 3 and 10 years.
We can also invest up to 35% of total assets in other kinds of
income-producing securities. We look for investment-grade securities (BBB/Baa or
above) denominated in U.S. dollars and foreign currencies. However, we can
invest up to 10% of total assets in below investment-grade securities--also
known as high yield or "junk" bonds.
The Fund may use a variety of hedging strategies to protect the value of
the Fund's investments, including derivatives and cross-currency hedges.
Our approach to global investing focuses on country and currency
selection. We look at fundamentals to identify relative value.
While we make every effort to achieve our objective, we can't guarantee
success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The Fund invests
in debt obligations which have credit, market and interest rate risks. Credit
risk is the possibility that an issuer of a debt obligation does not pay the
Fund interest or repay principal. "Junk" bonds have more credit risk and tend to
be less liquid than higher-rated securities. Market risk, which may affect an
industry, a sector or the entire market, is the
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
possibility that the market value of an investment may move up or down and that
its movement may occur quickly or unpredictably. Interest rate risk refers to
the fact that the value of most bonds will fall when interest rates rise. The
longer the maturity and the lower the credit quality of the bond, the more
likely its value will decline.
Since we invest in foreign securities, there are different risks than if we
invested only in obligations of the U.S. government and U.S. corporations. The
amount of income available for distribution may be affected by the Fund's
foreign currency gains or losses and certain hedging activities. Foreign
markets, especially those in developing countries, are often more volatile than
U.S. markets and are generally not subject to regulatory requirements comparable
to those in the U.S. In addition, changes in currency exchange rates can reduce
or increase market performance.
The Fund is nondiversified, meaning we can invest more than 5% of our
assets in the securities of any one issuer. Investing in a nondiversified mutual
fund involves greater risk than investing in a diversified fund because a loss
resulting from the decline in the value of one security may represent a greater
portion of the total assets of a nondiversified fund.
Some of our investment strategies involve additional risk. The Fund may use
risk management techniques to try to preserve assets or enhance return. These
strategies may present above-average risks. Derivatives may not fully offset the
underlying positions and this could result in losses to the Fund that would not
otherwise have occurred.
Like any mutual fund, an investment in the Fund could lose value and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests-Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
- --------------------------------------------------------------------------------
2 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The following
bar chart shows the Fund's performance for each full calendar year of operation
for the last 10 years. The bar chart and table below demonstrate the risk of
investing in the Fund by showing how returns can change from year to year and by
showing how the Fund's average annual returns compare with those of a broad
measure of market performance and a group of similar mutual funds. Past
performance does not mean that the Fund will achieve similar results in the
future.
ANNUAL RETURNS* (CLASS A SHARES)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
10.03% 7.10% 6.85% 3.59% 15.99% -7.02% 24.01% 11.13% 4.42% 8.91%
BEST QUARTER: 9.84% (1st quarter of 1995) WORST QUARTER: (3.59)% (1st quarter of 1994)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS(1) (AS OF 12/31/98)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS(4) SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares 5.64% 7.17% 7.90% 7.80% (since 5-26-88)
Class B shares 5.39% 7.15% N/A 7.76% (since 1-15-92)
Class C shares 6.31% N/A N/A 9.25% (since 8-1-94)
Class Z shares 9.07% N/A N/A 8.29% (since 9-13-96)
Morgan GBI(2) 15.31% 8.09% 11.87% N/A(2)
Lipper Average(3) 6.23% 5.57% 7.58% N/A(3)
- --------------------------------------------------------------------------------
</TABLE>
(1) THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
(2) THE J. P. MORGAN GOVERNMENT BOND INDEX-GLOBAL (GBI) IS A MARKET-WEIGHTED
INDEX OF THE TOTAL RETURN OF GOVERNMENT BONDS OF THE FOLLOWING NATIONS:
AUSTRALIA, BELGIUM, CANADA, DENMARK, FRANCE, GERMANY, ITALY, JAPAN, THE
NETHERLANDS, SPAIN, SWEDEN, THE UNITED KINGDOM AND THE UNITED STATES. THE
GBI IS AN UNMANAGED INDEX AND IS TRADED, UNHEDGED AND MEASURED IN U.S.
DOLLARS. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGES. THE
SECURITIES IN GBI MAY BE VERY DIFFERENT THAN THOSE IN THE FUND. THESE
RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES. GBI
RETURNS SINCE THE INCEPTION OF EACH CLASS ARE 7.52% FOR CLASS A, 6.51% FOR
CLASS B, 9.06% FOR CLASS C AND 8.43% FOR CLASS Z SHARES. SOURCE: LIPPER,
INC.
(3) THE LIPPER GLOBAL INCOME AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL
MUTUAL FUNDS IN THE LIPPER GLOBAL INCOME CATEGORY AND DOES NOT INCLUDE THE
EFFECT OF ANY SALES CHARGES. AGAIN, THESE RETURNS WOULD BE LOWER IF THEY
INCLUDED THE EFFECT OF SALES CHARGES. LIPPER RETURNS SINCE THE INCEPTION OF
EACH CLASS ARE 9.00% FOR CLASS A, 8.57% FOR CLASS B, 7.85% FOR CLASS C AND
6.46% FOR CLASS Z SHARES. THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES
CHARGES AND EXPENSES. SOURCE: LIPPER, INC.
(4) PRIOR TO OCTOBER 7, 1991 THE FUND OPERATED AS A CLOSED-END INVESTMENT
COMPANY.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of the Fund--Class A, B, C and Z. Each
share class has different sales charges--known as loads--and expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Fund."
<TABLE>
<CAPTION>
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
- -----------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on 3% None 1% None
purchases (as a percentage of offering price)
Maximum deferred sales charge (load) None 3%(2) 1%(3) None
(as a percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed None None None None
on reinvested dividends and other
distributions
Redemption fees None None None None
Exchange fee None None None None
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
- -----------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .75% .75% .75% .75%
+ Distribution and service (12b-1) fees .30%(4) .75% 1.00%(4) None
+ Other expenses .61% .61% .61% .61%
= Total annual Fund operating expenses 1.66% 2.11% 2.36% 1.36%
- - Fee waiver or expense reimbursement -.05%(5) None -.25% None
= Net annual Fund operating expenses 1.61% 2.11% 2.11% 1.36%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
(2) THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE THIRD AND FOURTH YEARS AND 0% IN THE FIFTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY FIVE YEARS AFTER
PURCHASE.
(3) THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
(4) FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999, THE DISTRIBUTOR OF THE FUND
HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE FEES FOR
CLASS A AND CLASS C SHARES TO .25% OF 1% AND .75% OF 1% OF THE AVERAGE
DAILY NET ASSETS OF CLASS A AND CLASS C SHARES, RESPECTIVELY.
(5) PRIOR TO JANUARY 1, 1999, THE DISTRIBUTOR WAIVED .15 OF 1% OF ITS
DISTRIBUTION AND SERVICE FEE FOR CLASS A SHARES. THE TABLE SHOWS CURRENT
EXPENSES.
- --------------------------------------------------------------------------------
4 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and the cost of investing in the Fund with the cost of investing
in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. After the first year, the example
does not take into consideration the Distributor's agreement to reduce
distribution and service fees for Class A and Class C shares. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $459 $803 $1,171 $2,202
Class B shares $539 $836 $1,260 $2,288
Class C shares $412 $805 $1,325 $2,750
Class Z shares $138 $431 $ 745 $1,635
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $459 $803 $1,171 $2,202
Class B shares $539 $836 $1,260 $2,288
Class C shares $312 $805 $1,325 $2,750
Class Z shares $138 $431 $ 745 $1,635
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
-------------------------------------
On January 1, 1999, 11 of the 15 member states of the European Union
introduced the euro as a common currency. During a three-year
transitional period, the euro will coexist with each participating
state's currency. Beginning July 1, 2002, the euro is anticipated to
become the sole currency of the participating states. During the
transition period, the Fund will treat the euro as a separate currency
from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the
European Monetary Union; or if the computing, accounting and trading
systems used by the Fund's service providers, or by entities with
which the Fund or its service providers do business, are not capable
of recognizing the euro as a distinct currency at the time of, and
following, euro conversion. In addition, the conversion could cause
markets to become more volatile.
-------------------------------------
The Fund's investment objective is to seek to MAXIMIZE TOTAL RETURN, made up of
CURRENT INCOME and CAPITAL APPRECIATION. This means we seek investments that
will increase in value as well as pay the Fund interest and other income. While
we make every effort to achieve our objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 65% of total assets
in income-producing debt securities issued or guaranteed by U.S. and foreign
governments, supranational organizations, semi-governmental entities or
government agencies or any of their political subdivisions or instrumentalities.
As a "global" fund, we usually invest in issuers from at least 3 different
countries, including the U.S. We may invest in securities of developing
countries, which may be subject to more abrupt or erratic market movements than
those of developed countries.
We can invest in securities in U.S. dollars and securities in foreign
countries based on U.S. dollars or foreign currencies. We generally limit
investments in particular currencies to 30% of the Fund's total assets, although
we can go higher if we think a particular currency might significantly increase
in value compared to the U.S. dollar. Also, the Fund may invest up to 65% of its
total assets in securities denominated in the euro. The Fund may invest up to
50% of its total assets in securities denominated in Canadian, Japanese or
British currencies. We won't invest more than 25% of total assets in securities
of government entities from any one foreign country which are considered
industries, however, government entities of national and local governments are
considered separate industries.
- --------------------------------------------------------------------------------
6 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
The investment adviser has a team of fixed-income professionals, including
credit analysts and traders, with experience in many foreign fixed-income
securities markets. In selecting portfolio securities, the investment adviser
considers country and currency selection, economic conditions and interest rate
fundamentals. The investment adviser also evaluates individual debt securities
within each fixed-income sector based upon their relative investment merit and
considers factors such as yield, duration and potential for price or currency
appreciation as well as credit quality, maturity and risk.
Some government securities are backed by the full faith and credit of the
issuing government which means that payment of principal and interest are
guaranteed, but market value is not. Other government securities may be able to
borrow from a centralized treasury and some government securities depend
entirely on their own resources to repay their debt.
We can also invest up to 35% of total assets in any combination of the
following:
- Up to 20% of total assets in investment-grade U.S. corporate debt
securities
- Up to 10% of total assets in convertible securities
- Up to 10% of total assets in common stock and warrants to buy common
stocks when they are accompanied by debt securities
- Up to 20% of total assets in obligations of foreign banks and foreign
branches of U.S. banks
- Less than 10% in collateralized mortgage obligations
We invest primarily in "investment-grade" debt securities. This means
Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's") or another major rating service, have rated the securities within
one of their four highest quality grades. Debt obligations in the four highest
grades are regarded as investment-grade, but have speculative characteristics
and are riskier than higher-rated securities. Up to 10% of the Fund's total
assets may be invested in lower-rated securities, which are even riskier and are
considered "speculative". The Fund's investments in these high-yield or "junk"
bonds will have a minimum rating of B by Moody's or S&P or another major rating
service at the time they are purchased. The Fund may continue to hold a security
if it is later downgraded below B or is no longer rated by a major rating
service. A rating is an assessment of the likelihood of timely repayment of
interest and principal and can be useful when comparing different debt
obligations. These ratings are not a guarantee of quality. The opinions of the
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
rating agencies do not reflect market risk and they may at times lag behind the
current financial conditions of a company. We may also invest in obligations
that are not rated, but that we believe are of comparable quality to the
obligations described above.
The Fund has a dollar-weighted average maturity of between 3 and 10 years.
We normally don't buy securities with a remaining maturity of more then 10
years. The maturity of a bond is simply the number of years until the principal
is due and payable. Weighted average maturity is calculated by adding the
maturities of all of the bonds in a portfolio and dividing by the number of
bonds on a weighted basis.
To increase return, we may sell options on U.S. and foreign government
securities. The Fund may also use a variety of "hedging" strategies intended to
help protect the value of the Fund's securities or to improve returns. These may
include derivative transactions and cross-currency hedges which are described in
more detail below and in the Fund's Statement of Additional Information.
For more information about this Fund and its investments, see "Investment
Risks" and the Statement of Additional Information, "Description of the Fund,
Its Investments and Risks." The Statement of Additional Information--which we
refer to as the SAI--contains additional information about the Fund. To obtain a
copy, see the back cover page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board can change investment policies
that are not fundamental.
OTHER INVESTMENTS
In addition to the principal strategies, we may also make the following
investments to try to increase the Fund's returns or protect its assets if
market conditions warrant.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in high-quality money market
instruments, including commercial paper of domestic and foreign corporations,
certificates of deposit, bankers' acceptances and other obligations of domestic
and foreign banks and short-term obligations issued or guaranteed by the U.S.
government and its agencies. Investing heavily in these securities limits our
ability to achieve capital appreciation, but can help to preserve the Fund's
assets when the bond markets are volatile.
- --------------------------------------------------------------------------------
8 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
STRIPPED SECURITIES
The Fund can invest up to 10% of its total assets in "stripped securities" of
U.S. and foreign government debt securities. Stripped securities are those with
the principal and interest sold separately. The 10% limit is combined with the
Fund's investment in similar U.S. and foreign government securities.
ADJUSTABLE/FLOATING RATE SECURITIES
The Fund can invest in adjustable or floating rate securities whose interest
rate is calculated by reference to a specific index and is reset periodically.
The value of adjustable or floating rate securities does not respond as quickly
to changing interest rates as do fixed rate securities.
REPURCHASE AGREEMENTS
The Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Fund's returns or
protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available, or that the Fund will not lose money. Derivatives--such as futures,
options, foreign currency forward contracts and options on futures--involve
costs and can be volatile. With derivatives, the investment adviser tries to
predict whether the underlying investment--a security, market index, currency,
interest rate or some benchmark investment--will go up or down at some future
date. We may use derivatives to try to reduce risk or to increase return
consistent with the Fund's overall investment objective. The investment adviser
will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use may
not match the Fund's underlying holdings.
Because we are a global fund and invest in securities denominated in
different foreign currencies, we may use "currency hedges". Currency hedges can
help protect the Fund's NAV from declining if a particular foreign currency were
to decrease in value compared to the U.S. dollar.
The Fund may invest without limit in commercial paper and other instruments
that are "indexed" to certain specific foreign currency exchange rates. This
means that the instrument's principal amount is adjusted upward or downward (but
not below zero) to reflect changes in the exchange rate
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
between two currencies from the time the instrument is outstanding until it
matures. When the Fund purchases one of these instruments, it pays with the
currency in which the instrument is denominated and, at maturity, it receives
interest and principal payments in the same currency. These instruments offer
the potential for realizing gains as a result of changes in foreign currency
exchange rates that can be used to hedge (or cross-hedge) against a decline in
the U.S. dollar value of the investments while providing an attractive money
market rate of return.
OPTIONS
The Fund may purchase and sell put and call options on securities and currencies
traded on U.S. or foreign securities exchanges or on the over-the-counter
market. An option is the right to buy or sell securities in exchange for a
premium. The options may be on debt securities, aggregates of debt securities,
financial indexes, U.S. government securities, foreign government securities and
foreign currencies. The Fund will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS;
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may purchase and sell financial futures contracts and related options
on debt securities, aggregates of debt securities, financial indexes, U.S.
government securities, corporate debt securities, foreign government securities
and foreign currencies. A futures contract is an agreement to buy or sell a set
quantity of an underlying product at a future date, or to make or receive a cash
payment based on the value of a securities index. The Fund also may enter into
foreign currency forward contracts to protect the value of its assets against
future changes in the level of foreign currency exchange rates. A foreign
currency forward contract is an obligation to buy or sell a given currency on a
future date and at a set price.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks--Risk Management and Return Enhancement
Strategies."
ADDITIONAL STRATEGIES
The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 30% of the value of its total assets, including
collateral received in the transaction); and HOLDS ILLIQUID SECURITIES (the Fund
- --------------------------------------------------------------------------------
10 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions, those without a readily
available market, and repurchase agreements with maturities longer than seven
days). The Fund is "NONDIVERSIFIED," meaning it can invest more than 5% of its
assets in the securities of any one issuer. The Fund is subject to certain other
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other investments the Fund may make. See, too,
"Description of the Fund, Its Investments and Risks" in the SAI.
<TABLE>
- ------------------------------
INVESTMENT TYPE -------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
- The Fund's share price, - Bonds have generally
INCOME-PRODUCING SECURITIES yield and total return outperformed money
will fluctuate in market instruments over
AT LEAST 65% response to bond market the long term with less
movements risk than stock
- Credit risk--the default - Intermediate-term
of an issuer would leave securities may be less
the Fund with unpaid susceptible to loss of
interest or principal. principal than
The lower a bond's longer-term securities
quality, the higher its
potential volatility - Most bonds will rise in
value when interest
- Market risk--the risk rates fall
that the market value of
an investment may move - Regular interest income
up or down, sometimes
rapidly or - Generally more secure
unpredictably. Market than stock since
risk may affect an companies must pay their
industry, a sector, or debts before paying
the market as a whole stockholders
- Interest rate risk--the - Investment-grade bonds
value of most bonds will have a lower risk of
fall when interest rates default
rise; the longer a
bond's maturity and the
lower its credit
quality, the more its
value typically falls.
It can lead to price
volatility, particularly
for junk bonds and
stripped securities
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
<TABLE>
- ------------------------------
INVESTMENT TYPE (CONT'D) -------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
- As a nondiversified - Bonds with longer
INCOME-PRODUCING SECURITIES fund, we will have maturity dates typically
(CONT'D) greater exposure to loss have higher yields
from a single issuer
- Principal and interest
- Not all government on government securities
securities are insured may be guaranteed by the
or guaranteed by the issuing government
government but only by
the issuing agency - Junk bonds offer higher
yields and higher
- Junk bonds (rated BB/Ba potential gains
or lower) have a higher
risk of default, tend to
be less liquid and may
be more difficult to
value
- --------------------------------------------------------------------------------------------------
- Foreign markets, - Investors can
FOREIGN SECURITIES economies and political participate
systems may not be as in foreign markets and
PERCENTAGE VARIES stable as in the U.S., companies operating in
particularly those in those markets
developing countries
- Changing value of
- Currency risk--changing foreign currencies
values of foreign
currencies - Opportunities for
diversification
- Debt securities issued by
supranational organizations
or semi-governmental issuers
may be backed by limited assets
in the event of default
- May be less liquid than
U.S. stocks and bonds
- Differences in foreign
laws, accounting
standards, public
information, custody and
settlement practices
- Year 2000 conversion may
be more of a problem for
some foreign issuers
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
12 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
<TABLE>
- ------------------------------
INVESTMENT TYPE (CONT'D) -------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
- Derivatives such as - The Fund could make
DERIVATIVES futures, options and money and protect
foreign currency forward against losses if the
PERCENTAGE VARIES contracts may not fully investment analysis
offset the underlying proves correct
positions and this could
result in losses to the - Derivatives that involve
Fund that would not have leverage could generate
otherwise occurred substantial gains at low
cost
- Derivatives used for
risk management may not - One way to manage the
have the intended Fund's risk/return
effects and may result balance is to lock in
in losses or missed the value of an
opportunities investment ahead of time
- The other party to a - May be used to hedge
derivatives contract against changes in
could default currency exchange rates
- Derivatives that involve
leverage could magnify
losses
- Certain types of
derivatives involve
costs to the Fund that
can reduce returns
- --------------------------------------------------------------------------------------------------
- More volatile than - Value rises faster when
STRIPPED SECURITIES securities that have not interest rates fall
separated principal and
UP TO 10% interest
- --------------------------------------------------------------------------------------------------
- May be difficult to - May offer a more
ILLIQUID SECURITIES value precisely attractive yield or
potential for growth
UP TO 15% OF NET ASSETS - May be difficult to sell than more widely traded
at the time or price securities
desired
- --------------------------------------------------------------------------------------------------
- Limits potential for - May preserve the Fund's
MONEY MARKET INSTRUMENTS capital appreciation assets
UP TO 100% ON A TEMPORARY - See credit risk and
BASIS market risk
- --------------------------------------------------------------------------------------------------
- Value lags value of - Can take advantage of
ADJUSTABLE/FLOATING RATE fixed rate securities rising interest rates
SECURITIES when interest rates
change
PERCENTAGE VARIES
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
The Board of Directors oversees the actions of the Manager, investment adviser
and Distributor and decides on general policies. The Board also oversees the
Fund's officers who conduct and supervise the daily business operations of the
Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended December 31, 1998, the Fund paid PIFM management fees of .75 of 1% of the
Fund's average net assets.
As of January 31, 1999, PIFM served as the Manager to all 46 of the
Prudential Mutual Funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $71.7 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. Prudential Investments has entered into a service agreement
with PRICOA Asset Management Ltd. (PRICOA), a subsidiary of The Prudential
Insurance Company of America, for the provision of investment advisory services
to the Fund and compensates PRICOA for its reasonable costs and expenses in
providing such services. PIFM has responsibility for all investment advisory
services, supervises Prudential Investments and PRICOA and reimburses Prudential
Investments for its reasonable costs and expenses.
PRICOA, an indirect wholly owned subsidiary of Prudential, is located at
Cutlers Court, 115 Houndsditch, London EC3A 7BR England. It was incorporated
under U.K. law in January 1997, and as of December 31, 1998, had approximately
$2.58 billion under management.
- --------------------------------------------------------------------------------
14 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Prudential Investments Fixed Income Group is organized into teams that
specialize by sector. The Fixed Income Investment Policy Committee which is
comprised of senior investment staff from each sector team provides guidance to
teams regarding duration risk, asset allocations and general risk parameters.
The portfolio managers contribute security selection within those guidelines.
The Fund has been co-managed by J. GABRIEL IRWIN and SIMON WELLS since April
1995. Gabriel Irwin and Simon Wells lead the Global Fixed Income Group. Before
joining Prudential they were Senior Vice Presidents and portfolio managers at
Smith Barney Global Capital Management in London. The portfolio managers use a
fundamental approach to international bond investing. They analyze worldwide
macroeconomic, political and social events and trends searching for
opportunities they believe will offer attractive yields as well as the potential
for price appreciation.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.
YEAR 2000 READINESS DISCLOSURE
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 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. The
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------
Fund and its Board receive, and have received since early 1998, satisfactory
quarterly reports from the principal service providers as to their preparations
for year 2000 readiness, although there can be no assurance that the service
providers (or other securities market participants) will successfully complete
the necessary changes in a timely manner or that there will be no adverse impact
on the Fund. Moreover, the Fund at this time has not considered retaining
alternative service providers or directly undertaken efforts to achieve year
2000 readiness, the latter of which would involve substantial expenses without
an assurance of success.
Additionally, issuers of securities generally, as well as those purchased
by the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Fund.
- --------------------------------------------------------------------------------
16 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA), or some other qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues
you should be aware of, but is not meant to be tax advice. For tax advice,
please speak with your tax adviser.
DISTRIBUTIONS
The Fund declares daily and distributes DIVIDENDS of any net investment
income to shareholders typically every month. For example, if the Fund owns
Utopia government bonds and the bond pays income, the Fund will pay out a
portion of this income to its shareholders, assuming the Fund's income is
more than its costs and expenses. The dividends you receive from the Fund
will be taxed as ordinary income whether or not they are reinvested in the
Fund.
The amount of income available for distribution to shareholders will be
affected by any foreign currency gains or losses generated by the Fund and
cannot be predicted. This fact, coupled with the different tax and accounting
treatment of certain currency gains and losses, increases the possibility
that distributions, in whole or in part, may be a return of capital to
shareholders.
The Fund also distributes realized NET CAPITAL GAINS to
shareholders--typically once a year--which are generated when the Fund sells
its assets for a profit. For example, if the Fund bought Utopia government
bonds for a total of $1,000 and more than one year later sold the bonds for a
total of $1,500, the Fund has net long-term capital gains of $500, which it
will pass on to shareholders (assuming the Fund's total gains are greater
than any losses it may have). Capital gains are taxed differently depending
on how long the Fund holds the security--if a security is held more than one
year before it is sold, LONG-TERM capital gains are taxed at the rate of 20%,
but if the security is held one year or less, SHORT-TERM capital gains are
taxed at ordinary income rates of up to 39.6%. Different rates apply to
corporate shareholders.
For your convenience, Fund distributions of dividends and capital gains
are AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask
us to pay the distributions in cash, we will send you a check if your account
is with
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or
account. For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Fund as part of a qualified tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified tax-deferred plan or
account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
WITHHOLDING TAXES
If you are subject to backup withholding, we will withhold and pay to the U.S.
Treasury 31% of your distributions, or, if federal tax law requires you to
provide the Fund with your tax identification number and certifications as to
your tax status, and you fail to do this, we will withhold and pay to the U.S.
Treasury 31% of your distributions and sale proceeds. Dividends of net
investment income and short-term capital gains paid to a nonresident foreign
shareholder generally will be subject to a U.S. withholding tax of 30%. This
rate may be lower, depending on any tax treaty the U.S. may have with the
shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well since you bought shares one day and
soon thereafter received a distribution. That is not so because when dividends
- --------------------------------------------------------------------------------
18 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
are paid out, the value of each share of the Fund decreases by the amount of the
dividend and the market changes (if any) to reflect the payout. The distribution
you receive makes up for the decrease in share value. However, the timing of
your purchase does mean that part of your investment came back to you as taxable
income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
- ---------------------------------------------------------
[GRAPHICAL REPRESENTATION OF CHART]
+$ CAPITAL GAIN
RECEIPTS (TAXES OWED)
FROM SALE $ OR
-$ CAPITAL LOSS
(offset against gain)
- ---------------------------------------------------------
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified
tax-deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
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19
<PAGE>
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Fund Distributions and Tax Issues
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AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately five years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Five
Years" in the next section.
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20 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
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HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within four years (that is why it is called a Contingent
Deferred Sales Charge or CDSC), but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
- The amount of your investment
- The length of time you expect to hold the shares and the impact of the
varying distribution fees
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- The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
- Whether you qualify for any reduction or waiver of sales charges
- The fact that Class B shares automatically convert to Class A shares
approximately five years after purchase
- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount (1)
Minimum amount for $100 $100 $100 None
subsequent purchases (1)
Maximum initial 3% of the public None 1% of the public None
sales charge offering price offering price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge (CDSC) (2) Year 1, 3% made within
Year 2, 2% 18 months
Year 3, 1% of purchase (2)
Year 4, 1%
Year 5, 0%
Annual distribution .30 of 1% .75 of 1% 1% (.75 of 1% None
and service (12b-1) (.25 of 1% currently)
fees shown as a currently)
percentage of average
net assets (3)
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM
INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC
INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT PLAN."
(2) FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES--CONTINGENT DEFERRED SALES CHARGES (CDSC)." CLASS C SHARES
BOUGHT BEFORE NOVEMBER 2, 1998, HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
(3) THESE DISTRIBUTION FEES ARE PAID FROM THE FUND'S ASSETS ON A CONTINUOUS
BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR INVESTMENT AND
MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES. THE SERVICE FEE
FOR CLASS A, CLASS B AND C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE FOR
CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING THE .25 OF 1% SERVICE
FEE), FOR CLASS B SHARES IS LIMITED TO .75 OF 1% (INCLUDING THE .25 OF 1%
SERVICE FEE) AND IS .75 OF 1% FOR CLASS C SHARES.
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22 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
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REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales charge by
increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $100,000 3.00% 3.09% 2.75%
$100,000 to $499,999 2.50% 2.56% 2.25%
$500,000 to $999,999 2.00% 2.04% 1.75%
$1 million and above * None None None
</TABLE>
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES.
To satisfy the purchase amounts above, you can:
- Insert with an eligible group of related investors
- Buy the Class A shares of two or more Prudential mutual funds at the
same time
- Use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of the
shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify
for Rights of Accumulation)
- Sign a LETTER OF INTENT, stating in writing that you or a group of
related investors will purchase a certain amount of shares in the Fund
and other Prudential mutual funds within 13 months.
BENEFIT PLANS. Benefit Plans can avoid Class A's initial sales charge if the
Benefit Plan has existing assets of at least $1 million invested in shares of
Prudential mutual funds (excluding money market funds other than those acquired
under the exchange privilege) or 250 eligible employees or participants. For
these purposes, a Benefit Plan is a pension, profit-sharing or other employee
benefit plan qualified under Section 401 of the Internal Revenue Code, a
deferred compensation or annuity plan under Sections 403(b) and 457 of the
Internal Revenue Code, a "rabbi" trust, or a nonqualified deferred compensation
plan sponsored by an employer that has a
- --------------------------------------------------------------------------------
23
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tax-qualified benefit plan with Prudential. Class A shares may also be purchased
without a sales charge by participants who are repaying loans from Benefit Plans
where Prudential (or its affiliates) provides administrative or recordkeeping
services, sponsors the product or provides account services.
Certain Prudential retirement programs--such as PruArray Association
Benefit Plans and PruArray Savings Programs--may also be exempt from Class A's
sales charge. For more information, see the SAI or contact your financial
adviser. In addition, waivers are available to investors in certain programs
sponsored by brokers, investment advisers and financial planners who have
agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades and charges its clients a management, consulting or
other fee for its services
- Mutual fund "supermarket" programs, where the sponsor links its
customers' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
OTHER TYPES OF INVESTORS. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, Prudential
mutual funds, the subadvisers of the Prudential mutual funds and clients of
brokers that have entered into a selected dealer agreement with the Distributor.
To qualify for a reduction or waiver of the sales charge, you must notify the
Transfer Agent or your broker at the time of purchase. For more information, see
the SAI, "Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver
of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares may also be purchased
without an initial sales charge by participants who are repaying loans from
Benefit Plans where Prudential (or its affiliates) provides administrative or
recordkeeping services, sponsors the product or provides account services.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived for
purchases of Class C shares by both qualified and nonqualified retirement and
deferred compensation plans participating in a PruArray Plan and other plans if
Prudential also provides administrative or recordkeeping services.
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24 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
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INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one of
the following:
- Purchase your shares through an account at Prudential Securities
- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
- Any Benefit Plan as defined above, and certain nonqualified plans,
provided the Benefit Plan--in combination with other plans sponsored
by the same employer or group of related employers--has at least $50
million in defined contribution assets
- Participants in any fee-based program or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and the Fund as an available option
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option
- Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and, as of September 20, 1996
were either Class Z shareholders of the Prudential mutual funds or
executed a letter of intent to purchase Class Z shares of the
Prudential mutual funds
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
- Employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan
- Prudential with an investment of $10 million or more
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In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 3% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY FIVE YEARS
If you buy Class B shares and hold them for approximately five years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested dividends
and other distributions. Since the 12b-1 fees for Class A shares are lower than
for Class B shares, converting to Class A shares lowers your Fund expenses.
When we do the conversion, you will get fewer Class A shares than the
number of converted Class B shares if the price of the Class A shares is higher
than the price of Class B shares. The total dollar value will be the same, so
you will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is determined
by a simple calculation: it's the total value of the Fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of Fund XYZ owned by shareholders, the price of one
share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Fund's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to check the price of mutual funds daily.
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26 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
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- ---------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes
every day because the value of a fund's
portfolio changes constantly. For
example, if Fund XYZ holds Utopia
government bonds in its portfolio and
the price of Utopia government bonds
goes up while the value of the fund's
other holdings remains the same and
expenses don't change, the NAV of Fund
XYZ will increase.
- ---------------------------------------
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. Because
we are a global fund, the NAV can change on days when you cannot buy or sell
shares. We do not determine the NAV on days when we have not received any orders
to purchase, sell or exchange Fund shares, or when changes in the value of the
Fund's portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge a separate or additional fee for purchases of
shares.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
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PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial adviser will help you
determine which retirement plan best meets your needs. Complete instructions
about how to establish and maintain your plan and how to open accounts for you
and your employees will be included in the retirement plan kit you receive in
the mail.
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we
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28 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
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will send one annual shareholder report, one semi-annual shareholder report and
one annual prospectus per household, unless you instruct us or your broker
otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York Time to
process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records, or you are a business or a
trust and if you hold your shares directly with the Transfer Agent, you will
need to have the signature on your sell order guaranteed by a financial
institution.
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For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within four years of purchase or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
- Amounts representing shares you purchased with reinvested dividends
and distributions
- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past four years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
- Amounts representing the cost of shares held beyond the CDSC period
(four years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 3% in the first year, 2% in the second, 1% in the third, 1% in
the fourth and 0% in the fifth year. The rate decreases on the first day of the
month following the anniversary date of your purchase, not on the anniversary
date itself. The CDSC is 1% for Class C shares--which is applied to shares sold
within 18 months of purchase (or one year for Class C shares if purchased before
November 2, 1998). For both Class B and Class C shares, the CDSC is calculated
based on the lesser of the original purchase price or the redemption proceeds.
For purposes of determining how long you've held your shares, all purchases
during the month are grouped together and considered to have been made on the
last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
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30 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
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WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy (with rights of survivorship), provided the shares were
purchased before the death or disability
- To provide for certain distributions--made without IRS penalty--from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account
- On certain sales from a Systematic Withdrawal Plan
For more information on the above and other waivers, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred
Sales Charge--Class B Shares."
WAIVER OF THE CDSC--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in a PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account (a group annuity insurance product sponsored by Prudential),
the Guaranteed Insulated Separate Account (a separate account offered by
Prudential) and shares of The Stable Value Fund (an unaffiliated bank collective
fund).
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which the
broker provides administrative or recordkeeping services.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
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SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA, or some
other tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares to
reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your employer
or plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the
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32 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
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first day of the month after initial purchase, excluding any time shares were
held in a money market fund. We may change the terms of the exchange privilege
after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately four years of your original
purchase, or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
- --------------------------------------------------------------------------------
33
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The Fund may
notify a market timer of rejection of an exchange or purchase order after the
day the order is placed. If the Fund allows a market timer to trade Fund shares,
it may require the market timer to enter into a written agreement to follow
certain procedures and limitations.
- --------------------------------------------------------------------------------
34 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
CLASS A SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
<TABLE>
<CAPTION>
- -----------------------------------------------
CLASS A SHARES (FISCAL YEARS ENDED 12-31)
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998(1) 1997(1) 1996 1995(2) 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $7.91 $8.34 $8.30 $7.32 $8.43
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .49 .54 .56 .52 .50
Net realized and unrealized gain
(loss) on investments and foreign .19 (.18) .33 1.20 (1.09)
currency transactions
TOTAL FROM INVESTMENT OPERATIONS .68 .36 .89 1.72 (.59)
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.50) (.54) (.56) (.52) (.29)
Distributions in excess of net __ (.25) (.29) (.22) --
investment income
Distributions from capital gains -- -- -- -- (.01)
Tax return of capital distributions -- -- -- -- (.22)
TOTAL DISTRIBUTIONS (.50) (.79) (.85) (.74) (.52)
NET ASSET VALUE, END OF YEAR $8.09 $7.91 $8.34 $8.30 $7.32
TOTAL RETURN(2) 8.91% 4.42% 11.13% 24.01% (7.02)%
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $126,191 $137,799 $165,829 $181,985 $207,153
Average net assets (000) $130,686 $153,168 $169,219 $200,759 $262,882
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.51% 1.41% 1.40% 1.40% 1.46%
Expenses, excluding distribution fees 1.36% 1.26% 1.25% 1.25% 1.31%
Net investment income 6.11% 6.62% 6.55% 6.09% 6.04%
Portfolio turnover 35% 40% 45% 220% 554%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) CALCULATED BASED UPON AVERAGE SHARES OUTSTANDING DURING THE YEAR.
(2) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED.
- --------------------------------------------------------------------------------
35
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS B SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
<TABLE>
<CAPTION>
- ------------------------------------------------
CLASS B SHARES (FISCAL PERIODS ENDED 12-31)
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998(1) 1997(1) 1996 1995(1) 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $7.92 $8.34 $8.31 $7.33 $8.44
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .44 .50 .53 .47 .45
Net realized and unrealized gain
(loss) on investments and foreign .19 (.18) .30 1.20 (1.09)
currency transactions
TOTAL FROM INVESTMENT OPERATIONS .63 .32 .83 1.67 (.64)
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.45) (.50) (.53) (.47) (.26)
Distributions in excess of net __ (.24) (.27) (.22) --
investment income
Distributions from capital gains -- -- -- -- (.01)
Tax return of capital distributions -- -- -- -- (.20)
TOTAL DISTRIBUTIONS (.45) (.74) (.80) (.69) (.47)
NET ASSET VALUE, END OF YEAR $8.10 $7.92 $8.34 $8.31 $7.33
TOTAL RETURN(2) 8.39% 3.80% 10.36% 23.25% (7.69)%
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $5,950 $8,896 $12,987 $17,317 $22,906
Average net assets (000) $7,872 $11,377 $15,491 $19,336 $31,835
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.11% 2.01% 2.00% 2.00% 2.07%
Expenses, excluding distribution fees 1.36% 1.26% 1.25% 1.25% 1.31%
Net investment income 5.51% 6.04% 5.94% 5.49% 5.44%
Portfolio turnover 35% 40% 45% 220% 554%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) CALCULATED BASED UPON AVERAGE SHARES OUTSTANDING DURING THE YEAR.
(2) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED.
- --------------------------------------------------------------------------------
36 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS C SHARES
The financial highlights were audited by , independent
accountants, whose reports were unqualified.
<TABLE>
<CAPTION>
- -------------------------------------------------
CLASS C SHARES (FISCAL PERIODS ENDED 12-31)
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998(2) 1997(2) 1996 1995(2) 1994(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.92 $8.34 $8.31 $7.33 $7.69
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .44 .50 .53 .47 .14
Net realized and unrealized gain
(loss) on investments and foreign .19 (.18) .30 1.20 (.32)
currency transactions
TOTAL FROM INVESTMENT OPERATIONS .63 .32 .83 1.67 (.18)
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.45) (.50) (.53) (.47) (.10)
Distributions in excess of net -- (.24) (.27) (.22) --
investment income
Tax return of capital distributions -- -- -- -- (.08)
TOTAL DISTRIBUTIONS (.45) (.74) (.80) (.69) (.18)
NET ASSET VALUE, END OF PERIOD $8.10 $7.92 $8.34 $8.31 $7.33
TOTAL RETURN(3) 8.39% 3.80% 10.36% 23.25% (2.44)%
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $316 $198 $190 $13 $193(4)
Average net assets (000) $251 $213 $110 $11 $197(4)
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.11% 2.01% 2.00% 2.00% 1.05%(5)
Expenses, excluding distribution fees 1.36% 1.26% 1.25% 1.25% .30%(5)
Net investment income 5.51% 6.25% 6.02% 5.49% 3.30%(5)
Portfolio turnover 35% 40% 45% 220% 554%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) FOR THE PERIOD FROM 8-1-94 (WHEN CLASS C SHARES WERE FIRST OFFERED) THROUGH
12-31-94.
(2) CALCULATED BASED UPON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN A FULL YEAR IS NOT
ANNUALIZED.
(4) FIGURES ARE ACTUAL AND NOT ROUNDED TO THE NEAREST THOUSAND.
(5) ANNUALIZED.
- --------------------------------------------------------------------------------
37
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
<TABLE>
<CAPTION>
- -----------------------------------------------------
CLASS Z SHARES (FISCAL PERIODS ENDED 12-31)
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998(2) 1997(2) 1996(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.91 $8.34 $8.39
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .50 .55 .32
Net realized and unrealized gain (loss)
on investment and foreign currency transactions .19 (.18) .12
TOTAL FROM INVESTMENT OPERATIONS .69 .37 .44
- ------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.51) (.55) (.32)
Distributions in excess of net investment income __ (.25) (.17)
TOTAL DISTRIBUTIONS (.51) (.80) (.49)
NET ASSET VALUE, END OF PERIOD $8.09 $7.91 $8.34
TOTAL RETURN(2) 9.07% 4.57% 5.21%
- ------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
- ------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $4,251 $2,518 $341
Average net assets (000) $3,403 $1,668 $142
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.36% 1.26% 1.11%(3)
Expenses, excluding distribution fees 1.36% 1.26% 1.11%(3)
Net investment income 6.26% 6.76% 6.94%(3)
Portfolio turnover 35% 40% 45%
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) FOR THE PERIOD FROM 9-13-96 (WHEN CLASS Z SHARES WERE FIRST OFFERED)
THROUGH 12-31-96.
(2) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS.
IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON
THE LAST DAY OF EACH PERIOD REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN
A FULL YEAR IS NOT ANNUALIZED.
(3) ANNUALIZED.
- --------------------------------------------------------------------------------
38 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[This page has been left blank intentionally.]
- --------------------------------------------------------------------------------
39
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For more information about these funds, contact your financial adviser or
call us at (800) 225-1852. Read the prospectus carefully before you invest or
send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL UTILITY FUND, INC.
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth Equity Fund
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Active Balanced Fund
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Europe Index Fund
Prudential Pacific Index Fund
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Global Series
International Stock Series
GLOBAL UTILITY FUND, INC.
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
Limited Maturity Portfolio
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
40 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Short-Intermediate Term Series
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Bond Market Index Fund
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Income Portfolio
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Series
California Income Series
PRUDENTIAL MUNICIPAL BOND FUND
High Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
Money Market Series
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Money Market Series
PRUDENTIAL MUNICIPAL SERIES FUND
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
Institutional Money Market Series
- --------------------------------------------------------------------------------
41
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into
this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call
1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP Numbers:
Class A Shares--74435G-20-3
Class B Shares--74435G-30-2
Class C Shares--74435G-40-1
Class Z Shares--74435G-50-0
Investment Company Act File No: 811-5510
MF155A [RECYCLE LOGO] Printed on Recycled Paper
<PAGE>
FUND TYPE:
- ---------------------------------
Global debt
INVESTMENT OBJECTIVE:
- ---------------------------------
Total return, made up of
current income and capital
appreciation.
Prudential [LOGO]
THE GLOBAL TOTAL
RETURN FUND, INC.
PROSPECTUS: MARCH 1, 1999
As with all mutual funds, the
Securities and Exchange
Commission has not approved or
disapproved the Fund's shares, nor
has the SEC determined that this [LOGO] PRUDENTIAL
prospectus is complete or accurate. INVESTMENTS
It is a criminal offense to state
otherwise.
<PAGE>
- -------------------------------------------------------------------------------
Table of Contents
- -------------------------------------------------------------------------------
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 How the Fund Invests
6 Investment Objective and Policies
8 Other Investments
9 Derivative Strategies
11 Additional Strategies
12 Investment Risks
16 How the Fund is Managed
16 Manager
16 Investment Adviser
16 Portfolio Managers
17 Distributor
17 Year 2000 Readiness Disclosure
19 Fund Distributions and Tax Issues
19 Distributions
20 Tax Issues
21 If You Sell or Exchange Your Shares
23 How to Buy, Sell and Exchange Shares of the Fund
23 How to Buy Shares
31 How to Sell Your Shares
35 How to Exchange Your Shares
38 Financial Highlights
39 Class A Shares
40 Class B Shares
41 Class C Shares
42 Class Z Shares
44 The Prudential Mutual Fund Family
For More Information (Back Cover)
- --------------------------------------------------------------------------------
The Global Total Return Fund, Inc. [telephone] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
This section highlights key information about THE GLOBAL TOTAL RETURN FUND,
INC., which we refer to as "the Fund." Additional information follows this
summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to seek TOTAL RETURN, made up of CURRENT INCOME and
CAPITAL APPRECIATION. We normally invest at least 65% of the Fund's total assets
in income-producing debt securities of the U.S. and foreign governments,
supranational organizations, semi-governmental entities or government agencies,
authorities or instrumentalities and short-term bank debt securities or bank
deposits.
We can also invest up to 35% of total assets in corporate debt
instruments, other nongovernment debt securities including convertible
securities and intermediate and long-term bank debt securities. We look for
investment-grade securities (BBB/Baa or above) denominated in U.S. dollars and
foreign currencies. We can invest up to 10% of total assets in below investment
grade debt securities also known as high-yield or "junk bonds." The Fund may use
a variety of hedging strategies to protect the value of the Fund's investments,
including derivatives and cross-currency hedges.
Our approach to global investing focuses on country and currency
selection. We look at fundamentals to identify relative value.
While we make every effort to achieve our objective, we can't guarantee
success.
- -------------------------------------------------------------------------------
DID YOU KNOW...
A SUPRANATIONAL ORGANIZATION is formed by the governments of different countries
to promote economic development. The World Bank, the European Investment Bank
and the Asian Development Bank are supranational entities. Securities of
semi-governmental entities are issued by organizations owned by a national or
state government or are debts of a political unit that are not backed by the
national government's credit and taxing power. The Province of Ontario and the
City of Stockholm are examples of semi-governmental entities.
- -------------------------------------------------------------------------------
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The Fund invests
in debt obligations which have credit, market and interest rate risks. Credit
risk is the possibility that an issuer of a debt obligation does not pay the
Fund interest or repay principal. "Junk" bonds have more credit risk and tend to
be less liquid than higher rated securities. Market risk, which may affect an
industry, a sector
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
or the entire market, is the possibility that the market value of an investment
may move up or down and that its movement may occur quickly or unpredictably.
Interest rate risk refers to the fact that the value of most bonds will fall
when interest rates rise. The longer the maturity and the lower the credit
quality of a bond, the more likely its value will decline.
Since we invest in foreign securities, there are different risks than if
we invested only in obligations of the U.S. government and U.S. corporations.
The amount of income available for distribution may be affected by the Fund's
foreign currency gains or losses and certain hedging activities of the Fund.
Foreign markets, especially those in developing countries, are often more
volatile than U.S. markets and are generally not subject to regulatory
requirements comparable to U.S. issuers. In addition, changes in currency
exchange rates can reduce or increase market performance.
The Fund is nondiversified, meaning we can invest more than 5% of our
assets in the securities of any one issuer. Investing in a nondiversified mutual
fund involves greater risk than investing in a diversified fund because a loss
resulting from the decline in the value of one security may represent a greater
portion of the total assets of a nondiversified fund.
Some of our investment strategies also involve risk. The Fund may use risk
management techniques to try to preserve assets or enhance return. These
strategies may present above average risks. Derivatives may not fully offset the
underlying positions and this could result in losses to the Fund that would not
otherwise have occurred.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
- --------------------------------------------------------------------------------
2 The Global Total Return Fund, Inc. [telephone] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The following
bar chart shows the Fund's performance for each full calendar year of operation
for the last 10 years. The bar chart and table below demonstrate the risk of
investing in the Fund by showing how returns can change from year to year and by
showing how the Fund's average annual total returns compare with those of a
broad measure of market performance and a group of similar mutual funds. Past
performance does not mean that the Fund will achieve similar results in the
future.
<TABLE>
<CAPTION>
ANNUAL RETURNS* (CLASS A SHARES)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.03% 16.72% 10.91% -0.68% 18.12% -6.78% 25.45% 13.15% 4.55% 8.92%
BEST QUARTER: 11.06% (1st quarter of 1995) WORST QUARTER: -6.79% (3rd quarter of 1992)
</TABLE>
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS(1) (AS OF 12/31/98)
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares 4.56% 7.67% 9.03% 10.05% (since 7-7-86)
Class B shares 3.13% N/A N/A 7.22% (since 1-15-96)
Class C shares 6.05% N/A N/A 7.73% (since 1-15-96)
Class Z shares 9.07% N/A N/A 8.19% (since 3-17-97)
Morgan GBI(2) 15.31% 8.09% N/A N/A(2)
Lipper Average(3) 6.23% 5.57% 7.58% N/A(3)
</TABLE>
(1) THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
(2) THE J. P. MORGAN GOVERNMENT BOND INDEX--GLOBAL (GBI) IS A MARKET WEIGHTED
INDEX OF THE TOTAl RETURN OF GOVERNMENT BONDS OF THE FOLLOWING NATIONS:
AUSTRALIA, BELGIUM, CANADA, DENMARK, FRANCE, GERMANY, ITALY, JAPAN, THE
NETHERLANDS, SPAIN, SWEDEN, THE UNITED KINGDOM AND THE UNITED STATES, THE
GBI IS AN UNMANAGED INDEX AND IS TRADED, UNHEDGED AND MEASURED IN U.S.
DOLLARS. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGES.
THE SECURITIES IN GBI MAY BE VERY DIFFERENT THAN THOSE IN THE FUND. THESE
RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES. GBI
RETURNS SINCE THE INCEPTION OF EACH CLASS ARE 8.94% FOR CLASS A, 7.46%
FOR CLASS B AND CLASS C AND 11.87% FOR CLASS Z SHARES. SOURCE: LIPPER,
INC.
(3) THE LIPPER GLOBAL AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL
FUNDS IN THE LIPPER GLOBAL CATEGORY AND DOES NOT INCLUDE THE EFFECT OF
ANY SALES CHARGES. AGAIN, THESE RETURNS WOULD BE LOWER IF THEY INCLUDED
THE EFFECT OF SOLES CHARGES. LIPPER RETURNS SINCE THE INCEPTION OF EACH
CLASS ARE 190.10% FOR CLASS A, 18.66% FOR CLASS B AND CLASS C AND 12.10%
FOR CLASS Z SHARES. THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES
CHARGES AND EXPENSES. SOURCE: LIPPER, INC.
- -------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
FEES AND EXPENSES
These tables show the sales charges, fees and expenses for each share class of
the Fund--Class A, B, C and Z. Each share class has different sales
charges--known as loads--and expenses, but represents an investment in the same
fund. Class Z shares are available only to a limited group of investors. For
more information about which share class may be right for you, see "How to Buy,
Sell and Exchange Shares of the Fund."
<TABLE>
<CAPTION>
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4% None 1% None
Maximum deferred sales charge (load)
(as a percentage of the lower of original
purchase price or sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load) imposed
on reinvested dividends and other
distributions
Redemption fees(1) None None None None
Exchange fee None None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .75% .75% .75% .75%
+ Distribution and service (12b-1) fees .30%(4) 1.00%(4) 1.00%(4) None
+ Other expenses .43% .43% .43% .43%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.48% 2.18% 2.18% 1.18%
- - Fee Waiver and/or reimbursement(4) .05%(5) .25% .25% None
= NET ANNUAL FUND OPERATING EXPENSES 1.43% 1.93% 1.93% 1.18%
</TABLE>
(1) YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
(2) THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES
BY 1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH
YEAR. CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS
AFTER PURCHASE.
(3) THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
(4) FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999, THE DISTRIBUTOR OF THE FUND
HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE FEES FOR
CLASS A SHARES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS
A SHARES AND .75 OF 1% FOR BOTH THE CLASS B AND CLASS C SHARES.
(5) PRIOR TO JANUARY 1, 1999, THE DISTRIBUTOR WAIVED .15 OF 1% OF ITS
DISTRIBUTION AND SERVICE FEE FOR CLASS A SHARES. THE TABLE SHOWS CURRENT
EXPENSES.
- --------------------------------------------------------------------------------
4 The Global Total Return Fund, Inc. [telephone] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Risk/Return Summary
- --------------------------------------------------------------------------------
EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. After the first year, the example
does not take into consideration the Distributor's agreement to reduce its
distribution and service fees for Class A, Class B and Class C shares. Although
your actual costs may be higher or lower, based on these assumptions, your costs
would be:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $540 $844 $1,171 $2,094
Class B shares $696 $958 $1,247 $2,233
Class C shares $394 $752 $1,235 $2,569
Class Z shares $120 $375 $ 649 $1,432
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $540 $844 $1,171 $2,094
Class B shares $196 $658 $1,147 $2,233
Class C shares $294 $752 $1,235 $2,569
Class Z shares $120 $375 $ 649 $1,432
</TABLE>
- -------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek TOTAL RETURN, made up of CURRENT
INCOME and CAPITAL APPRECIATION. This means we seek investments that will
increase in value, as well as pay the Fund interest and other income. While we
make every effort to achieve our objective, we can't guarantee success.
- -------------------------------------------------------------------------------
THE EURO
On January 1, 1999, 11 of the 15 member states of the European Union introduced
the "euro" as a common currency. During a three year transitional period, the
euro will coexist with each participating states's currency. Beginning July 1,
2002, the euro is anticipated to become the sole currency of the participating
states. During the transition period, the Fund will treat the euro as a separate
currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take effect as
planned; if a participating state withdraws from the European Monetary Union; or
if the computing, accounting and trading systems used by the Funds' service
providers, or by entities with which the Fund or its service providers do
business, are not capable of recognizing the euro as a distinct currency at the
time of, and following, euro conversion. In addition, the conversion could cause
markets to become more volatile.
- -------------------------------------------------------------------------------
In pursuing our objective, we normally invest at least 65% of the Fund's
total assets in income-producing debt securities of the U.S. and foreign
governments, supranational organizations, semi-governmental entities or
government agencies, authorities or instrumentalities and short-term bank debt
securities or bank deposits. We can invest in developed countries and developing
or emerging market countries that we believe are stable. We can invest in debt
securities in U.S. dollars and debt securities in foreign countries based on
U.S. dollars or foreign currencies.
The investment adviser has a team of fixed-income professionals, including
credit analysts and traders, with experience in many foreign fixed-income
securities markets. In selecting portfolio securities, the investment adviser
considers country and currency selection, economic conditions and interest rate
fundamentals. The investment adviser also evaluates individual debt securities
within each fixed income sector based upon their relative investment merit and
considers factors such as yield, duration and potential for price appreciation
as well as credit quality, maturity and risk.
Some government securities are backed by the full faith and credit of the
issuing government which means that payment of principal and interest are
- --------------------------------------------------------------------------------
6 The Global Total Return Fund, Inc. [telephone] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
guaranteed, but market value is not. Other government securities may be able to
borrow from a centralized treasury and some government securities depend
entirely on their own resources to repay their debt.
We generally limit investments in particular currencies (even U.S.
dollars) to 40% of the Fund's total assets except for the euro. The Fund may
invest up to 65% of its total assets in debt securities denominated in the euro.
As a "global" fund, we usually invest in issuers from at least three different
countries, including the U.S. We may invest in securities of developing
countries, which may be subject to more abrupt or erratic market movements than
those of developed countries.
We can also invest up to 35% of total assets in corporate debt
instruments, other nongovernment debt securities including convertible
securities and intermediate and long-term bank debt securities in the U.S. or
foreign countries.
Most of the Fund's debt securities are "investment-grade." This means
major rating services, like Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's"), have rated the securities within one of
their four highest quality grades. Debt obligations in the fourth highest grade
are regarded as investment grade, but have speculative characteristics and are
riskier than higher-rated securities. Up to 10% of the Fund's total assets may
be invested in lower-rated securities, which are riskier and considered
"speculative" with respect to their capacity to pay principal and interest. The
Fund's investments in these high-yield or "junk" bonds will have a minimum
rating of B by Moody's or S&P or another major rating service at the time they
are purchased. The Fund may continue to hold such a security if it is
subsequently downgraded below B or is no longer rated by a major rating service.
A rating is an assessment of the likelihood of timely repayment of interest and
principal and can be useful when comparing different debt obligations. These
ratings are not a guarantee of quality. The opinions of the rating agencies do
not reflect market risk and they may at times lag behind the current financial
conditions of a company. We may also invest in obligations that are not rated,
but that we believe are of comparable quality to the obligations described
above.
The Fund has a dollar weighted average maturity of not more than 10 years.
We normally don't buy securities with a remaining maturity of more than 10
years. The maturity of a bond is simply the number of years until the principal
is due and payable. Weighted average maturity is calculated by adding the
maturities of all of the bonds in a portfolio and dividing by the number of
bonds on a weighted basis.
- -------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
The Fund may also use a variety of "hedging" strategies intended to help
protect the value of the Fund's securities rather than to make a profit. These
may include derivative transactions and cross-currency hedges which are
described in more detail in the Fund's Statement of Additional Information.
For more information about this Fund and its investments, see "Investment
Risks" and the Statement of Additional Information, "Description of the Fund,
Its Investments and Risks." The Statement of Additional Information--which we
refer to as the SAI--contains additional information about the Fund. To obtain a
copy, see the back cover page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board can change investment policies
that are not fundamental.
OTHER INVESTMENTS
In addition to the principal strategies, we may also make the following
investments to try to increase the Fund's returns or protect its assets if
market conditions warrant.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in U.S. Treasury or other
U.S. dollar-denominated securities or high-quality money market instruments,
including commercial paper of domestic and foreign corporations, foreign
government securities, certificates of deposit, bankers' acceptances and time
deposits of domestic and foreign banks and short-term obligations issued or
guaranteed by the U.S. government and its agencies denominated in either U.S.
dollars or foreign currencies. Investing heavily in these securities limits our
ability to achieve our investment objective but can help to preserve the Fund's
assets when the bond markets are volatile.
ZERO COUPON SECURITIES
We can invest in ZERO COUPON SECURITIES. These are bonds that are sold for a
price that is less than their stated value. Interest payments on a zero coupon
bond are not made during the life of the bond, but at the bond's maturity, the
holder gets the bond's stated value. The difference between the price paid for
- --------------------------------------------------------------------------------
8 The Global Total Return Fund, Inc. [telephone] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
the bond and the amount paid to the holder at the bond's maturity is the
holder's return. This type of security may experience greater fluctuation in
value and less liquidity than similarly rated bonds that pay interest at regular
intervals.
STRIPPED SECURITIES
The Fund can invest up to 10% of its total assets in "stripped securities,"
(securities where the principal or a scheduled interest payment is sold
separately) of U.S. and foreign government debt securities, combined with
investments in similar U.S. and foreign government securities.
ADJUSTABLE/FLOATING RATE SECURITIES
The Fund can invest in adjustable or floating rate securities whose interest
rate is calculated by reference to a specific index and is reset periodically.
The value of adjustable or floating rate securities does not respond as quickly
to changing interest rates as do fixed rate securities.
REPURCHASE AGREEMENTS
The Fund also may use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Fund's returns or
protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Fund will not lose money. Derivatives--such as futures,
options, foreign currency forward contracts and options on futures--involve
costs and can be volatile. With derivatives, the investment adviser tries to
predict whether the underlying investment--a security, market index, currency,
interest rate or some other benchmark--will go up or down at some future date.
We may use derivatives to try to reduce risk or to increase return consistent
with the Fund's overall investment objective. The investment adviser will
consider other factors (such as cost) in deciding whether to employ any
- -------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
particular strategy or use any particular instrument. Any derivatives we use may
not match the Fund's underlying holdings.
Because we are a global fund and invest in securities denominated in
different foreign currencies, we may use "currency hedges." Currency hedges can
help protect the Fund's NAV from declining if a particular foreign currency were
to decrease in value compared to the U.S. dollar.
The Fund may invest without limit in commercial paper and other
instruments that are "indexed" to certain specific foreign currency exchange
rates. This means that the instrument's principal amount is adjusted upward or
downward (but not below zero) to reflect changes in the exchange rate between
two currencies from the time the instrument is outstanding until it matures.
When the Fund purchases one of these instruments, it pays with the currency in
which the instrument is denominated and, at maturity, it receives interest and
principal payments in the same currency. These instruments offer the potential
for realizing gains as a result of changes in foreign currency exchange rates
that can be used to hedge (or cross-hedge) against a decline in the U.S. dollar
value of the investments while providing an attractive money market rate of
return.
OPTIONS
The Fund may purchase and sell put and call options on securities and currencies
traded on U.S. or foreign securities exchanges or in the over-the-counter
market. An option is the right to buy or sell securities in exchange for a
premium. The options may be on debt securities, aggregates of debt securities,
financial indices, U.S. government securities, foreign government securities and
foreign currencies. The Fund will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS;
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may purchase and sell financial futures contracts and related
options on debt securities, aggregates of debt securities, financial indices,
U.S. government securities, corporate debt securities, foreign government
securities and foreign currencies. A futures contract is an agreement to buy or
sell a set quantity of an underlying product at a future date, or to make or
receive a cash payment based on the value of a securities index. The Fund also
may enter into foreign currency forward contracts to protect the value of its
assets against
- --------------------------------------------------------------------------------
10 The Global Total Return Fund, Inc. [telephone] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
future changes in the level of foreign currency exchange rates. A foreign
currency forward contract is an obligation to buy or sell a given currency on a
future date and at a set price.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks--Risk Management and Return Enhancement
Strategies."
ADDITIONAL STRATEGIES
The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets) and HOLDS ILLIQUID SECURITIES
(the Fund may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions, those without a readily
available market and repurchase agreements with maturities longer than seven
days). The Fund is "NONDIVERSIFIED," meaning it can invest more than 5% of its
assets in the securities of any one issuer. The Fund is subject to certain other
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- -------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indices, performance of the Fund can deviate from performance of the indices.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other investments the Fund may make. See, too,
"Description of the Fund, Its Investments and Risks" in the SAI.
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
- The Fund's share - Bonds have
INCOME-PRODUCING DEBT price, yield and total generally outperformed
SECURITIES return will fluctuate money market
in response to bond instruments over the
AT LEAST 65% market movements long term with less
risk than stock
- Credit risk--the - Most bonds will rise
default of an issuer in value when interest
would leave the Fund rates fall
with unpaid interest
or principal. The - Regular interest income
lower a bond's quality
the higher its - Investment-grade bonds
potential volatility have a lower risk of
default
- Market risk--the risk
that the market value - Bonds with longer
of an investment may maturity dates
move up or down, typically have higher
sometimes rapidly or yields
unpredictably. Market
risk may affect an - Generally more secure
industry, a sector or than stocks since
the market as a whole companies must pay
their debts before
- Interest rate risk--the paying stockholders
value of most bonds
will fall when - Principal and interest
interest rates rise; on government
the longer a bond's securities may be
maturity and the lower guaranteed by the
its credit quality, issuing government
the more its value
typically falls. It - Junk bonds offer
can lead to price higher yields and
volatility, higher potential gains
particularly for junk
bonds and stripped
securities
- As a nondiversified fund,
we will have greater
exposure to loss from a
single issuer
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
12 The Global Total Return Fund, Inc. [telephone] (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME-PRODUCING DEBT - Not all government
SECURITIES (CONT'D) securities are insured
or guaranteed by the
government but only by
the issuing agency
- Junk bonds (rated BB/Ba
or lower) have a higher
risk of default, tend to
be less liquid and may be
more difficult to value
- --------------------------------------------------------------------------------------------------
- Foreign markets, economies - Investors can
FOREIGN SECURITIES and political systems may participate in foreign
not be as stable as in markets and companies
PERCENTAGE VARIES the U.S., particularly operating in those
those in developing markets
countries
- Changing value of
foreign currencies
- Currency risk--changing
values of foreign - Opportunities for
currencies diversification
- Debt securities issued by
supranational organizations or
semi-governmental issuers may
be backed by limited assets in
the event of default
- May be less liquid
than U.S. stocks and
bonds
- Differences in foreign laws,
accounting standards, public
information, custody and
settlement practices
- Year 2000 conversion
may be more of a
problem for some
foreign issuers
- -------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
DERIVATIVES - Derivatives such as - The Fund could make
futures, options and money and protect
PERCENTAGE VARIES foreign currency against losses if the
forward contracts that investment analysis
are used for hedging proves correct
purposes may not
fully offset the - Derivatives that
underlying positions involve leverage could
and this could result generate substantial
in losses to the Fund gains at low cost
that would not have
otherwise - One way to manage the
occurred Fund's risk/return
balance is to lock in
- Derivatives used for the value of an
risk management may investment ahead of
not have the intended time
effects and may result
in losses or missed - May be used to hedge
opportunities against changes in
currency exchange rates
- The other party to a
derivatives contract
could default
- Derivatives that
involve leverage could
magnify losses
- Certain types of
derivatives involve
costs to the Fund that
can reduce returns
- --------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES - May be difficult to - May offer a more
value precisely attractive yield or
UP TO 15% OF NET ASSETS potential for growth
- May be difficult to than more widely
sell at the time or traded securities
price desired
- --------------------------------------------------------------------------------------------------
MONEY MARKET - Limits potential for - May preserve the
INSTRUMENTS capital appreciation Fund's assets
UP TO 100% ON A - See credit risk and
TEMPORARY BASIS market risk
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
14 The Global Total Return Fund, Inc. [telephone] (800) 225-1852
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
BORROWING - Leverage borrowing for - Leverage may magnify
UP TO 20% investment may magnify investment gains
losses
- Interest costs and
borrowing fees may
exceed potential
investment gains
- --------------------------------------------------------------------------------------------------
ZERO COUPON BONDS - Generates "phantom - May lock in a higher
income" for the Fund rate of return than is
UP TO 10% OF NET ASSETS for tax purposes available in the
although no income is marketplace at time of
paid maturity
- Typically subject to greater
volatility and less liquidity
in adverse markets than other
income-producing securities
- --------------------------------------------------------------------------------------------------
ADJUSTABLE/FLOATING RATE - Value lags value of - Can take advantage of
SECURITIES fixed rate securities rising interest rates
when interest rates
PERCENTAGE VARIES change
- --------------------------------------------------------------------------------------------------
STRIPPED SECURITIES - More volatile than - Value rises faster
securities that have when interest rates
UP TO 10% not separated fall
principal and interest
- --------------------------------------------------------------------------------------------------
15
</TABLE>
<PAGE>
================================================================================
How the Fund is Managed
================================================================================
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended December 31, 1998, the Fund paid PIFM management fees of .75% of the
Fund's average net assets.
As of January 31, 1999, PIFM served as the Manager to all 46 of the
Prudential mutual funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $71.7 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
Prudential Investments has entered into a service agreement with PRICOA
Asset Management Ltd. (PRICOA), a subsidiary of The Prudential Insurance Company
of America, for the provision of investment advisory services to the Fund and
compensates PRICOA for its reasonable costs and expenses in providing such
services. PRICOA, an indirect wholly-owned subsidiary of Prudential, is located
at Cutlers Court, 115 Houndstitch, London EC3A 7BR England. It was incorporated
under U.K. law in January 1997 and as of December 31, 1998 had approximately
$2.58 billion under management.
PORTFOLIO MANAGERS
Prudential Investments Fixed Income Group has organized into teams that
specialize by sector. The Fixed Income Investment Policy Committee which is
comprised of senior investment staff from each sector team provides guidance to
the teams regarding duration risk, asset allocations and general risk
- --------------------------------------------------------------------------------
16 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
================================================================================
How the Fund is Managed
================================================================================
parameters. The Portfolio Managers contribute security selection within those
guidelines.
The Fund has been co-managed by J. GABRIEL IRWIN and SIMON WELLS since April
1995.
Gabriel Irwin and Simon Wells both joined Prudential Investments in April
1995 to lead the Global Fixed Income Group. Before joining Prudential they were
Senior Vice Presidents at Smith Barney Capital Management in London.
Simon and Gabriel use a fundamental approach to global bond investing. They
analyze worldwide macro-economic, political and social events and trends
searching for opportunities they believe will offer attractive yields, as well
as the potential for price appreciation.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" table.
YEAR 2000 READINESS DISCLOSURE
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 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. The Fund and its Board receive and have
received since early 1998 satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the service providers (or other securities market
participants) will successfully complete the necessary
- --------------------------------------------------------------------------------
17
<PAGE>
================================================================================
How the Fund is Managed
================================================================================
changes in a timely manner. Moreover, the Fund at this time has not considered
retaining alternative service providers or directly undertaken efforts to
achieve year 2000 readiness, the latter of which would involve substantial
expenses without an assurance of success.
Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Fund.
- --------------------------------------------------------------------------------
18 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to shareholders
typically every quarter. For example, if the Fund owns Utopia Government bonds
and the bond pays income, the Fund will pay out a portion of this income to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from the Fund will be taxed as ordinary income whether
or not they are reinvested in the Fund.
The amount of income available for distribution to shareholders will be
affected by any foreign currency gains or losses generated by the Fund and
cannot be predicted. This fact, coupled with the different tax and accounting
treatment of certain currency gains and losses, increases the possibility that
distributions, in whole or in part, may be a return of capital to shareholders.
The Fund also distributes realized net CAPITAL GAINS to
shareholders--typically once a year--which are generated when the Fund sells its
assets for a profit. For example, if the Fund bought Utopia government bonds for
a total of $1,000 and more than one year later sold the bonds for a total of
$1,500, the Fund has net longterm capital gains of $500, which it will pass on
to shareholders (assuming the Fund's total gains are greater than any losses it
may have). Capital gains are taxed differently depending on how long the Fund
holds the security--if a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at ordinary income
rates of up to 39.6%. Different rates apply to corporate shareholders.
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or
account. For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Fund as part of a qualified tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified tax-deferred plan or
account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your distributions and sale
proceeds. If you are subject to backup withholding, we will withhold and pay to
the U.S. Treasury 31% of your distributions. Dividends of net investment income
and short-term capital gains paid to a nonresident foreign shareholder generally
will be subject to a U.S. withholding tax of 30%. This rate may be lower,
depending on any tax treaty the U.S. may have with the shareholder's country.
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20 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
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Fund Distributions and Tax Issues
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IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day and
soon thereafter received a distribution. That is not so because when dividends
are paid out, the value of each share of the Fund decreases by the amount of the
dividend and the market changes (if any) to reflect the payout. The distribution
you receive makes up for the decrease in share value. However, the timing of
your purchase does mean that part of your investment came back to you as taxable
income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified
tax-deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
- -----------------------------------
[Graphical representation of chart]
+ $ Capital Gain (taxes owed)
Receipts from Sale $ OR
- $ Capital Loss (offset against gain)
- -----------------------------------
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you
- --------------------------------------------------------------------------------
21
<PAGE>
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Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
exchanged have increased in value since you purchased them, you have capital
gains, which are subject to the taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099, however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
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22 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
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How to Buy, Sell and
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HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852, or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C, and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
- The amount of your investment
- The length of time you expect to hold the shares and the impact of the
varying distribution fees
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23
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How to Buy, Sell and
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- The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
- Whether you qualify for any reduction or waiver of sales charges
- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
- Whether you qualify to purchase Class Z shares
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount (1)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Minimum amount for $100 $100 $100 None
subsequent purchases (1)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Maximum initial 4% of the public None 1% of the public None
sales charge offering price offering price
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Contingent Deferred None If Sold During: 1% on sales None
Sales Charge (CDSC) (2) Year 1, 5% made within
Year 2, 4% 18 months
Year 3, 3% of purchase (2)
Year 4, 2%
Years 5/6, 1%
Year 7, 0%
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Annual distribution .30 of 1% 1% (.75 of 1% 1% (.75 of 1% None
and service (12b-1) (.25 of 1% currently) currently)
fees shown as a currently)
percentage of average
net assets (3)
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM
INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC
INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT PLAN."
(2) FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES--CONTINGENT DEFERRED SALES CHARGE (CDSC)." CLASS C SHARES
BOUGHT BEFORE NOVEMBER 2, 1998 HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
- --------------------------------------------------------------------------------
24 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
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How to Buy, Sell and
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(3) THESE DISTRIBUTION FEES ARE PAID FROM THE FUND'S ASSETS ON A CONTINUOUS
BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR INVESTMENT AND
MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES. THE SERVICE FEE
FOR CLASS A, B AND C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE FOR CLASS A
SHARES IS LIMITED TO .30 OF 1% (INCLUDING THE .25 OF 1% SERVICE FEE) AND IS
.75 OF 1% FOR CLASS B AND CLASS C SHARES.
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales charge by
increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.00% 4.17% 3.75%
- --------------------------------------------------------------------------------
$50,000 to $99,999 3.50% 3.63% 3.25%
- --------------------------------------------------------------------------------
$100,000 to $249,999 2.75% 2.83% 2.50%
- --------------------------------------------------------------------------------
$250,000 to $499,999 2.00% 2.04% 1.90%
- --------------------------------------------------------------------------------
$500,000 to $999,999 1.50% 1.52% 1.40%
- --------------------------------------------------------------------------------
$1,000,000 and above * None None None
- --------------------------------------------------------------------------------
</TABLE>
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES.
To satisfy the purchase amounts above, you can:
- invest with an eligible group of related investors;
- buy the Class A shares of two or more Prudential mutual funds at the
same time;
- use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of the
shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify
for Rights of Accumulation); or
- sign a LETTER OF INTENT, stating in writing that you or a group of
related investors will purchase a certain amount of shares in the Fund
and other Prudential mutual funds within 13 months.
BENEFIT PLANS. Benefit Plans can avoid Class A's initial sales charge if the
Benefit Plan has existing assets of at least $1 million invested in shares of
Prudential
- --------------------------------------------------------------------------------
25
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How to Buy, Sell and
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mutual funds (excluding money market funds other than those acquired under the
exchange privilege) or 250 eligible employees or participants. For these
purposes, a Benefit Plan is a pension, profit-sharing or other employee benefit
plan qualified under Section 401 of the Internal Revenue Code, a deferred
compensation or annuity plan under Sections 403(b) and 457 of the Internal
Revenue Code, a "rabbi" trust or a nonqualified deferred compensation plan
sponsored by an employer that has a tax-qualified benefit plan with Prudential.
Class A shares may also be purchased without a sales charge by participants who
are repaying loans from Benefit Plans where Prudential (or its affiliates)
provides administrative or recordkeeping services, sponsors the product or
provides account services.
Certain Prudential retirement programs--such as PruArray Association
Benefit Plans and PruArray Savings Programs--may also be exempt from Class A's
sales charge. For more information, see the SAI or contact your financial
adviser. In addition, waivers are available to investors in certain programs
sponsored by brokers, investment advisers and financial planners who have
agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades and charges its clients a management, consulting or
other fee for its services;
- Mutual Fund "supermarket" programs where the sponsor links its
customers' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
OTHER TYPES OF INVESTORS. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, Prudential
mutual funds, the subadvisers of the Prudential mutual funds and clients of
brokers that have entered into a selected dealer agreement with the Distributor.
To qualify for a reduction or waiver of the sales charge, you must notify the
Transfer Agent or your broker at the time of purchase. For more information see
the SAI, "Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver
of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
Benefit Plans. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares may also be purchased
without an initial sales charge by participants who are repaying loans from
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26 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
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How to Buy, Sell and
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Benefit Plans where Prudential (or its affiliates) provides administrative or
recordkeeping services, sponsors the product or provides account services.
PRUDENTIAL Retirement PLANS. The initial sales charge will be waived for
purchases of Class C shares by both qualified and nonqualified retirement and
deferred compensation plans participating in a PruArray Plan and other plans if
Prudential also provides administrative or recordkeeping services.
Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one of
the following:
- Purchase your shares through an account at Prudential Securities;
- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation;
- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
- Any Benefit Plan as defined above, and certain nonqualified plans,
provided the Benefit Plan--in combination with other plans sponsored
by the same employer or group of related employers--has at least $50
million in defined contribution assets
- Participants in any fee-based program or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and the Fund as an available option
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option
- --------------------------------------------------------------------------------
27
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How to Buy, Sell and
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- Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and, as of September 20,
1996, were either Class Z shareholders of the Prudential mutual funds
or executed a letter of intent to purchase Class Z shares of the
Prudential mutual funds
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
- Employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan
- Prudential with an investment of $10 million or more
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested dividends
and other distributions. Since the 12b-1 fees for Class A shares are lower than
for Class B shares, converting to Class A shares lowers your Fund expenses.
When we do the conversion, you will get fewer Class A shares than the
number of converted Class B shares if the price of the Class A shares is higher
than the price of Class B shares. The total dollar value will be the same, so
you will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is
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28 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
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How to Buy, Sell and
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- ---------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes
every day because the value of a fund's
portfolio changes constantly. For
example, if Fund XYZ holds Utopia
government bonds in its portfolio and
the price of Utopia government bonds
goes up, while the value of the fund's
other holdings remains the same and
expenses don't change, the NAV of Fund
XYZ will increase.
- ---------------------------------------
determined by a simple calculation: it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the price of mutual
funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. Because
we are a global fund, the NAV can change on days when you cannot buy or sell
shares. We do not determine the NAV on days when we have not received any orders
to purchase, sell or exchange Fund shares, or when changes in the value of the
Fund's portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge a separate or additional fee for purchases of
shares.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
- --------------------------------------------------------------------------------
29
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How to Buy, Sell and
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- --------------------------------------------------------------------------------
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial adviser will help you
determine which retirement plan best meets your needs. Complete instructions
about how to establish and maintain your plan and how to open accounts for you
and your employees will be included in the retirement plan kit you receive in
the mail.
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30 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
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How to Buy, Sell and
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THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges, and
is not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York Time to
process the sale on that day. Otherwise, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay
- --------------------------------------------------------------------------------
31
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How to Buy, Sell and
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- --------------------------------------------------------------------------------
sending you the proceeds until your check clears, which can take up to 10 days
from the purchase date. You can avoid delay if you purchase by wire, certified
check or cashier's check. Your broker may charge you a separate or additional
fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust, and if you hold your shares directly with the Transfer Agent, you will
need to have the signature on your sell order guaranteed by a financial
institution. For more information, see the SAI, "Purchase, Redemption and
Pricing of Fund Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
- Amounts representing shares you purchased with reinvested dividends
and distributions
- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares)
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
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32 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
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Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in
the fourth and 1% in the fifth and sixth years and 0% in the seventh year. The
rate decreases on the first day of the month following the anniversary date of
your purchase, not on the anniversary date itself. The CDSC is 1% for Class C
shares--which is applied to shares sold within 18 months of purchase (or one
year for Class C shares purchased before November 2, 1998). For both Class B and
Class C shares, the CDSC is calculated based on the lesser of the original
purchase price or the redemption proceeds. For purposes of determining how long
you've held your shares, all purchases during the month are grouped together and
considered to have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy (with rights of survivorship), provided the shares were
purchased before the death or disability
- To provide for certain distributions--made without IRS penalty--from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account
- On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred
Sales Charge--Class B Shares."
- --------------------------------------------------------------------------------
33
<PAGE>
- --------------------------------------------------------------------------------
How to Buy, Sell and
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
WAIVER OF THE CDSC--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in a PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account (a group annuity insurance product sponsored by Prudential),
the Guaranteed Insulated Separate Account (a separate account offered by
Prudential) and shares of The Stable Value Fund (an unaffiliated bank collective
fund).
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which the
broker provides administrative or recordkeeping services.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
tax-deferred plan or account.
- --------------------------------------------------------------------------------
34 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How to Buy, Sell and
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares to
reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your employer
or plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
- --------------------------------------------------------------------------------
35
<PAGE>
- --------------------------------------------------------------------------------
How to Buy, Sell and
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
- --------------------------------------------------------------------------------
36 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
How to Buy, Sell and
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The Fund may
notify a market timer of rejection of an exchange or purchase order after the
day the order is placed. If the Fund allows a market timer to trade Fund shares,
it may require the market timer to enter into a written agreement to follow
certain procedures and limitations.
- --------------------------------------------------------------------------------
37
<PAGE>
- -------------------------------------------------------------------------------
Financial Highlights
- -------------------------------------------------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
- --------------------------------------------------------------------------------
38 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- -------------------------------------------------------------------------------
Financial Highlights
- -------------------------------------------------------------------------------
CLASS A SHARES
The financial highlights for two years ended December 31, 1998 were audited by
, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
CLASS A SHARES(1) (FISCAL YEARS ENDED 12-31)
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998(2) 1997(2) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $7.88 $8.38 $8.44 $7.46 $8.76
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .52 .55 .62 .54 .52
Net realized and unrealized gain
(loss) on investments and foreign .16 (.18) .32 1.25 (1.22)
currency transactions
TOTAL FROM INVESTMENT OPERATIONS .68 .37 .94 1.79 (.70)
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.35) (.68) (.62) (.54) (.17)
Distributions in excess of net (.02) (.19) (.50) (.27) --
investment income
Distributions from net realized (.16) -- -- -- (.13)
capital gains
Tax return of capital distributions -- -- -- -- (.30)
TOTAL DISTRIBUTIONS (.53) (.87) (1.12) (.81) (.60)
Redemption fee retained by Fund -- -- .12 -- --
NET ASSET VALUE, END OF YEAR $8.03 $7.88 $8.38 $8.44 $7.46
TOTAL RETURN(3) 8.92% 4.55% 13.15% 25.45% (8.10)%
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $158,932 $183,054 $229,770 $559,071 $493,645
Average net assets (000) $171,427 $204,795 $299,026 $549,407 $536,230
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.33% 1.39% 1.33% 1.02% 1.04%
Expenses, excluding distribution fees 1.18% 1.24% 1.18% 1.02% 1.04%
Net investment income 6.42% 6.73% 7.01% 6.50% 6.45%
Portfolio turnover rate 46% 43% 32% 256% 583%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) BEFORE 1-15-96, THE FUND WAS A CLOSED-END INVESTMENT COMPANY.
(2) CALCULATED BASED UPON AVERAGE SHARES OUTSTANDING DURING THE YEAR.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED.
- --------------------------------------------------------------------------------
39
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS B SHARES
The financial highlights for the two years ended December 31, 1998 were audited
by , independent accountants, and the financial
highlights for the period ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
CLASS B SHARES(1) (FISCAL YEARS ENDED 12-31)
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998(2) 1997(2) 1996(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $7.89 $8.39 $8.51
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .46 .49 .57
Net realized and unrealized gain (loss)
on investments and foreign currency .16 (.16) .26
transactions
TOTAL FROM INVESTMENT OPERATIONS .62 .33 .83
- ------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.30) (.64) (.57)
Distributions in excess of net investment income (.02) (.19) (.50)
Distribution from net realized capital gains (.16) -- --
TOTAL DISTRIBUTIONS (.48) (.83) (1.07)
Redemption fee retained by Fund -- -- .12
NET ASSET VALUE, END OF YEAR $8.03 $7.89 $8.39
TOTAL RETURN(3) 8.13% 3.98% 11.99%
- ------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
- ------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $3,625 $2,300 $175
Average net assets (000) $3,048 $1,246 $ 52
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.93% 1.99% 1.93%(4)
Expenses, excluding distribution fees 1.18% 1.24% 1.18%(4)
Net investment income 5.86% 6.13% 6.41%(4)
Portfolio turnover 46% 43% 32%
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) FOR THE PERIOD FROM 1-15-96 (WHEN CLASS B SHARES WERE FIRST OFFERED)
THROUGH 12-31-96.
(2) CALCULATED BASED UPON AVERAGE SHARES OUTSTANDING DURING THE YEAR.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN A FULL YEAR IS NOT
ANNUALIZED.
(4) ANNUALIZED.
- --------------------------------------------------------------------------------
40 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS C SHARES
The financial highlights for the two years ended December 31, 1998 were audited
by , independent accountants, and the financial
highlights for the period ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified
<TABLE>
<CAPTION>
- --------------------------------------------------------------
CLASS C SHARES (FISCAL YEARS ENDED 12-31)
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998(2) 1997(2) 1996(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.89 $8.39 $8.51
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .46 .49 .57
Net realized and unrealized gain (loss)
on investment and foreign currency transactions .16 (.16) .26
TOTAL FROM INVESTMENT OPERATIONS .62 .33 .83
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.30) (.64) (.57)
Distributions in excess of net investment income (.02) (.19) (.50)
Distributions from net realized capital gains (.16) -- --
TOTAL DISTRIBUTIONS (.48) (.83) (1.07)
Redemption fee retained by Fund -- -- .12
NET ASSET VALUE, END OF PERIOD $8.03 $7.89 $8.39
TOTAL RETURN(3) 8.13% 3.98% 11.99%
- ------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
- ------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $275 $190 $210(4)
Average net assets (000) $220 $397 $204(4)
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.93% 1.99% 1.93%(5)
Expenses, excluding distribution fees 1.18% 1.24% 1.18%(5)
Net investment income (loss) 5.84% 6.05% 6.41%(5)
Portfolio turnover 46% 43% 32%
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) FOR THE PERIOD FROM 1-15-96 (WHEN CLASS C SHARES WERE FIRST OFFERED)
THROUGH 12-31-96.
(2) CALCULATED BASED UPON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN A FULL YEAR IS NOT
ANNUALIZED.
(4) AMOUNTS ARE ACTUAL AND NOT ROUNDED TO THE NEAREST THOUSAND.
(5) ANNUALIZED.
- --------------------------------------------------------------------------------
41
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
CLASS Z SHARES (FISCAL YEARS ENDED 12-31)
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998(2) 1997(1)(2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.88 $8.32
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .52 .39
Net realized and unrealized gain (loss)
on investment and foreign currency transactions .17 .05
TOTAL FROM INVESTMENT OPERATIONS .69 .44
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.36) (.69)
Distributions in excess of net investment income (.02) (.19)
Distribution from net realized capital gains (.16) --
TOTAL DISTRIBUTIONS (.54) (.88)
NET ASSET VALUE, END OF YEAR $8.03 $7.88
TOTAL RETURN(3) 9.07% 5.56%
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $2,435 $686
Average net assets (000) $1,771 $257
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.18% 1.24%(4)
Expenses, excluding distribution fees 1.18% 1.24%(4)
Net investment income 6.65% 5.41%(4)
Portfolio turnover 46% 43%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) FOR THE PERIOD FROM 3-17-97 (WHEN CLASS Z SHARES WERE FIRST OFFERED)
THROUGH 12-31-97.
(2) CALCULATED BASED UPON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS.
IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON
THE LAST DAY OF EACH PERIOD REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN
A FULL YEAR IS NOT ANNUALIZED.
4 ANNUALIZED.
- --------------------------------------------------------------------------------
42 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
[This page has been left blank intentionally.]
- --------------------------------------------------------------------------------
43
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For more information about these funds, contact your financial adviser or
call us at (800) 225-1852. Read the prospectus carefully before you invest or
send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE
FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL UTILITY FUND, INC.
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth Equity Fund
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Active Balanced Fund
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
Prudential Developing Markets
Equity Fund
Prudential Latin America Equity Fund
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Europe Index Fund
Prudential Pacific Index Fund
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Global Series
International Stock Series
GLOBAL UTILITY FUND, INC.
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
Limited Maturity Portfolio
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
44 THE GLOBAL TOTAL RETURN FUND, INC. TELEPHONE (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME
FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Short-Intermediate Term Series
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN
FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Bond Market Index Fund
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Income Portfolio
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Series
California Income Series
PRUDENTIAL MUNICIPAL BOND FUND
High Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS
FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL SPECIAL MONEY MARKET
FUND, INC.
Money Market Series
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Money Market Series
PRUDENTIAL MUNICIPAL SERIES FUND
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY
PORTFOLIO, INC.
Institutional Money Market Series
- --------------------------------------------------------------------------------
45
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Please read this prospectus before
you invest in the Fund and keep it
for future reference. For information
or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- --------------------------------------------------------------------------------
Additional information about the
Fund can be obtained without charge
and can be found in the following
documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into
this prospectus)
ANNUAL REPORT
(contains a discussion of the market
conditions and investment strategies
that significantly affected the Fund's
performance)
SEMI-ANNUAL REPORT
MF169A
You can also obtain copies of Fund
documents from the Securities and
Exchange Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy
documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call
1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP Numbers:
Class A Shares--37936L-30-2
Class B Shares--37936L-40-1
Class C Shares--37936L-50-0
Class Z Shares--37936L-20-3
Investment Company Act File No:
811-4661
[logo] Printed on Recycled Paper
<PAGE>
EXHIBIT 17(e)
1 PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET, 9TH FLOOR
NEWARK, NEW JERSEY 07102-4077
IMPORTANT PROXY MATERIALS
PLEASE VOTE NOW!
August ,1999
----
Dear Shareholder:
I am writing to ask you to vote on an important proposal to merge Prudential
Intermediate Global Income Fund, Inc. into The Global Total Return Fund, Inc. A
shareholder meeting of Prudential Intermediate Global Income Fund, Inc. is
scheduled for September 8, 1999. This package contains information about the
proposal and includes materials you will need to vote by mail.
The Board of Directors of Prudential Intermediate Global Income Fund, Inc. has
reviewed the proposed merger and has recommended that the proposed merger be
presented to shareholders for their consideration. Although the Directors have
determined that a merger is in the shareholders' best interest, the final
decision is up to you.
If approved, the merger would give you the opportunity to participate in a
larger fund with similar investment policies. It is estimated that the combined
fund would also have lower expenses. To help you understand the proposal, we are
including a "Q and A" that answers commonly asked questions about merger
transactions. The accompanying proxy statement includes a detailed description
of the proposed merger.
Please read the enclosed materials carefully and cast your vote on the proxy
card. Remember, your vote is extremely important, no matter how large or small
your holdings. By completing and returning the proxy card now, you can help
avoid additional costs that are incurred with follow-up letters and calls. To
vote, complete the proxy card enclosed in this package. Be sure to sign the card
before mailing it in the postage-paid envelope provided.
<PAGE>
If you have any questions before you vote, please call us at 1-800-225-1852.
We're glad to help you understand the proposal and assist you in voting. Thank
you for your participation.
Sincerely,
- ------------------------
John R. Strangfeld, Jr.
President
<PAGE>
IMPORTANT INFORMATION TO HELP YOU UNDERSTAND AND VOTE ON
THE PROPOSAL
Please read the enclosed proxy statement for a complete description of
the merger proposal. As a quick reference, the following provides a brief
overview of the proposal.
WHAT PROPOSAL AM I BEING ASKED TO VOTE ON?
You are being asked to approve a merger of Prudential Intermediate Global
Income Fund, Inc. (Intermediate Fund) into The Global Total Return Fund, Inc.
(Total Return Fund).
WHAT IS THE REASON FOR THIS MERGER?
The proposed merger is intended to combine two similarly managed funds
with the goal of overall lower expenses. The merger is also desirable because
of the inability of Intermediate Fund to attract investment and build an
investment portfolio that can effectively pursue the Fund's objective. The
Total Return Fund which is a larger fund, has built an investment portfolio
that can more fully implement its objective of total return through current
income and capital appreciation.
DO THE FUNDS BEING MERGED HAVE SIMILAR INVESTMENT POLICIES?
Yes. Both Funds are classified as "global" funds, which means they have
the ability to invest in many countries, including the United States. As a
result, they are grouped in the same Lipper Global Income investment category.
In addition, both Funds have very similar investment objectives. Intermediate
Fund seeks to maximize total return, made up of current income and capital
appreciation. Total Return Fund seeks total return made up of current income
and capital appreciation. Typically, both Funds invest at least 65% of total
assets in U.S. and foreign government backed income-producing debt securities,
although they have the ability to invest up to 35% of total assets in corporate
debt instruments. In addition, Intermediate Fund typically limits investments in
particular currencies to 30% of the Fund's total assets. Total Return Fund
generally limits investments in particular currencies to 40% of the Fund's total
assets, except for the euro (up to 65%). Also, since both Funds primarily invest
in investment grade debt, they have credit quality breakdowns that resemble each
other.
WHO ARE THE FUND PORTFOLIO MANAGERS FOR THESE FUNDS?
Gabriel Irwin and Simon Wells currently manage both Funds and are
expected to manage the combined fund.
<PAGE>
HOW DO THE EXPENSE STRUCTURES OF THE FUNDS COMPARE?
Ratios as of December 31, 1998:
<TABLE>
<CAPTION>
Intermediate Fund Total Return Fund** Pro Forma Combined
<S> <C> <C> <C>
Class A 1.61%* 1.43% 1.41%
Class B 2.11% 1.93% 1.91%
Class C 2.11% 1.93% 1.91%
Class Z 1.36% 1.18% 1.16%
</TABLE>
*For the fiscal year ended December 31, 1998 the Distributor voluntarily reduced
its distribution and service fee for Class A shares to .15 of 1% of the average
daily net assets of Class A shares. For the fiscal year ending December 31, 1999
the Distributor contractually reduced its distribution and service fee for Class
A shares to .25 of 1%. Therefore, net annual Fund operating expenses are
expected to be 1.61% of the average daily net assets of Class A shares.
Additionally, with respect to Intermediate Fund's Class C shares, the
Distributor has contractually agreed to reduce its distribution and service fees
for Class C shares to .75 of 1% of the average daily net assets of Class C
shares. **For the fiscal year ending December 31, 1999, the Distributor has
contractually reduced its distribution and service fee for Class A shares to .25
of 1% of the average daily net assets of the Class A shares and .75 of 1% for
both Class B and Class C shares.
IS THE REORGANIZATION A TAXABLE EVENT FOR FEDERAL INCOME TAX PURPOSES?
Typically, the exchange of shares pursuant to a reorganization does not
result in a gain or loss for federal income tax purposes. A description of the
conditions necessary to avoid tax recognition is included in the proxy
statement.
WHAT WILL BE THE SIZE OF THE GLOBAL TOTAL RETURN FUND, INC. AFTER THE MERGER?
If the proposal is approved, the combined fund is anticipated to have
over $275 million in assets.
WHAT HAS BEEN THE COMPARATIVE PERFORMANCE OF THE FUNDS?
A. The table below shows average annual total returns for both Total
Return Fund and its Lipper peer group over the 1, 5 and 10 year and since
inception periods. Please keep in mind that past performance is no guarantee of
future results and you may have a gain or loss when you sell your shares.
<PAGE>
AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1999*
The Global Total Return Fund, Inc.
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares (7-07-86)
Class B shares N/A N/A (1-15-96)
Class C shares N/A N/A (1-15-96)
Class Z shares N/A N/A (3-17-97)
Lipper Global Income
Funds Average** N/A+
J. P. Morgan Government Bond Index++
</TABLE>
* Average annual total returns are historical and include changes in
share price, reinvestment of dividends and capital gains, if any. Share
price, yield and return will vary.
** Lipper, Inc. is a nationally recognized organization that reports on
mutual fund total return performance and calculates fund rankings. Lipper
average returns are for all funds in each share class for the periods
shown in the Global Income Funds category. Peer group averages include
reinvested dividends and capital gains, if any, and exclude sales
charges.
+ Lipper since inception returns are % for Class A, % for Class B and
Class C and % for Class Z Shares based on funds in each share class.
++ The Index is traded, unhedged, and measured in U.S. dollars. The
Index is market weighted and represents the total return of government
bonds from 13 countries, including Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, the United
Kingdom and the United States. The Index provides a broad measure of
market performance. The Index is unmanaged and includes the reinvestment
of all dividends, but does not reflect the payment of transaction costs
and advisory fees associated with an investment in the Fund. The Index
is not the only index that may be used to characterize performance of
global bond funds, and other indexes may portray different comparative
performances. Investors cannot invest directly in an index.
The table below shows average annual total returns for both
Intermediate Fund and its Lipper peer group over the 1, 5 and 10 year and since
inception periods. Please keep in mind that past performance is no guarantee of
future results and you may have a gain or loss when you sell your shares.
AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1998*
Prudential Intermediate Global Income Fund, Inc.
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares (7-07-86)
Class B shares N/A N/A (1-15-96)
Class C shares N/A N/A (1-15-96)
Class Z shares N/A N/A (3-17-97)
Lipper Global Income
Funds Average** N/A+
JP Morgan Government Bond Index
</TABLE>
<PAGE>
* Average annual total returns are historical and include changes in
share price, reinvestment of dividends and capital gains, if any. Share
price, yield and return will vary.
** Lipper, Inc. is a nationally recognized organization that reports on
mutual fund total return performance and calculates fund rankings. Lipper
average returns are for all funds in each share class for the periods
shown in the Global Income fund category. Peer group averages include
reinvested dividends and capital gains, if any, and exclude sales
charges.
+Lipper since inception returns are % for Class A, % for Class B and
Class C and % for Class Z shares based on all funds in each share class.
HOW WILL YOU DETERMINE THE NUMBER OF SHARES OF THE GLOBAL TOTAL RETURN FUND,
INC. THAT I WILL RECEIVE?
As of the close of business of the New York Stock Exchange on
September 17, 1999 (the Closing Date) of the merger, shareholders will receive
the number of full and fractional Class A, Class B, Class C or Class Z shares of
Total Return Fund, respectively, that is equal in value to the net asset value
of their Class A, Class B, Class C or Class Z shares of Intermediate Fund on
that date. The anticipated closing date is September 17, 1999.
WHAT IF THERE ARE NOT ENOUGH VOTES TO REACH QUORUM BY THE SCHEDULED SHAREHOLDER
MEETING DATE?
If we do not receive sufficient votes to hold the meeting, we or
Shareholder Communications Corporation, a proxy solicitation firm, may contact
you by mail or telephone to encourage you to vote. Shareholders should review
the proxy materials and cast their vote to avoid additional mailings or
telephone calls. If there are not sufficient votes to approve the proposal by
the time of the Shareholder Meeting (September 8, 1999), the meeting may be
adjourned to permit further solicitation of proxy votes.
HAS EACH FUND'S BOARD OF DIRECTORS APPROVED THE PROPOSAL?
Yes. The Board of Directors of both Funds has unanimously approved the
proposal and recommends that you vote to approve it.
HOW MANY VOTES AM I ENTITLED TO CAST?
As a shareholder, you are entitled to one vote for each share you own of
Intermediate Fund on the record date. The record date is July 2, 1999.
<PAGE>
HOW DO I VOTE MY SHARES?
You can vote your shares by completing and signing the enclosed proxy
card, and mailing it in the enclosed postage paid envelope. If you need any
assistance, or have any questions regarding the proposal or how to vote your
shares, please call Prudential at (800) 225-1852.
HOW DO I SIGN THE PROXY CARD?
INDIVIDUAL ACCOUNTS: Shareholders should sign exactly as their names
appear on the account registration shown on the card.
JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.
ALL OTHER ACCOUNTS: The person signing must indicate his or her capacity. For
example, a trustee for a trust should include his/her title, such as "Jane Doe,
Trustee"; or an authorized officer of a company should indicate his/her position
with the company, such as "John Smith, President."
