As filed with the Securities and Exchange Commission on July 11, 1997
Securities Act File No. 33-63945
Investment Company Act File No. 811-5123
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 3 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 9 /X/
(Check appropriate box or boxes)
----------
THE GLOBAL GOVERNMENT PLUS FUND, INC.
(Exact name of registrant as specified in charter)
100 MULBERRY STREET, GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
----------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
100 MULBERRY STREET,GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service of Process)
----------
Approximate date of proposed public offering:
As soon as practicable after the effective date of the Registration Statement.
----------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/x/ 60 days after filing pursuant to paragraph (a)(1)
/ / on (date), pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE SECURITIES
ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940.
REGISTRANT FILED A NOTICE UNDER SUCH RULE FOR ITS FISCAL YEAR ENDED DECEMBER 31,
1996 ON OR ABOUT FEBRUARY 26, 1997.
================================================================================
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C> <C>
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis ............................................................. Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information ...................................... Fund Expenses; Financial Highlights; How
the Fund Calculates Performance
Item 4. General Description of Registrant .................................... Cover Page; Fund Highlights; How the Fund
Invests; General Information
Item 5. Management of the Fund ............................................... Financial Highlights; How the Fund is
Managed; General Information; Shareholder
Guide
Item 5A. Management's Discussion of Fund Performance .......................... Financial Highlights
Item 6. Capital Stock and Other Securities ................................... Taxes, Dividends, and Distributions;
General Information; Shareholder Guide
Item 7. Purchase of Securities Being Offered ................................. Shareholder Guide; How the Fund Values its
Shares; How the Fund is Managed
Item 8. Redemption or Repurchase ............................................. Shareholder Guide; How the Fund Values its
Shares; General Information
Item 9. Pending Legal Proceedings ............................................ Not Applicable
PART B
Item 10. Cover Page ........................................................... Cover Page
Item 11. Table of Contents .................................................... Table of Contents
Item 12. General Information and History ...................................... General Information
Item 13. Investment Objectives and Policies ................................... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund ............................................... Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of Securities .................. Not Applicable
Item 16. Investment Advisory and Other Services ............................... Manager; Distributor; Custodian, Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other Practices ............................. Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities ................................... Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Offered ......... Purchase and Redemption of Fund Shares;
Shareholder Investment Account; Net Asset
Value
Item 20. Tax Status ........................................................... Taxes
Item 21. Underwriters ......................................................... Distributor
Item 22. Calculation of Performance Data ...................................... Performance Information
Item 23. Financial Statements ................................................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
<PAGE>
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
- --------------------------------------------------------------------------------
Prospectus dated August __, 1997
- --------------------------------------------------------------------------------
Prudential International Bond Fund, Inc. (the Fund), formerly known as The
Global Government Plus Fund, Inc., is an open-end, non-diversified, management
investment company whose investment objective is to seek total return, the
components of which are current income and capital appreciation. There is no
assurance that the Fund will achieve its investment objective. The Fund seeks to
achieve its objective by investing at least 65% of its total assets in debt
securities of issuers located in at least three countries, excluding the United
States (except in periods of market weakness). The Fund invests in foreign debt
securities issued by foreign corporate issuers as well as securities issued or
guaranteed by foreign governments, semi-governmental entities, governmental
agencies, supranational entities and other governmental entities (Governmental
Entities). The Fund generally maintains an average portfolio maturity of between
3 and 15 years. The Fund's investment adviser seeks to achieve high dividends
through management of yield, maturity and currency considerations affecting such
securities. In particular, the Fund's investment adviser selects debt securities
which, in its judgment, will produce a high yield with currency stability
relative to the U.S. dollar or have a combined yield, capital or currency
appreciation potential to produce an overall return consistent with the Fund's
objective. The Fund may also purchase and sell certain derivatives, including
put and call options on securities and foreign currencies and engage in
transactions involving futures contracts and options thereon (including interest
rate futures contracts, and currency futures) and forward currency exchange
contracts to hedge its portfolio and to attempt to enhance return. See "How the
Fund Invests--Investment Objective and Policies." THE FUND IS NON-DIVERSIFIED
AND MAY INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ONE OR MORE
ISSUERS. INVESTMENT IN A NON-DIVERSIFIED PORTFOLIO INVOLVES GREATER RISK THAN
INVESTMENT IN A DIVERSIFIED PORTFOLIO. IN ADDITION, THE FUND MAY INVEST UP TO
15% OF ITS TOTAL ASSETS IN NON-INVESTMENT GRADE SECURITIES, WHICH MAY ENTAIL
ADDITIONAL RISKS. There can be no assurance that the Fund's investment objective
will be achieved. Investing in foreign securities, options contracts and futures
contracts and options thereon involves considerations and possible risks which
are different from those ordinarily associated with investing in U.S.
securities. See "How the Fund Invests--Risk Factors." The Fund's address is
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and
its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated August __, 1997, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL INTERNATIONAL BOND FUND, INC.?
Prudential International Bond Fund, Inc. is a mutual fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
non-diversified, management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek total return, the components of
which are current income and capital appreciation. It seeks to achieve this
objective by investing at least 65% of the Fund's total assets in debt
securities of issuers located in at least three countries, excluding the United
States (except in periods of market weakness). The Fund invests in foreign debt
securities issued by foreign corporate issuers as well as securities issued or
guaranteed by foreign governments, semi-governmental entities, governmental
agencies, supranational entities and other governmental entities (Governmental
Entities). There can be no assurance that the Fund's objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page __.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
Investing in securities issued by foreign governments and foreign corporate
issuers involves considerations and risks not typically associated with
investing in obligations issued by the U.S. Government and domestic
corporations. See "How the Fund Invests--Risk Factors--Foreign Investments" at
page __. The Fund generally maintains an average portfolio maturity of between 3
and 15 years. The Fund may invest up to 35% of its total assets in obligations
of United States issuers. The Fund may also engage in various hedging and return
enhancement strategies, including derivatives, which may be considered
speculative and may result in higher risks and costs to the Fund. The Fund may
seek to protect and enhance dividend return through the use of options, futures
and foreign currency transactions. See "How the Fund Invests--Risk
Factors--Hedging and Return Enhancement Strategies" at page __. In addition, the
Fund may invest up to 15% of its total assets in securities rated below
investment grade, but with a minimum rating of B, as determined by Moody's
Investors Service (Moody's), Standard & Poor's Ratings Group (S&P) or by another
nationally recognized statistical ratings organization (NRSRO), or if unrated,
deemed to be of equivalent quality by the investment adviser. Lower-rated
securities are subject to a greater risk of loss of principal and interest. See
"How the Fund Invests--Risk Factors--Medium and Lower-Rated Securities" at page
__. The amount of income available for distribution to shareholders will be
affected by any foreign currency gains or losses generated by the Fund upon the
disposition of debt securities denominated in a foreign currency and by certain
hedging activities of the Fund. Gains and losses on security and currency
transactions cannot be predicted. This fact, coupled with the different tax and
accounting treatment of certain currency gains and losses, increases the
likelihood of distributions in whole or in part constituting a return of capital
to shareholders. See "Taxes, Dividends and Distributions" at page __. As with an
investment in any mutual fund, an investment in this Fund can decrease in value
and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of .75
of 1% of the Fund's average daily net assets up to US $1 billion, and .70 of 1%
of such assets in excess of US $1 billion. As of June 30, 1997, PIFM served as
manager or administrator to ___ investment companies, including __ mutual funds,
with aggregate assets of approximately $___ billion. The Prudential Investment
Corporation, which does business under the name of Prudential Investments (PI,
the Subadviser or the investment adviser), furnishes investment advisory
services in connection with the management of the Fund under a Subadvisory
Agreement with PIFM. See "How the Fund is Managed--Manager" at page __.
2
<PAGE>
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares and is
paid a distribution and service fee with respect to Class A shares which is
currently being charged at the annual rate of .15 of 1% of the average daily net
assets of the Class A shares and is paid a distribution and service fee with
respect to Class B and Class C shares which is currently being charged at the
annual rate of .75 of 1% of the average daily net assets of the Class B and
Class C shares. Prudential Securities incurs the expense of distributing the
Fund's Class Z shares under a Distribution Agreement with the Fund, none of
which is reimbursed or paid for by the Fund. See "How the Fund is
Managed--Distributor" at page __.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page __ and "Shareholder
Guide--Shareholder Services" at page __.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See "How
the Fund Values its Shares" at page __ and "Shareholder Guide--How to Buy Shares
of the Fund" at page __.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
O Class A Shares: Sold with an initial sales charge of up to 4% of the
offering price.
O Class B Shares: Sold without an initial sales charge but are subject
to a contingent deferred sales charge or CDSC (declining from 5% to
zero of the lower of the amount invested or the redemption proceeds)
which will be imposed on certain redemptions made within six years of
purchase. Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject to lower
ongoing distribution-related expenses) approximately seven years after
purchase.
O Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions. Like Class B
shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not convert
to another class.
O Class Z Shares: Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z shares are not
subject to any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page __.
HOW DO I SELL MY SHARES?
You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page __.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net
investment income and make distributions of any net capital gains at least
annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. The amount of income available for
distribution to shareholders as ordinary income will be affected by any foreign
currency gains or losses generated by the Fund upon the disposition of debt
securities denominated in a foreign currency and by certain hedging activities
of the Fund. See "Taxes, Dividends and Distributions" at page __.
3
<PAGE>
<TABLE>
<CAPTION>
FUND EXPENSES
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ............. 4% None None None
Maximum Deferred Sales Load (as a percentage
of original purchase price or redemption
price, whichever is lower) ...................... None 5% during the first year, 1% on None
decreasing by 1% annually redemptions
to 1% in the fifth year and made within
1% in the sixth year and one year
0% in the seventh year* of purchase
Maximum Sales Load Imposed on
Reinvested Dividends ............................ None None None None
Redemption Fees .................................. None None None None
Exchange Fees .................................... None None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES** CLASS B SHARES CLASS C SHARES CLASS Z SHARES***
(AS A PERCENTAGE OF AVERAGE NET ASSETS) ---------------- -------------- -------------- -----------------
Management Fees .................................. .75% .75% .75% .75%
12b-1 Fees (After Reduction) ..................... .15%++ .75%++ .75%++ None
Other Expenses ................................... .59% .59% .59% .59%
---- ---- ---- ----
Total Fund Operating Expenses
(After Reduction) ............................... 1.49% 2.09% 2.09% 1.34%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period: Class A ...................... $55 $85 $118 $211
Class B ...................... $71 $95 $122 $220
Class C ...................... $31 $65 $112 $242
Class Z*** ................... $14 $42 -- --
You would pay the following expenses on the same investment,
assuming no redemption: Class A ...................... $55 $85 $118 $211
Class B ...................... $21 $65 $112 $220
Class C ...................... $21 $65 $112 $242
Class Z*** ................... $14 $42 -- --
</TABLE>
The above example is based on data for the Fund's fiscal year ended December 31,
1996. The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Fund, such as directors' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian (domestic and foreign) fees.
- ----------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Based on expenses expected to have been incurred if the Class A
Distribution and Service Plan had been in existence throughout the fiscal
year ended December 31, 1996.
*** Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended December 31,
1996.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A, Class B and Class C Distribution and Service Plans
provide that the Fund may pay up to an annual rate of .30 of 1%, 1% and 1%
of average daily net assets of the Class A, Class B and Class C shares,
respectively, the Distributor has agreed to limit its distribution fee with
respect to Class A, Class B and Class C shares of the Fund to no more than
.15 of 1%, .75 of 1% and .75 of 1% of the average daily net assets of the
Class A, Class B and Class C shares, respectively, for the fiscal year
ending December 31, 1997. Total operating expenses without such limitation
would be 1.64% for Class A shares, 2.34% for Class B shares and 2.34%
for Class C shares. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights with respect to each of the five years
in the period ended December 31, 1996 have been audited by Price Waterhouse LLP,
independent accountants whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholders Services--Reports to Shareholders."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995(c) 1994(c) 1993(c) 1992(c) 1991(c) 1990(c)
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period ..................... $ 7.68 $ 6.76 $ 7.84 $ 7.38 $ 8.28 $ 8.25 $ 8.25
------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income .................... .56 .48 .45 .55 .67 .66 .59
Net realized and unrealized
gain (loss) on investments
and foreign currencies .................. .28 1.13 (.97) .74 (.70) .09 .06
------- -------- -------- -------- -------- -------- --------
Total from investment
operations ............................. .84 1.61 (.52) 1.29 (.03) .75 .65
------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income ....................... (.67) (.48) (.23) (.23) (.67) (.66) (.59)
Distributions in excess of net
investment income ....................... (.40) (.21) -- -- -- -- --
Distributions from net realized
capital gains ........................... -- -- (.10) (.54) (.20) -- --
Distributions in excess of
net capital gains ....................... -- -- -- (.06) -- -- --
Tax return of capital
distributions ........................... -- -- (.23) -- -- (.06) (.21)
------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions .......................... (1.07) (.69) (.56) (.83) (.87) (.72) (.80)
------- -------- -------- -------- -------- -------- --------
Increase resulting from Fund
share transactions ..................... -- -- -- -- -- .15
------- -------- -------- -------- -------- -------- --------
Redemption fee retained by Fund .......... .18 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 7.63 $ 7.68 $ 6.76 $ 7.84 $ 7.38 $ 8.28 $ 8.25
======= ======== ======== ======== ======== ======== ========
Market price per share,
end of period .......................... $ N/A $ 7.375 $ 5.625 $ 7.00 $ 7.00 $ 7.75 $ 7.25
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN
based on(e):
Market Price ........................... N/A 44.39% (12.04)% 11.57% 1.25% 17.44% 8.04%
Net asset value ........................ 14.02% 25.14% (5.62)% 18.38% (0.08)% 10.45% 11.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .......... $125,637 $350,339 $308,703 $357,783 $336,780 $377,911 $376,722
Average net assets (000) ................. $180,588 $342,741 $331,421 $361,374 $364,037 $364,072 $382,943
Ratios to average net assets:
Expenses, including distribution fees ... 1.48% 1.05% 1.11% 1.07% 1.15% 1.29% 1.47%
Expenses, excluding distribution fees ... 1.34% 1.05% 1.11% 1.07% 1.15% 1.29% 1.47%
Net investment income ................... 6.45% 6.37% 6.21% 6.93% 8.36% 8.30% 7.40%
Portfolio turnover ....................... 38% 203% 526% 441% 346% 267% 503%
<CAPTION>
JULY 31, 1987(a)
YEAR ENDED DECEMBER 31, THROUGH
----------------------- DECEMBER 31,
1989(c) 1988(c) 1987(c)
-------- -------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period ..................... $ 8.95 $ 9.86 $ 9.27(d)
-------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income .................... .59 .64 .25
Net realized and unrealized
gain (loss) on investments
and foreign currencies .................. (.19) (.35) .75
-------- -------- --------
Total from investment
operations ............................. .40 .29 1.00
-------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income ....................... (.59) (.64) (.25)
Distributions in excess of net
investment income ....................... -- -- --
Distributions from net realized
capital gains ........................... -- -- (.11)
Distributions in excess of
net capital gains ....................... -- (.32) --
Tax return of capital
distributions ........................... (.51) (.24) (.05)
-------- -------- --------
Total dividends and
distributions .......................... (1.10) (1.20) (.41)
-------- -------- --------
Increase resulting from Fund
share transactions ..................... -- -- --
-------- -------- --------
Redemption fee retained by Fund .......... -- -- --
-------- -------- --------
Net asset value, end of period ........... $ 8.25 $ 8.95 $ 9.86
======== ======== ========
Market price per share,
end of period .......................... $ 7.50 $ 9.125 $ 10.00
======== ======== ========
TOTAL INVESTMENT RETURN
based on(e):
Market Price ........................... (5.87)% 3.83% 12.10%
Net asset value ........................ 5.52% 3.21% 10.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .......... $434,245 $469,141 $513,225
Average net assets (000) ................. $440,037 $488,462 $499,539
Ratios to average net assets:
Expenses, including distribution fees ... 1.59% 1.59% 1.75%(b)
Expenses, excluding distribution fees ... 1.59% 1.59% 1.75%(b)
Net investment income ................... 7.00% 6.87% 6.22%(b)
Portfolio turnover ....................... 477% 452% 97%
</TABLE>
- ----------
(a) Commencement of investment operations.
(b) Annualized.
(c) During these periods, the Fund operated as a closed-end investment company.
Effective January 15, 1996, the Fund commenced operations as an open-end
investment company. Accordingly, historical expenses and ratios of expenses
to average net assets are not necessarily indicative of future expenses and
related ratios.
(d) Net of underwriting discount ($.70) and offering costs ($.03).
(e) Total investment return based on net asset value is calculated assuming a
purchase of common stock at the current net asset value on the first day
and a sale at the current net asset value on the last day of each period
reported. Total return does not consider the effect of sales load. Prior to
January 15, 1996 the Fund operated as a closed-end investment company and
total investment return based on market value was calculated assuming a
purchase of common stock at the current market value on the first day and a
sale at the current market value on the last day of each period reported.
Dividends and distributions are assumed for purposes of this calculation to
be reinvested at prices obtained under the dividend reinvestment plan. This
calculation does not reflect brokerage commissions. Total return for
periods of less than one full year are not annualized.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
(CLASS B AND C SHARES)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class B share and
Class C share, respectively, of common stock outstanding, total return, ratios
to average net assets and other supplemental data for the period indicated. The
information is based on data contained in the financial statements. Further
performance information is contained in the annual report, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------ -------------------
JANUARY 15, 1996(a) JANUARY 15, 1996(a)
THROUGH THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1996
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<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .......................... $7.72 $7.72
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INCOME FROM INVESTMENT OPERATIONS
Net investment income ......................................... .52 .52
Net realized and unrealized gain (loss) on investments
and foreign currencies transactions .......................... .25 .25
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Total from investment operations ............................. .77 .77
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LESS DISTRIBUTIONS
Dividends from net investment income .......................... (.63) (.63)
Distributions in excess of net investment income .............. (.40) (.40)
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Total dividends and distributions ............................ (1.03) (1.03)
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Redemption fee retained by Fund ............................... .18 .18
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Net asset value, end of period ................................ $7.64 $7.64
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TOTAL INVESTMENT RETURN(c): ................................... 12.86% 12.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ............................... $ 75 $ 13
Average net assets (000) ...................................... $ 23 $ 8
Ratios to average net assets(b):
Expenses, including distribution fees ........................ 2.09% 2.09%
Expenses, excluding distribution fees ........................ 1.34% 1.34%
Net investment income ........................................ 5.85% 5.85%
Portfolio turnover ............................................ 38% 38%
</TABLE>
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(a) Commencement of operations.
(b) Annualized.
(c) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
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HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TOTAL RETURN, THE COMPONENTS OF
WHICH ARE CURRENT INCOME AND CAPITAL APPRECIATION. THERE IS NO ASSURANCE THAT
THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AS WITH AN INVESTMENT IN ANY
MUTUAL FUND, AN INVESTMENT IN THIS FUND CAN DECREASE IN VALUE AND YOU CAN LOSE
MONEY.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY OF THE FUND.
FUNDAMENTAL POLICIES MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A
MAJORITY OF THE FUND'S OUTSTANDING VOTING SECURITIES AS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND
POLICIES THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
THE FUND ATTEMPTS TO ACHIEVE ITS OBJECTIVE BY INVESTING AT LEAST 65% OF ITS
TOTAL ASSETS IN DEBT SECURITIES OF ISSUERS LOCATED IN AT LEAST THREE COUNTRIES,
EXCLUDING THE UNITED STATES (EXCEPT IN PERIODS OF MARKET WEAKNESS). THE FUND
INVESTS IN FOREIGN DEBT SECURITIES ISSUED BY FOREIGN CORPORATE ISSUERS AS WELL
AS SECURITIES ISSUED OR GUARANTEED BY GOVERNMENTS, SEMI-GOVERNMENTAL ENTITIES,
GOVERNMENTAL AGENCIES, SUPRANATIONAL ENTITIES AND OTHER GOVERNMENTAL ENTITIES
(COLLECTIVELY "GOVERNMENTAL ENTITIES"). The investment adviser considers a bond
to be any interest-bearing security that obligates the issuer to pay the
bondholder specified sums of money on specified dates and generally requires the
issuer to repay the principal amount of the loan at maturity. The Fund's
investment adviser seeks to achieve high dividends through management of yield,
maturity and currency considerations affecting such securities. In particular,
the Fund's investment adviser selects debt securities which, in its judgment,
will produce a high yield with currency stability relative to the U.S. dollar or
have a combined yield, capital or currency appreciation potential to produce an
overall return consistent with the Fund's objective. See "Investment Objective
and Policies" in the Statement of Additional Information.
THE FUND INVESTS PRIMARILY IN INVESTMENT GRADE DEBT SECURITIES (I.E., THOSE
RATED IN ONE OF THE FOUR HIGHEST RATING CATEGORIES BY MOODY'S, S&P'S OR ANOTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO)), OR IN NON-RATED
SECURITIES DETERMINED BY THE FUND'S INVESTMENT ADVISER TO BE OF EQUIVALENT
QUALITY. THE FUND MAY INVEST UP TO 15% OF ITS TOTAL ASSETS IN DEBT SECURITIES
RATED BELOW INVESTMENT GRADE, WITH A MINIMUM RATING OF B, BY EITHER S&P'S OR
MOODY'S OR COMPARABLY RATED BY ANOTHER NRSRO, OR, IF UNRATED, DEEMED TO BE OF
EQUIVALENT QUALITY BY THE INVESTMENT ADVISER. SEE "RISK FACTORS--MEDIUM AND
LOWER-RATED SECURITIES" BELOW.
The Fund will not normally invest in securities denominated in a particular
foreign currency if immediately thereafter securities denominated in such
currency would exceed 30% of the Fund's total assets, unless, in the judgment of
the investment adviser, the particular currency appears likely to appreciate
significantly relative to the U.S. dollar. However, the Fund may invest up to
50% of its total assets in securities denominated in Japanese, British or German
currencies. 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.
In periods of market weakness and for temporary defensive and cash
management purposes, the Fund may invest without limit in U.S. Treasury or other
dollar-denominated debt securities or high-quality money market instruments,
including commercial paper of domestic and foreign corporations, certificates of
deposit, bankers' acceptances and other obligations of domestic and foreign
banks and short-term obligations issued or guaranteed by the U.S. Government,
its instrumentalities or agencies without regard to maturity. After reviewing
the yields and maturities available on all eligible governmental investments and
currencies, the investment adviser will consider other factors bearing on the
selection of investments, such as the protection and enhancement of net asset
value and maintenance of a varied, liquid, high quality portfolio.
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<PAGE>
The Fund may invest up to 35% of its total assets in obligations of
issuers, including U.S. Governmental Entities, located in the United States. See
"U.S. Government Securities" below. The Fund may also engage in various
strategies using derivatives, including the use of options on securities and
currencies and futures contracts and options thereon. See "Hedging and Return
Enhancement Strategies" below.
The Fund maintains, under normal circumstances, an average weighted
maturity of between 3 and 15 years. In general, the average weighted maturity of
the Fund's portfolio is not expected to exceed 15 years; it is not likely to be
less than 3 years except for temporary defensive purposes. The average maturity
of the Fund's portfolio will be actively managed in light of market conditions
and trends. Generally, when the investment adviser expects interest rates to
rise, the average maturity of the Fund's portfolio will be shortened.
Conversely, when the investment adviser expects interest rates to fall, the
average maturity of the Fund's portfolio will be lengthened.
THE FUND IS A "NON-DIVERSIFIED" INVESTMENT COMPANY AND MAY INVEST MORE THAN
5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ONE OR MORE ISSUERS. However, the
Fund intends to limit its investments in the securities of any one bank or
corporation to 10% of its total assets at the time of purchase. 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 or, as to 50% of
its assets, more than 5% in any one issuer. 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.
FOREIGN SECURITIES
THE FUND MAY INVEST IN FOREIGN SECURITIES OF DEVELOPED COUNTRIES AND
DEVELOPING OR EMERGING MARKET COUNTRIES including, among others, Canada, Chile,
China, Columbia, the Czech Republic, Australia, Greece, Hong Kong, Indonesia,
Israel, Japan, New Zealand, Portugal, Singapore, Austria, Belgium, Denmark,
Finland, France, Ireland, Italy, Malaysia, the Netherlands, Norway, South Korea,
Spain, Sweden, Switzerland, Thailand, United Kingdom and Germany. Foreign
securities may be denominated in U.S. dollars or in foreign currencies
(including debt securities of an issuer in any country denominated in the
currency of another above-listed country). See "Risk Factors--Foreign
Investments" for more information.
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, UNDER CERTAIN CONDITIONS, HELP TO PROTECT AGAINST
DECLINES IN THE U.S. DOLLAR VALUE OF INCOME AVAILABLE FOR DISTRIBUTION TO
SHAREHOLDERS AND DECLINES IN THE NET ASSET VALUE OF THE FUND'S SHARES RESULTING
FROM ADVERSE CHANGES IN CURRENCY EXCHANGE RATES. For example, the return
available from securities denominated in a particular foreign currency would
diminish in the event the value of the U.S. dollar increased against such
currency. Such a decline could be partially or completely offset by an increase
in value of a cross-currency hedge involving a forward exchange contract to sell
a different foreign currency, where such contract is available on terms more
advantageous to the Fund than a contract to sell the currency in which the
position being hedged is denominated. Cross-currency hedges can, therefore,
under certain conditions, provide protection of net asset value in the event of
a general rise in the U.S. dollar against foreign currencies. However, there can
be no assurance that the Fund will be able to engage in cross-currency hedging
or that foreign exchange rate relationships will be sufficiently predictable to
enable the investment adviser to employ cross-currency hedging techniques
successfully. A cross-currency hedge cannot protect against exchange rate risks
perfectly, and if the investment adviser is incorrect in its judgment of future
exchange rate relationships, the Fund could be in a less advantageous position
than if such a hedge had not been established.
THE FUND MAY INVEST WITHOUT LIMITATION IN COMMERCIAL PAPER AND OTHER
INSTRUMENTS WHICH ARE INDEXED TO CERTAIN SPECIFIC FOREIGN CURRENCY EXCHANGE
RATES. The terms of such instruments provide that its principal amount is
adjusted
8
<PAGE>
upwards or downwards (but not below zero) at maturity to reflect changes in the
exchange rate between two currencies while the obligation is outstanding. The
Fund will purchase such instruments with the currency in which they are
denominated and, at maturity, will receive interest and principal payments
thereon in that currency, but the amount of principal payable by the issuer at
maturity will change in proportion to the change (if any) in the exchange rate
between the two specified currencies between the date the instrument is issued
and the date the instrument matures. While such instruments entail the risk of
loss of principal, the potential for realizing gains as a result of changes in
foreign currency exchange rates enables the Fund to hedge (or cross-hedge)
against a decline in the U.S. dollar value of investments denominated in foreign
currencies while providing an attractive money market rate of return.
FOREIGN GOVERNMENT SECURITIES. "FOREIGN GOVERNMENT SECURITIES" INCLUDE DEBT
SECURITIES ISSUED OR GUARANTEED, AS TO PAYMENT OF PRINCIPAL AND INTEREST, BY
GOVERNMENTS, SEMI-GOVERNMENTAL ENTITIES, GOVERNMENTAL AGENCIES, SUPRANATIONAL
ENTITIES AND OTHER GOVERNMENTAL ENTITIES. A "supranational entity" is an entity
constituted by the national governments of several countries to promote economic
development. Examples of such supranational entities include, among others, the
World Bank (International Bank for Reconstruction and Development), the European
Investment Bank and the Asian Development Bank. Debt securities of
"semi-governmental entities" are issued by entities owned by a national, state,
or equivalent government or are obligations of a political unit that are not
backed by the national government's "full faith and credit" and general taxing
powers. Examples of semi-governmental issuers include, among others, the
Province of Ontario and the City of Stockholm. "Foreign Government securities"
also includes debt securities of Government Entities denominated in European
Currency Units. A European Currency Unit represents specified amounts of the
currencies of certain of the member states of the European Union.
Foreign Government securities also includes mortgage-backed securities
issued or guaranteed by foreign Governmental Entities including
semi-governmental entities and Brady Bonds, which are long-term bonds issued by
Governmental Entities in developing countries as part of a restructuring of
their commercial loans. See "Investment Objective and Policies--Foreign
Securities" in the Statement of Additional Information.
CORPORATE AND OTHER NON-GOVERNMENT DEBT SECURITIES
THE FUND MAY INVEST IN CORPORATE AND OTHER NON-GOVERNMENT DEBT OBLIGATIONS
OF FOREIGN AND DOMESTIC ISSUERS INCLUDING CONVERTIBLE SECURITIES AND (SUBJECT TO
THE FUND'S MATURITY LIMITATIONS) IN INTERMEDIATE-TERM AND LONG-TERM BANK DEBT
SECURITIES IN THE UNITED STATES AND IN FOREIGN COUNTRIES DENOMINATED IN U.S.
DOLLARS OR IN FOREIGN CURRENCIES. ISSUERS ARE NOT LIMITED TO THE CORPORATE FORM
OF ORGANIZATION. Bonds and other debt securities are used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest and must repay the amount borrowed at maturity. Some debt securities,
such as zero coupon bonds, do not pay current interest but are purchased at a
discount from their face values. The discount approximates the total amount of
interest the security will accrue and compound over the period until maturity or
the particular interest payment date at a rate of interest reflecting the market
rate of the security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest.
These investments benefit the issuer by mitigating its need for cash to meet
debt service, but also require a higher rate of return to attract investors who
are willing to defer receipt of cash. These investments may experience greater
volatility in market value than securities that make regular payments of
interest. The Fund accrues income on these investments for tax and accounting
purposes, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Fund's distribution obligations, in which case the
Fund will forego the purchase of additional income producing assets with these
funds. Zero coupon securities include corporate and foreign and U.S. government
securities. Pay-in-kind securities have their interest payable upon maturity by
delivery of additional securities. Deferred payment securities are securities
that remain a zero coupon security until a predetermined date, at which time the
stated coupon rate becomes effective and interest payable at regular intervals.
Certain debt securities are subject to call provisions. Zero coupon, pay-in-kind
and deferred payment securities may be
9
<PAGE>
subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparable rated securities paying cash interest
at regular interest payment periods. See "Investment Objective and
Policies--Corporate and Other Non-Government Debt Obligations" in the Statement
of Additional Information.
THE FUND IS PERMITTED TO INVEST IN ADJUSTABLE RATE OR FLOATING RATE DEBT
SECURITIES, INCLUDING CORPORATE SECURITIES AND SECURITIES ISSUED BY U.S.
GOVERNMENT AGENCIES, WHOSE INTEREST RATE IS CALCULATED BY REFERENCE TO A
SPECIFIED INDEX SUCH AS THE CONSTANT MATURITY TREASURY RATE, THE T-BILL RATE OR
LIBOR (LONDON INTERBANK OFFERED RATE) AND IS RESET PERIODICALLY. Adjustable rate
securities allow the Fund to participate in increases in interest rates through
these periodic adjustments. The value of adjustable or floating rate securities
will, like other debt securities, generally vary inversely with changes in
prevailing interest rates. The value of adjustable or floating rate securities
is unlikely to rise in periods of declining interest rates to the same extent as
fixed rate instruments of similar maturities. In periods of rising interest
rates, changes in the coupon will lag behind changes in the market rate
resulting in a lower net asset value until the coupon resets to market rates.
U.S. GOVERNMENT SECURITIES
The U.S. Government securities in which the Fund may invest include U.S.
Treasury securities, securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and mortgage-related securities issued by U.S.
Government agencies or instrumentalities.
U.S. TREASURY SECURITIES. The Fund may invest in U.S. Treasury securities,
including Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. Government and,
as such, are backed by the "full faith and credit" of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in debt securities issued or guaranteed
by agencies or instrumentalities of the U.S. Government, including, but not
limited to, Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
securities. Obligations of GNMA, the Farmers Home Administration and the
Export-Import Bank are backed by the "full faith and credit" of the United
States. In the case of securities not backed by the "full faith and credit" of
the United States, the Fund must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment. Such securities include
obligations issued by the Student Loan Marketing Association (SLMA), FNMA and
FHLMC, each of which may borrow from the U.S. Treasury to meet its obligations,
although the U.S. Treasury is under no obligation to lend to such entities.
The Fund may invest in component parts of U.S. Government debt securities,
namely either the corpus (principal) of such obligations or one or more of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of (i) obligations from which the interest coupons have been
stripped; (ii) the interest coupons that are stripped; (iii) book-entries at a
Federal Reserve member bank representing ownership of obligation components; or
(iv) receipts evidencing the component parts (corpus or coupons) of U.S.
Government obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of U.S. Government obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. The Fund may also invest in custodial receipts held by a third party that
are not U.S. Government securities. See "Investment Objective and Policies--U.S.
Government Securities--Custodial Receipts" in the Statement of Additional
Information.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. The Fund may invest in mortgage-backed
securities and other derivative mortgage products, including those representing
an undivided ownership interest in a pool of mortgages, e.g., GNMA, FNMA and
FHLMC Certificates where the U.S.
10
<PAGE>
Government or its agencies or instrumentalities guarantees the payment of
interest and principal of these securities. However, these guarantees do not
extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates, nor do these guarantees extend to the yield
or value of the Fund's shares. See "Investment Objective and Policies--U.S.
Government Securities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees.
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including,
among others, commercial paper of a U.S. or non-U.S. company, foreign government
securities, certificates of deposit, bankers' acceptances and time deposits of
domestic and foreign banks, and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar-denominated or denominated in a foreign currency. Money market
instruments typically have a maturity of one year or less as measured from the
date of purchase. The Fund may invest in money market instruments without limit
for temporary defensive and cash management purposes. To the extent the Fund
otherwise invests in money market instruments, it is subject to the limitations
described above.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund does not currently intend to invest in repurchase agreements whose
maturities exceed one year. The Fund's repurchase agreements will at all times
be fully collateralized in an amount at least equal to the resale price. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss. The Fund participates in a joint
repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the SEC. See "Additional
Investment Policies--Repurchase Agreements" in the Statement of Additional
Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. The Fund's investment in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing Rule 144A securities. Repurchase agreements subject to demand are
deemed to have a maturity equal to the applicable notice period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place a month or more in the future in order to secure what is considered to be
an advantageous price and yield to the Fund at the
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<PAGE>
time of entering into the transaction. While the Fund will only purchase
securities on a when-issued or delayed delivery basis with the intention of
acquiring the securities, the Fund may sell the securities before the settlement
date, if it is deemed advisable. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, the Fund will
record the transaction and thereafter reflect the value, each day, of such
security in determining the net asset value of the Fund. At the time of delivery
of the securities, the value may be more or less than the purchase price. The
Fund's custodian will maintain, in a segregated account of the Fund, cash, U. S.
Government securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, having a value equal to or greater than the Fund's
purchase commitments. Subject to this requirement, the Fund may purchase
securities on such basis without limit.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated at the time of the borrowing) from banks for temporary,
extraordinary or emergency purposes, for the clearance of transactions or for
investment purposes. The Fund may pledge up to 20% of its total assets to secure
these borrowings. If the Fund's asset coverage for borrowing falls below 300%,
the Fund will take prompt action to reduce its borrowings. If the 300% asset
coverage should decline as a result of market fluctuations or other reasons, the
Fund may be required to sell portfolio securities to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. Such liquidations could
cause the Fund to realize gains on securities held for less than three months.
Because no more than 30% of the Fund's gross income may be derived from the sale
or disposition of securities held for less than three months to maintain the
Fund's status as a regulated investment company under the Internal Revenue Code,
such gains would limit the ability of the Fund to sell other securities held for
less than three months that the Fund might wish to sell. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
Borrowing for investment purposes is generally known as "leveraging."
Leveraging exaggerates the effect on net asset value of any increase or decrease
in the market value of the Fund's portfolio. Money borrowed for leveraging will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased and may exceed the income from the securities
purchased. In addition, the Fund may be required to maintain minimum average
balances in connection with such borrowing or pay a commitment fee to maintain a
line of credit, which would increase the cost of borrowing over the stated
interest rate.
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, its portfolio turnover rate
may exceed 100%, although the rate is not expected to exceed 250%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions (or mark-ups) and other transaction rates, which will be borne
directly by the Fund. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information. In addition, high portfolio turnover may
result in increased short-term capital gains, which, when distributed to
shareholders, are treated as ordinary income. See "Taxes, Dividends and
Distributions."
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. THE FUND, AND THUS THE INVESTOR, MAY
LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies
currently include the use of options, forward currency exchange contracts and
futures contracts and options thereon (including interest rate futures contracts
and currency futures and options thereon.) The Fund's ability to use these
strategies may be limited by market
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conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Additional Investment
Policies" in the Statement of Additional Information. New financial products and
risk management techniques continue to be developed and the Fund may use these
new investments and techniques to the extent consistent with its investment
objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON U.S. AND FOREIGN SECURITIES
EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ATTEMPT TO ENHANCE RETURN OR TO
HEDGE ITS PORTFOLIO INVESTMENTS. THESE OPTIONS WILL BE ON DEBT SECURITIES,
AGGREGATES OF DEBT SECURITIES, FINANCIAL INDICES, U.S. GOVERNMENT SECURITIES
(LISTED ON AN EXCHANGE AND OVER-THE-COUNTER, I.E., PURCHASED OR SOLD THROUGH
U.S. GOVERNMENT SECURITIES DEALERS), FOREIGN GOVERNMENT SECURITIES AND FOREIGN
CURRENCIES. The Fund may write covered put and call options to attempt to
generate additional income through the receipt of premiums, purchase put options
in an effort to protect the value of a security that it owns against a decline
in market value and purchase call options in an effort to protect against an
increase in price of securities (or currencies) it intends to purchase. The Fund
may also purchase put and call options to offset previously written put and call
options of the same type. See "Additional Investment Policies--Options on
Securities" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY
SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE).
The writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, it gives up the potential for gain on the underlying securities or
currency in excess of the exercise price of the option during the period that
the option is open. There is no limitation on the amount of call options the
Fund may write.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered if,
as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or (ii) maintains in a segregated account,
cash, U.S. Government securities, equity securities or other liquid unencumbered
assets, marked-to-market daily, in an amount equal to or greater than its
obligation under the option. Under the first circumstance, the Fund's losses are
limited because it owns the underlying security; under the second circumstance,
in the case of a written call option, the Fund's losses are potentially
unlimited. See "Additional Investment Policies--Options on Securities and
Additional Risks of Options, Futures Contracts, Options on Futures Contracts and
Forward Contracts" in the Statement of Additional Information. THE FUND WILL NOT
PURCHASE PUT OR CALL OPTIONS ON SECURITIES OR CURRENCIES IF, AS A RESULT
THEREOF, THEIR VALUE WOULD EXCEED 5% OF THE FUND'S NET ASSETS.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. The Fund may enter into such contracts on a spot, i.e.,
cash, basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract.
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THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in or convertible into that currency or in a different currency (cross
hedge). The Fund may also cross hedge its currency exposure under circumstances
where the investment adviser believes that the currency in which a security is
denominated may deteriorate against the dollar and that the possible loss in
value can be hedged, return can be enhanced and risks can be managed by entering
into forward contracts to sell the deteriorating currency and buy a currency
that is expected to appreciate in relation to the dollar. Although there are no
limits on the number of forward contracts which the Fund may enter into, the
Fund may not position hedge (including cross-hedges) with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of forward currency) of the
securities being hedged. See "Additional Investment Policies--Forward Currency
Exchange Contracts" in the Statement of Additional Information.
THE FUND WILL NOT ENTER INTO FORWARD CONTRACTS TO PURCHASE OR SELL CURRENCY
IF, AS A RESULT THEREOF, THE COST OF CLOSING ALL SUCH CONTRACTS EXCEEDS 5% OF
THE FUND'S NET ASSETS.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING AND RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN
ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC).
These futures contracts and related options will be on debt securities,
aggregates of debt securities, financial indices, U.S. Government securities,
Foreign Government securities, foreign currencies and composite foreign
currencies. THE FUND, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. A financial futures contract is an
agreement to purchase or sell an agreed amount of securities or currencies at a
set price for delivery in the future.
THE FUND MAY NOT PURCHASE OR SELL FUTURES CONTRACTS AND RELATED OPTIONS TO
ATTEMPT TO ENHANCE RETURN OR FOR RISK MANAGEMENT PURPOSES, IF IMMEDIATELY
THEREAFTER THE SUM OF THE AMOUNT OF INITIAL MARGIN DEPOSITS ON THE FUND'S
EXISTING FUTURES AND OPTIONS ON FUTURES AND PREMIUMS PAID FOR SUCH RELATED
OPTIONS WOULD EXCEED 5% OF THE MARKET VALUE OF THE FUND'S TOTAL ASSETS. THE FUND
MAY PURCHASE AND SELL FUTURES CONTRACTS AND RELATED OPTIONS WITHOUT LIMITATION,
FOR BONA FIDE HEDGING PURPOSES IN ACCORDANCE WITH REGULATIONS OF THE CFTC (I.E.,
TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS). THE VALUE OF ALL FUTURES CONTRACTS
SOLD WILL NOT EXCEED THE TOTAL MARKET VALUE OF THE FUND'S INVESTMENTS.
Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If the Fund does not hold the
security or currency underlying the futures contract, the Fund will be required
to segregate on an ongoing basis with its Custodian cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, in an amount at least equal to the Fund's obligations
with respect to such futures contracts.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than a specified futures contract,
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of a futures contract
or related options may vary, either up or down, from the previous day's
settlement price. These daily limits may restrict the Fund's ability to purchase
or sell certain futures contracts or related options on any particular day.
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<PAGE>
THE FUND'S ABILITY TO ENTER INTO OR CLOSE OUT FUTURES CONTRACTS AND OPTIONS
THEREON IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. SEE "ADDITIONAL INVESTMENT
POLICIES--FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS" AND "TAXES,
DIVIDENDS AND DISTRIBUTIONS" IN THE STATEMENT OF ADDITIONAL INFORMATION.
RISK FACTORS
FOREIGN INVESTMENTS
INVESTING IN SECURITIES ISSUED BY FOREIGN GOVERNMENTS INVOLVES
CONSIDERATIONS AND POSSIBLE RISKS NOT TYPICALLY ASSOCIATED WITH INVESTING IN
OBLIGATIONS ISSUED BY THE U.S. GOVERNMENT AND DOMESTIC CORPORATIONS. The values
of foreign investments are affected by changes in currency rates or exchange
control regulations, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic or monetary policy (in
this country or abroad) or changed circumstances in dealings between nations.
Costs are incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions are generally higher than in the United
States, and foreign securities markets may be less liquid, more volatile and
less subject to governmental supervision than in the United States. Investments
in foreign countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.
THE FUND INVESTS IN FOREIGN SECURITIES DENOMINATED IN FOREIGN CURRENCIES. A
CHANGE IN THE VALUE OF ANY SUCH CURRENCY AGAINST THE U.S. DOLLAR WILL RESULT IN
A CORRESPONDING CHANGE IN THE U.S. DOLLAR VALUE OF THE FUND'S ASSETS DENOMINATED
IN THAT CURRENCY. THESE CURRENCY FLUCTUATIONS CAN RESULT IN GAINS OR LOSSES FOR
THE FUND. FOR EXAMPLE, IF A FOREIGN SECURITY INCREASES IN VALUE 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 YIELD, INCOME AND
DISTRIBUTIONS TO SHAREHOLDERS. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency decreases after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions. Similarly, if an exchange rate for any such currency
decreases between the time the Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the amount of such currency required to be converted
into U.S. dollars in order to pay such expenses in U.S. dollars will be greater
than the equivalent amount of such currency at the time such expenses were
incurred. Under the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code), changes in an exchange rate which occur between the time the Fund
accrues interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable net investment income. Similarly,
dispositions of certain debt securities (by sale, at maturity or otherwise) at a
U.S. dollar amount that is higher or lower than the Fund's original U.S. dollar
cost may result in foreign exchange gains or losses, which will increase or
decrease distributable net investment income. Gains and losses on security and
currency transactions cannot be predicted. This fact coupled with the different
tax and accounting treatment of certain currency gains and losses increases the
likelihood of distributions in whole or in part constituting a return of capital
to shareholders.
The Fund's interest income from Foreign Government securities issued
in local markets may, in some cases, be subject to applicable withholding
taxes imposed by governments in such markets. The Fund may sell a foreign
security it owns prior to maturity in order to avoid foreign withholding taxes
on dividend and interest income and buy back the same security for a future
settlement date. Interest on Foreign Government securities is not generally
subject to foreign withholding taxes. See "Taxes, Dividends and Distributions"
in the Statement of Additional Information.
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INVESTING IN THE FIXED-INCOME MARKETS OF EMERGING MARKET COUNTRIES INVOLVES
EXPOSURE TO ECONOMIES THAT ARE GENERALLY LESS DIVERSE AND MATURE, AND TO
POLITICAL SYSTEMS WHICH CAN BE EXPECTED TO HAVE LESS STABILITY THAN THOSE OF
DEVELOPED COUNTRIES. HISTORICAL EXPERIENCE INDICATES THAT THE MARKETS OF
DEVELOPING COUNTRIES HAVE BEEN MORE VOLATILE THAN THE MARKETS OF DEVELOPED
COUNTRIES. THE RISKS ASSOCIATED WITH INVESTMENTS IN FOREIGN SECURITIES,
DESCRIBED ABOVE, MAY BE GREATER WITH RESPECT TO INVESTMENTS IN DEVELOPING
COUNTRIES.
MEDIUM AND LOWER-RATED SECURITIES
The Fund may invest in medium grade securities (i.e., rated Baa by Moody's,
BBB by S&P's or comparably rated by another NRSRO) and up to 15% 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 Fund's 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 Fund's investment adviser. Securities rated Baa by
Moody's, although considered investment grade, possess speculative
characteristics, and changes in economic or other conditions are more likely to
impair the ability of issuers of these securities to make interest and principal
payments than is the case with respect to issuers of higher-grade bonds. See
"Appendix A--Description of Security Ratings" below.
Generally, lower-rated securities and unrated securities of comparable
quality, commonly referred to as junk bonds (i.e., securities rated lower than
Baa by Moody's or BBB by S&P's or comparably rated by another NRSRO), offer a
higher current yield than is offered by higher-rated securities, but also (i)
will likely have some quality and protective characteristics that, in the
judgment of the rating organizations, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (ii) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. The market values of
certain of these securities also tend to be more sensitive to individual issuer
developments and changes in economic conditions than higher-quality bonds. In
addition, medium and lower-rated securities and comparable unrated securities
generally present a higher degree of credit risk. The risk of loss due to
default by these issuers is significantly greater because medium and lower-rated
securities and unrated securities of comparable quality generally are unsecured
and frequently are subordinated to the prior payment of senior indebtedness. The
investment adviser, under the supervision of the Manager and the Directors, in
evaluating the creditworthiness of an issuer whether rated or unrated, takes
various factors into consideration, which may include, as applicable, the
issuer's financial resources, its sensitivity to economic conditions and trends
and regulatory matters.
In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for the Fund to purchase and may also have the effect
of limiting the ability of the Fund to sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by the Fund may decline proportionately
more than a portfolio consisting of higher-rated securities. If the Fund
experiences unexpected net redemptions, it may be forced to sell its
higher-rated bonds, resulting in a decline in the overall credit quality of the
securities held by the Fund and increasing the exposure of the Fund to the risks
of lower-rated securities. Investments in zero coupon bonds may be more
speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
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<PAGE>
Subsequent to its purchase by a Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of these securities by the Fund, but
the investment adviser will consider this event in its determination of whether
the Fund should continue to hold the securities.
During the fiscal year ended December 31, 1996, 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 (Prior to August __,
1997 the Fund limited its investments in securities rated lower than BBB/Baa to
10% of total assets.):
PERCENTAGE OF
RATING TOTAL INVESTMENTS
------- -----------------
AAA/Aaa 76.76
AA/Aa 2.52
A/A 0.75
BBB/Baa 10.27
BB/Ba 6.31
B/B 1.45
CCC/Caa --
CC/Ca --
Unrated 1.93
HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS THE
INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. If
the investment adviser's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of options, foreign
currency and futures contracts and options on futures contracts and foreign
currencies include (1) dependence on the investment adviser's ability to predict
correctly movements in the direction of interest rates, securities prices and
currency markets; (2) imperfect correlation between the price of options and
futures contracts and options thereon and movements in the prices of the
securities or currencies being hedged; (3) the fact that skills needed to use
these strategies are different from those needed to select portfolio securities;
(4) the possible absence of a liquid secondary market for any particular
instrument at any time; (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences; and (6) the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the Fund
to sell a security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate securities in connection with hedging
techniques. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDE UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the period ended December 31, 1996, the Fund's total expenses as a
percentage of average net assets for Class A, Class B and Class C shares were
1.48%, 2.09% (annualized) and 2.09% (annualized), respectively. See "Financial
Highlights." Until January 15, 1996, the Fund operated as a closed-end
investment company.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (FORMERLY PRUDENTIAL MUTUAL FUND
MANAGEMENT LLC) (PIFM OR THE MANAGER), GATEWAY CENTER THREE, 100 MULBERRY
STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER OF THE FUND AND IS
COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .75 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS UP TO $1 BILLION AND .70 OF 1% OF SUCH ASSETS IN EXCESS
OF $1 BILLION. PIFM is organized in New York as a limited liability company. It
is the successor to Prudential Mutual Fund Management, Inc., which transferred
its assets to PIFM in September 1996. For the fiscal year ended December 31,
1996, the Fund paid management fees to PIFM of .75% of the Fund's average net
assets. See "Manager" in the Statement of Additional Information.
As of June 30, 1997, PIFM served as the manager of __________ open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to __________ closed-end investment companies. These
companies have aggregate assets of approximately $_____ billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PIFM
continues to have responsibility for all investment advisory services pursuant
to the Management Agreement and supervises PI's performance of such services.
The Fund is managed by J. Gabriel Irwin and Simon Wells, who head a Global
Fixed Income Group of PI. As a team, they have responsibility for the day-to-day
management of the Fund's portfolio. Messrs. Irwin and Wells are employed by
PRICOA Asset Management Company Ltd., a subsidiary of The Prudential Insurance
Company of America (Prudential) since August of 1997 and were employed by PI and
Prudential-Bache Securities (U.K.) Inc. from April 1995 to August 1997. Messrs.
Irwin and Wells were previously employed by Smith Barney Global Capital
Management Inc., where they worked together as Directors and senior members of
the Investment Policy Committee and managed approximately $1.5 billion in
institutional and mutual fund assets. Messrs. Irwin and Wells also serve as the
portfolio managers of Prudential Intermediate Global Income Fund, Inc. and The
Global Total Return Fund, Inc.
PIFM and PIC are wholly-owned subsidiaries of Prudential, a major
diversified insurance and financial services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE FUND'S SHARES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
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<PAGE>
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, (COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES INCURS THE EXPENSES OF
DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. Prudential
Securities also incurs the expenses of distributing the Fund's Class Z shares
under the Distribution Agreement, none of which is reimbursed by or paid for by
the Fund. These expenses include commissions and account servicing fees paid to,
or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS A SHARES.
The Class A Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of up to .25 of 1%) may not exceed .30 of 1% of
the average daily net assets of the Class A shares. Prudential Securities has
agreed to limit its distribution related fees payable under the Class A Plan to
.15 of 1% of the average daily net assets of the Class A shares for the fiscal
year ending December 31, 1997.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B and Class C Plans provide
for the payment to Prudential Securities of (i) an asset-based sales charge of
up to .75 of 1% of the average daily net assets of the Class B and Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class B and Class C shares; provided that the total
distribution-related fee does not exceed .75 of 1%. The service fee is used to
pay for personal service and/or the maintenance of shareholder accounts.
Prudential Securities has agreed to limit its distribution-related fees payable
under the Class B and Class C Plans to .75 of 1% of the average daily net assets
of the Class C shares for the fiscal year ending December 31, 1997. Prudential
Securities also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal period ended December 31, 1996, the Fund paid distribution
expenses of .15%, .75% (annualized) and .75% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Fund
records all payments made under the Plans as expenses in the calculation of net
investment income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of the Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and initial sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any
19
<PAGE>
agreement related to the Plan (the Rule 12b-1 Directors), vote annually to
continue the Plan. Each Plan may be terminated at any time by vote of a majority
of the Rule 12b-1 Directors or of a majority of the outstanding shares of the
applicable class of the Fund. The Fund will not be obligated to pay expenses
incurred under any plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons which distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker and/or futures commission
merchant for the Fund provided that the commissions, fees or other remuneration
it receives are fair and reasonable. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
20
<PAGE>
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS) Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE
FUND'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
dividends. As long as the Fund declares dividends daily, the NAV of the Class
A, Class B, Class C and Class Z shares will generally be the same. It is
expected, however, that the Fund's dividends will differ by approximately the
amount of any distribution and/or service fee expense accrual differential among
the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "YIELD" AND "TOTAL RETURN"
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD AND TOTAL RETURN ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are
based on historical earnings and are not intended to indicate future
performance. The "yield" refers to the income generated by an investment in the
Fund over a one-month or 30-day period. This income is then "annualized" that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown as
a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period.
21
<PAGE>
The "total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire period.
"Average annual" total return smooths out variations in performance and takes
into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The Fund also may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include data from
Lipper Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition also are
treated as ordinary gain or loss. These gains or losses increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency losses exceed
other investment company taxable income during a taxable year, distributions
made by the Fund during the year would be a return of capital to you, reducing
your basis in your Fund shares. See "Dividends and Distributions" below.
The Fund may incur foreign income taxes in connection with some of its
foreign investments. Certain of these taxes may be credited to shareholders. The
Fund may be permitted to "pass through" to shareholders the right to take
credits against federal income taxes or deductions in respect of foreign taxes
paid by the Fund. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts). At
the end of each fiscal year and at October 31 of such fiscal year, such
investments held by the Fund will be required to be "marked-to-market" for
federal income tax purposes; that is, treated as having been sold at market
value. Sixty percent of any gain or loss recognized on these "deemed sales" and
on actual dispositions may be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net taxable investment income, together with
distributions of short-term gains (i.e., the excess of net short-term capital
gains over net long-term capital losses) distributed to shareholders, will be
taxable as ordinary
22
<PAGE>
income to the shareholder whether or not reinvested. CERTAIN GAINS OR LOSSES
FROM FLUCTUATIONS IN EXCHANGE RATES (SECTION 988 GAINS OR LOSSES) WILL AFFECT
THE AMOUNT OF ORDINARY INCOME THE FUND WILL BE ABLE TO PAY AS DIVIDENDS. SEE
"TAXES, DIVIDENDS AND DISTRIBUTIONS" IN THE STATEMENT OF ADDITIONAL INFORMATION.
Any net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares.
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
any class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
WITHHOLDING TAXES. Under the Internal Revenue Code, the Fund is required to
withhold and remit to the U.S. Treasury 31% of taxable dividends, capital gain
income and redemption proceeds on the accounts of those shareholders who fail to
furnish their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the
case of certain foreign shareholders) with the required certifications regarding
the shareholder's status under the federal income tax law. Withholding at this
rate is also required from dividends and capital gains distributions (but not
redemption proceeds) payable to shareholders who are otherwise subject to backup
withholding. Dividends of net investment income and short-term capital gains to
a foreign shareholder will generally be subject to U.S. withholding tax at the
rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to declare daily and pay monthly dividends of net
investment income and make distributions at least annually of any net capital
and currency gains. The per share dividends on Class B and Class C shares will
be lower than the per share dividends on Class A shares as a result of the
higher distribution fee applicable with respect to Class B and Class C shares in
relation to Class A shares and lower dividends for Class A shares in relation to
Class Z shares. Distributions of net capital gains, if any, will be in the same
amount per share for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED
ON THE NAV OF EACH CLASS ON THE PAYMENT DATE AND RECORD DATE, OR SUCH OTHER DATE
AS THE BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN
WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE PAYMENT DATE TO RECEIVE
SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to
Prudential Mutual Fund Services LLC, Attention: Account Maintenance, P.O. Box
15015, New Brunswick, New Jersey 08906-5015. The Fund will notify each
shareholder after the close of the Fund's taxable year of both the dollar amount
and the taxable status of that year's dividends and distributions on a per share
basis. If you hold shares through Prudential Securities, you should contact your
financial adviser to elect to receive dividends and distributions in cash. To
the extent that, in a given year, distributions to shareholders exceed
recognized net investment income and recognized short-term and long-term capital
gains for the year, shareholders will receive a return of capital in respect of
such year and, in an annual statement, will be notified of the amount of any
return of capital for such year.
As of December 31, 1996, the Fund had a capital loss carryforward for
federal income tax purposes of approximately $3,166,900, which will expire in
2002. Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward
amount.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE
(WHICH GENERALLY OCCURS TWO BUSINESS DAYS PRIOR TO THE RECORD DATE) FOR A
CAPITAL GAIN DISTRIBUTION, THE PRICE YOU PAY WILL INCLUDE THE DISTRIBUTION. SUCH
DISTRIBUTIONS, ALTHOUGH IN EFFECT A
23
<PAGE>
RETURN OF INVESTED PRINCIPAL, ARE SUBJECT TO FEDERAL INCOME TAXES. ACCORDINGLY,
PRIOR TO PURCHASING SHARES OF THE FUND, AN INVESTOR SHOULD CAREFULLY CONSIDER
THE IMPACT OF CAPITAL GAINS DISTRIBUTIONS WHICH ARE EXPECTED TO BE OR HAVE BEEN
ANNOUNCED.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON APRIL 20, 1987 UNDER THE NAME "THE
GLOBAL GOVERNMENT PLUS FUND, INC." AS A CLOSED-END, NON-DIVERSIFIED, MANAGEMENT
INVESTMENT COMPANY. THE FUND OPERATED AS A CLOSED-END FUND PRIOR TO JANUARY 15,
1996. ON DECEMBER 6, 1995, SHAREHOLDERS APPROVED OPEN-ENDING THE FUND AND THE
FUND HAS OPERATED AS AN OPEN-END FUND SINCE JANUARY 15, 1996. EFFECTIVE AUGUST
1, 1997, THE FUND CHANGED ITS NAME TO PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE FUND IS AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.01 PAR VALUE
PER SHARE, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND
CLASS Z COMMON STOCK, CONSISTING OF 500 MILLION CLASS A SHARES, 500 MILLION
CLASS B SHARES, 500 MILLION CLASS C SHARES AND 500 MILLION CLASS Z SHARES. Each
class of common stock represents an interest in the same assets of the Fund and
is identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting rights
on any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege, (iv) only Class B shares have a
conversion feature, and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How the Fund is Managed--Distributor." In
accordance with the Fund's Articles of Incorporation, the Board of Directors may
authorize the creation of additional series of common stock and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board of Directors may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class (with the
exception of Class Z shares, which are not subject to any distribution 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 bear higher distribution expenses than Class A
shares, the liquidation proceeds to shareholders of those classes are likely to
be lower than to Class A shareholders and to Class Z shareholders, whose shares
are not subject to any distribution and/or service fees. The Fund's shares do
not have cumulative voting rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS FOR EXAMPLE THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE DIRECTORS OF THE FUND OR TO TRANSACT ANY OTHER BUSINESS.
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<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in proper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge.
Payment may be made by wire, check or through your brokerage account. See
"Alternative Purchase Plan" and "How the Fund Values its Shares."
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. There is no minimum initial investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares for which there is no minimum. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name, address,
tax identification number, dividend distribution election, amount being wired
and wiring bank. Instructions should then be given by you to your bank to
transfer funds by wire to State Street Bank and Trust Company, Boston,
Massachusetts, Custody and Shareholder Services Division, Attention: Prudential
International Bond Fund, Inc., specifying on the wire the account number
assigned by PMFS and your name and identifying the class in which you are
eligible to invest (Class A, Class B, Class C or Class Z shares).
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<PAGE>
If you arrange for receipt by State Street Bank and Trust Company of
Federal Funds prior to the calculation of NAV (4:15 P.M., New York time) on a
business day, you may purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
Bank and Trust Company directly and should be sure that the wire specifies
Prudential International Bond Fund, Inc., Class A, Class B, Class C or Class Z
shares and your name and individual account number. It is not necessary to call
PMFS to make subsequent purchase orders utilizing Federal Funds. The minimum
amount which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ----------------------- -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 4% .30 of 1% (currently Initial sales charge waived or reduced
of the public offering price being charged at a rate for certain purchases
of .15 of 1%)
CLASS B Maximum contingent deferred sales 1% (currently being Shares convert to Class A shares
charge or CDSC of 5% of the lesser charged at a rate of approximately seven years after
of the amount invested or the .75 of 1%) purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser 1% (currently being Shares do not convert to another class
of the amount invested or the charged at a rate of
redemption proceeds on .75 of 1%)
redemptions made within one
year of purchase
CLASS Z None None Sold to a limited group of investors.
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, and (iii)
only Class B shares have a conversion feature. The four classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee (if any) of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or
26
<PAGE>
redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 6 years, you should
consider purchasing Class A shares over either Class B or Class C shares
regardless of whether or not you qualify for a reduced sales charge on Class A
shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fees on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over the period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. SEE "REDUCTION AND
WAIVER OF INITIAL SALES CHARGES" AND "CLASS Z SHARES" BELOW.
CLASS A SHARES
The offering price is the NAV per share next determined following receipt
of an order by the Transfer Agent or Prudential Securities plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------ ---------------- --------------- -----------------
<S> <C> <C> <C>
Less than $50,000 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50% 3.63% 3.25%
$100,000 to $249,999 2.75% 2.83% 2.50%
$250,000 to $499,999 2.00% 2.04% 1.90%
$500,000 to $999,999 1.50% 1.52% 1.40%
$1,000,000 and above None None None
</TABLE>
27
<PAGE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined under
the federal securities laws.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent 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 PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are repaying
loans made from such plans to the participant.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans of
a company for which Prudential serves as plan administrator or recordkeeper are
aggregated in meeting the $1 million threshold. The term "existing assets" as
used herein includes stock issued by a plan sponsor, shares of Prudential Mutual
Funds and shares of certain unaffiliated mutual funds that participate in the
PruArray or SmartPath Program (Participating Funds). "Existing assets" also
include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided (i)
the purchase is made with the proceeds of a redemption from either GIA or SVF
and (ii) Class A shares are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers which
are members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit Plans
or non-qualified plans may purchase Class A shares at net asset value
without regard to the assets or number of participants in the individual
employer's qualified Plan(s) or non-qualified plans so long as the employers in
the Association (i) have retirement plan assets in the aggregate of at least $1
million or 250 participants in the aggregate and (ii) maintain their accounts
with the Fund's transfer agent.
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PruArray Savings Program. Class A shares are also offered at net asset
value 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 net asset value by Individual Retirement Accounts and Savings
Accumulation Plans of the company's employees. The Program is available only to
(i) employees who open an IRA or Savings Accumulation Plan account with the
Transfer Agent and (ii) spouses of employees who open an IRA account with the
Transfer Agent. The Program is offered to companies that have at least
250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or a
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b)employees of
Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of the
Prudential Mutual Funds provided that purchases at NAV are permitted by such
person's employer, (d) Prudential,employees and special agents of Prudential and
its subsidiaries and all persons who have retired directly from active service
with Prudential or one of its subsidiaries, (e) registered representatives and
employees of dealers who have entered into a selected dealer agreement with
Prudential Securities provided that purchases at NAV are permitted by such
person's employer and (f) investors who have a business relationship with a
financial adviser who joined Prudential Securities from another investment firm,
provided that (i) the purchase is made within 180 days of the commencement of
the financial adviser's employment at Prudential Securities, or within one year
in the case of Benefit Plans, (ii) the purchase is made with proceeds of a
redemption of shares of any open-end, non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (iii) the financial
adviser served as the client's broker on the previous purchases and (g)
investors in Individual Retirement Accounts, provided the purchase is made with
the proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential Investments serves as the recordkeeper or administrator.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges-- Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales alternatives is the NAV next determined following receipt
of an order by the Transfer Agent or Prudential Securities. Although there is no
sales charge imposed at the time of purchase, redemptions of Class B and Class C
shares may be subject to a CDSC. See "How to Sell Your Shares--Contingent
Deferred Sales Charges." The Distributor will pay sales commissions of up to 4%
of the purchase price of Class B shares to dealers, financial advisers and other
persons who sell Class B shares at the time of sale from its own resources. This
facilitates the ability of the Fund to sell the Class B shares without an
initial sales charge being deducted at the time of purchase. The Distributor
anticipates that it will recoup its advancement of sales commissions from the
combination of the CDSC and the distribution fee. See "How the Fund is
Managed--Distributor." In connection with the sales of Class C shares, the
Distributor will pay dealers, financial advisers and other persons which
distribute Class C shares a sales commission of up to 1% of the purchase price
at the time of the sale.
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CLASS Z SHARES
Class Z shares of the Fund are currently available for purchase by the
following categories of investors:
(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and annuity
plans under Sections 457 and 403(b)(7) of the Internal Revenue Code and
non-qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least $50
million in defined contribution assets; (ii) participants in any fee-based
program sponsored by Prudential Securities, The Prudential Savings Bank, F.S.B.
(or any affiliate) which includes mutual funds as investment options and for
which the Fund is an available option; (iii) certain participants in the MEDLEY
Program (group variable annuity contracts) sponsored by Prudential for whom
Class Z shares of the Prudential Mutual Funds are an available investment
option; (iv) Benefit Plans for which Prudential Retirement Services serves as
recordkeeper and as of September 20, 1996, (a) were Class Z shareholders of the
Prudential Mutual Funds, or (b) executed a letter of intent to purchase Class Z
shares of the Prudential Mutual Funds; (v) current and former Directors/Trustees
of the Prudential Mutual Funds (including the Fund); and (vi) employees of
Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan. After a Benefit Plan qualifies to
purchase Class Z shares, all subsequent purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. See "How the Fund Values its Shares." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER. IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A
WRITTEN REQUEST FOR REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS
REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN
THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST BE RECEIVED BY THE
TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF
REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY,
WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED
BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves 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 Prudential Preferred Financial Services offices. In the
case of redemptions from a PruArray or SmartPath Plan, if the proceeds of the
redemption are
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invested in another investment option of the plan, in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable (i.e., U.S. Government securities
or securities listed on a national exchange) and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a pro rata basis.) You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect federal tax
treatment of any gain or loss realized upon redemption. For more information on
the rule which disallows a loss on he sale or exchange of shares of the Fund
which are replaced, see "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
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CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your shares to an amount which is lower than the amount of all payments
by you for shares during the preceding six years, in the case of Class B shares,
and one year, in the case of Class C shares. A CDSC will be applied on the
lesser of the original purchase price or the current value of the shares being
redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor. See "How the Fund
is Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares." The following table sets forth the rates of the CDSC
applicable to redemptions of Class B shares:
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
------------------- ------------------------------------
First ....................... 5.0%
Second ...................... 4.0%
Third ....................... 3.0%
Fourth ...................... 2.0%
Fifth ....................... 1.0%
Sixth ....................... 1.0%
Seventh ..................... None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding six
years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of shares
held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
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disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i)in the case of a tax-deferred
retirement plan, a lump-sum or other distribution after retirement; (ii)in the
case of an IRA or Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 591 @2; and (iii)a tax-free return of an excess
contribution or plan distributions following the death or disability of the
shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES.
PruArray or SmartPath Plans. The CDSC will be waived on redemptions from
and non-qualified retirement and deferred compensation plans that participate in
the Transfer Agent's PruArray and SmartPath Programs.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares then 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.
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For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus, although
the aggregate dollar value will be same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS
C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE
NAV. No sales charge will be imposed at the time of the exchange. Any applicable
CDSC payable upon the redemption of shares exchanged will be that imposed by the
Fund in which shares were initially purchased and will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund, Inc. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 a.m. and 6:00 p.m., New
York time. For your protection and to prevent fraudulent exchanges, your
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<PAGE>
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after the
request is received in good order. The exchange privilege is available only in
states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in PSI's 401(k) Plan for which the Fund's Class Z
shares is an available option and who wish to transfer their Class Z shares out
of the PSI 401(k) Plan following separation from service (i.e., voluntary or
involuntary termination of employment or retirement) will have their Class Z
shares exchanged for Class A shares at NAV.
The Fund reserves the right to reject any exchange order including
exchanges (and market timing transactions) which are of size and/or frequency
engaged in by one or more accounts acting in concert or otherwise, that have or
may have an adverse effect on the ability of the Subadviser to manage the
portfolio. The determination that such exchanges or activity may have an adverse
effect and the determination to reject any exchange order shall be in the
discretion of the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
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SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges.
O AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities you should contact your financial adviser.
O AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.
O TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
O SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
O REPORTS TO SHAREHOLDERS. The Fund will send to you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.
O SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
36
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
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 in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC and CC is regarded, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
CC the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt considered short-term in the relevant
market.
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Term Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
o Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
============================================================================
TABLE OF CONTENTS
Page
----
FUND HIGHLIGHTS ...................................................... 2
What Are the Fund's Risk Factors and Special
Characteristics? .................................................. 2
FUND EXPENSES ........................................................ 4
FINANCIAL HIGHLIGHTS ................................................. 5
HOW THE FUND INVESTS ................................................. 7
Investment Objective and Policies ................................... 7
Other Investments and Policies ...................................... 11
Hedging and Return Enhancement Strategies ........................... 12
Risk Factors ........................................................ 15
Investment Restrictions ............................................. 17
HOW THE FUND IS MANAGED .............................................. 18
Manager ............................................................. 18
Distributor ......................................................... 18
Portfolio Transactions .............................................. 20
Custodian and Transfer and
Dividend Disbursing Agent .......................................... 21
HOW THE FUND VALUES ITS SHARES ....................................... 21
HOW THE FUND CALCULATES PERFORMANCE .................................. 21
TAXES, DIVIDENDS AND DISTRIBUTIONS ................................... 22
GENERAL INFORMATION .................................................. 24
Description of Common Stock ......................................... 24
Additional Information .............................................. 25
SHAREHOLDER GUIDE .................................................... 25
How to Buy Shares of the Fund ....................................... 25
Alternative Purchase Plan ........................................... 26
How to Sell Your Shares ............................................. 30
Conversion Feature--Class B Shares .................................. 33
How to Exchange Your Shares ......................................... 34
Shareholder Services ................................................ 36
DESCRIPTION OF SECURITY RATINGS ...................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY .................................... B-1
==========================================================================
MF 170 A
- ---------------------------------------------------------------------------
CUSIP Nos.: Class A: 378907-20-8
Class B: 378907-30-7
Class C: 378907-40-6
Class Z: 378907-50-5
- ---------------------------------------------------------------------------
PRUDENTIAL
INTERNATIONAL
BOND FUND,
INC.
PROSPECTUS
August __, 1997
[PRUDENTIAL LOGO]
<PAGE>
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
Statement of Additional Information
dated August __, 1997
Prudential International Bond Fund, Inc. (the Fund) is an open-end,
non-diversified management investment company, or a mutual fund, whose
investment objective is to seek total return, the components of which are
current income and capital appreciation. The Fund seeks to achieve this
objective by investing at least 65% of its total assets in debt securities of
issuers located in at least three countries, excluding the United States (except
in periods of market weakness). The Fund generally maintains an average
portfolio maturity of between 3 and 15 years. The Fund's investment adviser
seeks to achieve high dividends through management of yield, maturity and
currency considerations affecting such securities. In particular, the Fund's
investment adviser selects debt securities which, in its judgment, will produce
a high yield with currency stability relative to the U.S. dollar or have a
combined yield, capital or currency appreciation potential to produce an overall
return consistent with the Fund's objective. The Fund may also purchase and sell
certain derivatives, including put and call options on securities and foreign
currencies and engage in transactions involving futures contracts and options
thereon and forward currency exchange contracts. There can be no assurance that
the Fund's investment objective will be achieved.
The Fund's investment objective and policies are described in the Fund's
Prospectus. This statement contains additional information about those policies.
The Fund is also subject to certain investment restrictions. See "Investment
Restrictions" below.
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 August __, 1997, a
copy of which may be obtained from the Fund upon request.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information .............................................................. B-2 24
Investment Objective and Policies ................................................ B-2 7
Additional Investment Policies ................................................... B-4 11
Investment Restrictions .......................................................... B-16 17
Directors and Officers ........................................................... B-17 18
Manager .......................................................................... B-21 18
Distributor ...................................................................... B-22 18
Portfolio Transactions and Brokerage ............................................. B-24 20
Purchase and Redemption of Fund Shares ........................................... B-25 25
Shareholder Investment Account ................................................... B-28 36
Net Asset Value .................................................................. B-32 21
Performance Information .......................................................... B-33 21
Taxes, Dividends and Distributions ............................................... B-34 22
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants .... B-36 21
Financial Statements ............................................................. B-37 --
Report of Independent Accountants ................................................ B-47 --
Appendix I--General Investment Information ....................................... I-1 --
Appendix II--Historical Performance Data ......................................... II-1 --
Appendix III--Information Relating to Prudential ................................. III-1 --
====================================================================================================================
</TABLE>
MF170B
<PAGE>
GENERAL INFORMATION
The Fund was incorporated in Maryland on April 20, 1987 under the name "The
Global Government Plus Fund, Inc." as a closed-end, non-diversified management
investment company. The Fund operated as a closed-end fund prior to January 15,
1996. On December 6, 1995, shareholders approved open-ending the Fund, and since
January 15, 1996, the Fund has operated as an open-end fund. Effective August 1,
1997, the Fund changed its name to Prudential International Bond Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek total return, the components of
which are current income and capital appreciation. The Fund will seek to achieve
this objective by investing at least 65% of its total assets in debt securities
of issuers located in at least three countries, excluding the United States
(except in periods of market weakness). The Fund invests in foreign debt
securities issued by foreign corporate and governmental issuers. The Fund may
invest up to 35% of its total assets in obligations of U.S. issuers. The Fund
maintains an average portfolio maturity of between 3 and 15 years. The Fund's
investment adviser seeks to achieve high dividends through management of yield,
maturity and currency considerations affecting such securities. In particular,
the Fund's investment adviser selects debt securities which, in its judgment,
will produce a high yield with currency stability relative to the U.S. dollar or
have a combined yield, capital or currency appreciation potential to produce an
overall return consistent with the Fund's objective. The Fund may also purchase
and sell put and call options on securities and foreign currencies and engage in
transactions involving futures contracts and options thereon and forward
currency exchange contracts. The Fund may seek to protect and enhance dividend
return through the use of options, futures and foreign currency transactions.
There can be no assurance that the Fund's investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" in the Prospectus.
FOREIGN SECURITIES
Foreign securities in which the Fund will invest will generally be
denominated in foreign currencies, will be traded on foreign markets and will be
affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of the Fund's
assets denominated in that currency. These changes will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the value of the U.S. dollar
strengthens against a foreign currency after the Fund's income has been accrued
and translated into U.S. dollars, the Fund would experience a foreign currency
loss. Similarly, if the U.S. dollar value weakens against a foreign currency
between the time the Fund incurs expenses and the time such expenses are paid,
the amount of such currency required to be converted into U.S. dollars in order
to pay such expenses in U.S. dollars will be greater than the equivalent amount
of such currency at the time such expenses were incurred. Under the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code), changes in an
exchange rate which occur between the time the Fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities will result in foreign currency gains or losses that increase or
decrease an investment company's taxable income. Similarly, dispositions of
certain debt securities (by sale, at maturity or otherwise) at a U.S. dollar
value that is higher or lower than the Fund's original U.S. dollar cost may
result in foreign exchange gains or losses which will increase or decrease
investment company taxable income. The exchange rates between the U.S. dollar
and other currencies can be volatile and are determined by such factors as
supply and demand in the currency exchange markets, international balances of
payments, government intervention, speculation and other economic and political
conditions.
Foreign securities include securities of any foreign country the investment
adviser considers appropriate for investment by the Fund. Foreign securities may
also include securities of foreign issuers that are traded in U.S. dollars in
the United States although the underlying security is usually denominated in a
foreign currency. These securities include but are not limited to securities
traded in the form of American Depositary Receipts.
The costs attributable to foreign investing are higher than the costs of
domestic investing. For example, the cost of maintaining custody of foreign
securities generally exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing are frequently higher than
those attributable to domestic investing. Foreign investment income may be
subject to foreign withholding or other government taxes that could reduce the
return to the Fund on those securities. Tax treaties between the United States
and certain foreign countries may, however, reduce or eliminate the amount of
foreign tax to which the Fund would be subject.
In the event of a default of foreign debt obligations, it may be difficult
for the Fund to obtain or enforce a judgment against the issuer of the
securities.
B-2
<PAGE>
CORPORATE AND OTHER NON-GOVERNMENT DEBT OBLIGATIONS
ZERO COUPON, PAY-IN-KIND OR DEFERRED PAYMENT SECURITY
The Fund may also invest in zero coupon, pay-in-kind or deferred payment
securities. Zero coupon securities are securities that are sold at a discount to
par value and on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received annually "phantom income." The Fund
accrues income with respect to these securities prior to the receipt of cash
payments. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain a zero coupon security until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular intervals.
U.S. GOVERNMENT SECURITIES
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT INSTRUMENTALITIES.
Mortgages backing the securities purchased by the Fund include conventional
thirty year fixed rate mortgages, graduated payment mortgages, fifteen year
mortgages and adjustable rate mortgages. All of these mortgages can be used to
create pass-through securities. A pass-through security is formed when mortgages
are pooled together and undivided interests in the pool or pools are sold. The
cash flow from the mortgages is passed through to the holders of the securities
in the form of periodic payments of interest, principal and prepayments (net of
a service fee). Prepayments occur when the holder of an individual mortgage
prepays the remaining principal before the mortgage's scheduled maturity date.
As a result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. The remaining
expected average life of a pool of mortgage loans underlying a mortgage-backed
security is a prediction of when the mortgage loans will be repaid and is based
upon a variety of factors, such as the demographic and geographic
characteristics of the borrowers and the mortgaged properties, the length of
time that each of the mortgage loans has been outstanding, the interest rates
payable on the mortgage loans and the current interest rate environment.
During periods of declining interest rates, prepayments of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that time.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium generally will result in capital losses.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities, which evidence
an undivided interest in a pool or pools of mortgages. GNMA Certificates that
the Fund purchases are the "modified pass-through" type, which entitle the
holder to receive timely payment of all interest and principal payments due on
the mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of
whether or not the mortgagor actually makes the payment. The GNMA guarantee is
backed by the full faith and credit of the United States. The GNMA is also
empowered to borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (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. The FHLMC guarantees timely monthly
payment of interest on PCs and the stated principal amount. GMCs also represent
a pro rata interest in a pool of mortgages. However, these instruments pay
interest semi-annually and return principal once a year in guaranteed minimum
payments. The expected average life of these securities is approximately ten
years.
FNMA SECURITIES. The Federal National Mortgage Association (FNMA) issues
guaranteed mortgage pass-through certificates (FNMA Certificates). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all interest and principal payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates.
B-3
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, adjustable rate mortgage
securities (ARMs) have a specified maturity date and amortize principal over
their life. In periods of declining interest rates, there is a reasonable
likelihood that ARMs will experience increased rates of prepayment of principal.
However, the major difference between ARMs and fixed rate mortgage securities
(FRMs) is that the interest rate and the rate of amortization of principal of
ARMs can and do change in accordance with movements in a particular,
pre-specified, published interest rate index. The amount of interest on an ARM
is calculated by adding a specified amount, the "margin," to the index, subject
to limitations on the maximum and minimum interest that is charged during the
life of the mortgage or to maximum and minimum changes to that interest rate
during a given period. Because the interest rate on ARMs generally moves in the
same direction as market interest rates, the market value of ARMs tends to be
more stable than that of long-term fixed-rate securities.
FIXED-RATE MORTGAGE SECURITIES. The Fund anticipates investing in
high-coupon fixed-rate mortgage securities. Such securities are collateralized
by fixed-rate mortgages and tend to have high prepayment rates when the level of
prevailing interest rates declines significantly below the interest rates on the
mortgages. Thus, under those circumstances, the securities are generally less
sensitive to interest rate movements than lower coupon FRMs.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The interest rates paid on
the ARMs in which the Fund invests generally are readjusted at intervals of one
year or less to an increment over some predetermined interest rate index. There
are two main categories of indices: those based on U.S. Treasury securities and
those derived from a calculated measure such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-month Treasury
Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the 11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury Note rate, closely
mirror changes in market interest rate levels. Others, such as the 11th District
Home Loan Bank Cost of Funds index (often related to ARMs issued by FNMA), tend
to lag changes in market rate levels and tend to be somewhat less volatile.
The underlying mortgages which collateralize the ARMs, collateralized
mortgage obligations and Real Estate Mortgage Investment Conduits in which the
Fund invests will frequently have caps and floors which limit the maximum amount
by which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization.
The market value of mortgage securities, like other U.S. Government
securities, will generally vary inversely with changes in market interest rates,
declining when interest rates rise and rising when interest rates decline.
However, mortgage securities, while having comparable risk of decline during
periods of rising rates, usually have less potential for capital appreciation
than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline. In addition, to
the extent such mortgage securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments generally will result in some
loss of the holders' principal to the extent of the premium paid. On the other
hand, if such mortgage securities are purchased at a discount, an unscheduled
prepayment of principal will increase current and total returns and will
accelerate the recognition of income which when distributed to shareholders will
be taxable as ordinary income.
CUSTODIAL RECEIPTS
Obligations issued or guaranteed as to principal and interest by the United
States Government 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 United States Treasury notes or bonds. Such notes and bonds are held
in custody by a bank on behalf of the owners. These 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.
ADDITIONAL INVESTMENT POLICIES
In seeking to protect against the effect of changes in interest rates or
currency exchange rates that are adverse to the present or prospective position
of the Fund and to attempt to enhance returns, the Fund may employ certain
hedging, return enhancement and risk management techniques including the
purchase and sale of options, futures and options on futures on debt securities,
aggregates of debt securities, financial indices, U.S. and foreign debt
securities and foreign currencies and forward contracts on foreign currencies.
The Fund's ability to engage in these practices may be limited by tax
considerations and certain other legal considerations. See "Taxes, Dividends and
Distributions."
B-4
<PAGE>
OPTIONS ON SECURITIES
The Fund may purchase put and call options and write covered put and call
options on debt securities, aggregates of debt securities or indices of prices
thereof, other financial indices and U.S. and foreign government debt
securities. These may include options traded on U.S. or foreign exchanges and
options traded on U.S. or foreign over-the-counter markets (OTC Options).
When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. The Fund's principal objective in
writing options is to attempt to realize, through the receipt of premiums, a
greater return than would be realized on the underlying securities alone.
The purchaser of a call option has the right, for a specified period of
time, to purchase the securities subject to the option at a specified price (the
exercise price). By writing a call option, the Fund becomes obligated during the
term of the option, upon exercise of the option, to sell, depending upon the
terms of the option contract, the underlying securities or a specified amount of
cash to the purchaser against receipt of the exercise price.
Conversely, the purchaser of a put option has the right, for a specified
period of time, to sell the securities subject to the option to the writer of
the put at a specified exercise price. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price, upon exercise of the option.
The Fund may write only "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price of
the "covered" option, or will establish and maintain with its Custodian for the
term of the option a segregated account consisting of cash, U.S. Government
securities, equity securities, or other liquid, unencumbered assets,
marked-to-market daily, having a value at least equal to the fluctuating market
value of the optioned securities. A put option written by the Fund will be
considered "covered" if, so long as the Fund is obligated as the writer of the
option, it owns an option to sell the underlying securities subject to the
option having an exercise price equal to or greater than the exercise price of
the "covered" option, or it deposits and maintains with its Custodian in a
segregated account cash, U.S. Government securities, equity securities, or other
liquid, unencumbered assets, marked-to-market daily, having a value equal to or
greater than the exercise price of the option. There is no limitation to the
amount of call options the Fund may write. However, the Fund may only write
covered put options to the extent that cover for such options does not exceed
50% of the Fund's net assets.
The Fund may also write straddles (i.e., a combination of a call and a put
written on the same security at the same strike price where the same segregated
collateral is considered "cover" for both the put and the call). In such cases,
the Fund will also deposit in a segregated account with its Custodian cash, U.S.
Government securities, equity securities, or other liquid, unencumbered assets,
marked-to-market daily, equivalent to the amount, if any, by which the put is
"in-the-money," i.e., the amount by which the exercise price of the put exceeds
the current market value of the underlying security. It is contemplated that the
Fund's use of straddles will be limited to 5% of the Fund's net assets (meaning
that the securities used for cover or segregated as described above will not
exceed 5% of the Fund's net assets at the time the straddle is written). The
writing of a call and a put on the same security at the same stock price where
the call and put are covered by different securities is not considered a
straddle for the purposes of this limit.
The Fund may write both American style options and European style options.
An American style option is an option which may be exercised by the holder at
any time prior to its expiration. A European style option may only be exercised
as of the expiration of the option. The writer of an American style option has
no control over when the underlying securities must be sold, in the case of a
call option, or purchased, in the case of a put option, since such options may
be exercised by the holder at any time prior to the expiration of the option.
Whether or not an option expires unexercised, the writer retains the amount of
the premium. This amount may be offset or exceeded, in the case of a covered
call option, by a decline and, in the case of a covered put option, by an
increase in the market value of the underlying security during the option
period. If a call option is exercised, the writer must fulfill the obligation to
sell the underlying security at the exercise price, which will usually be lower
than the then market value of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the underlying
security at the exercise price, which will usually exceed the then market value
of the underlying security.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. However, the
writer of an option may not effect a closing purchase transaction after being
notified of the exercise of
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the option. Likewise, the holder of an option may liquidate a position by
effecting a "closing sale transaction" by selling an option of the same series
as the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option, will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss in closing out a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
An exchange-traded option position may be closed out only where there
exists a secondary market for an option of the same series. If a secondary
market does not exist, the Fund might not be able to effect a closing sale
transaction in a particular option it has purchased with the result that the
Fund would have to exercise the option in order to realize any profit. If the
Fund is unable to effect a closing purchase transaction in an option the Fund
has written, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position. Reasons for the absence of a liquid secondary
market include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by a securities exchange
(Exchange) on opening transactions or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an Exchange; (v)
the facilities of an Exchange or clearing organization may not at all times be
adequate to handle current trading volume; or (vi) one or more Exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that Exchange (or in that class or series
of options) would cease to exist, although outstanding options would continue to
be exercisable in accordance with their terms.
Exchange-traded options in the U.S. are issued by a clearing organization
affiliated with the Exchange on which the option is listed which, in effect,
gives its guarantee to every exchange-traded option transaction. In contrast,
OTC Options are contracts between the Fund and its counter party with no
clearing organization guarantee. Thus, when the Fund purchases an OTC Option, it
relies on the dealer from which it has purchased the OTC Option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. The Board of Directors will evaluate
the creditworthiness of any dealer from which the Fund proposes to purchase OTC
Options.
Exchange-traded options generally have a continuous liquid market while OTC
Options may not. Consequently, the Fund will generally be able to realize the
value of an OTC Option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when the Fund writes an OTC Option, it
generally will be able to close out the OTC Option prior to its expiration only
by entering into a closing purchase transaction with the dealer which originally
purchased the OTC Option. While the Fund will enter into OTC Options only with
dealers which agree to, and which are expected to be capable of, entering into
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate an OTC Option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in a
covered OTC call option the Fund has written, it will not be able to liquidate
securities used as cover until the option expires or is exercised or different
cover is substituted. In the event of insolvency of the contra-party, the Fund
may be unable to liquidate an OTC Option. With respect to options written by the
Fund, the inability to enter into a closing purchase transaction could result in
material losses to the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. The exercise price of the call the Fund determines to
write will depend upon the expected price movement of the underlying security.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying 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
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the option period. A buy-and-write transaction using out-of-the-money call
options may be used when it is expected that the premium received from writing
the call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call option is exercised in such
a transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price of the option. If
the option is not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close out the position or
take delivery of the underlying security at the exercise price. The Fund's
return will be the premium received from the put options minus the amount by
which the market price of the security is below the exercise price.
Out-of-the-money, at-the-money, and in-the-money put options may be used by the
Fund in the same market environments in which call options are used in
equivalent buy-and-write transactions.
The Fund may purchase call options on debt securities it intends to acquire
in order to hedge against an anticipated market appreciation in the price of the
underlying securities at limited risk and with a limited cash outlay. If the
market price does rise as anticipated, the Fund will benefit from that rise but
only to the extent that the rise exceeds the premiums paid. If the anticipated
rise does not occur or if it does not exceed the premium, the Fund will bear the
expense of the option premiums and transaction costs without gaining an
offsetting benefit.
The Fund may purchase put options on debt securities to hedge against a
decline in the value of its portfolio. If the market price of the Fund's
portfolio should increase, however, the profit which the Fund might otherwise
have realized will be reduced by the amount of the premium paid for the put
option and by transaction costs. The Fund may purchase call options on debt
securities to hedge against an anticipated rise in the price it will have to pay
for debt securities it intends to buy in the future. If the market price of the
debt securities should fall instead of rise, however, the benefit the Fund
obtains from purchasing the securities at a lower price will be reduced by the
amount of the premium paid for the call options and by transaction costs.
The Fund may purchase put options if the Fund believes that a defensive
posture is warranted for all or a portion of its portfolio. Protection is
provided during the life of the put because the put gives the Fund the right to
sell the underlying security at the put exercise price, regardless of a decline
in the underlying security's market price below the exercise price. This right
limits the Fund's losses from the security's possible decline in value below the
strike price of the option to the premium paid for the put option and related
transaction costs. However, if the market price of the security increases, the
profit the Fund realizes on the sale of the security will be reduced by the
premium paid for, and the commissions paid in connection with, the put option.
The Fund may wish to protect certain portfolio securities against a decline
in market value through purchase of put options on other carefully selected
securities, which the investment adviser believes may move in the same direction
as those portfolio securities. If the investment adviser's judgment is correct,
changes in the value of the put options should generally offset changes in the
value of the portfolio securities being hedged. If the investment adviser's
judgment is not correct, the value of the securities underlying the put option
may decrease less than the value of the Fund's portfolio securities and
therefore the put option may not provide complete protection against a decline
in the value of the Fund's portfolio securities below the level sought to be
protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire through purchase of call options on
other carefully selected debt securities, which the investment adviser believes
may move in the same direction as those portfolio securities. In such
circumstances the Fund will be subject to risks analogous to those summarized
above in the event that the correlation between the value of a call option so
purchased and the value of the securities intended to be acquired by the Fund is
not as close as anticipated and the value of the securities underlying the call
option increases less than the value of the securities to be acquired by the
Fund.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds and
Notes tends to center on the most recently auctioned issues, the Exchanges will
not indefinitely continue to introduce new series of options with expirations to
replace expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular issue will be
allowed to run their course, with the possible addition of a limited number of
new expirations as the original ones expire. Options trading on each series of
Bonds or Notes will thus be phased out as new options are listed on the more
recent issues, and a full range of expiration dates will not ordinarily be
available for every series on which options are traded.
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ON TREASURY BILLS. Because the deliverable Treasury Bill changes from week
to week, writers of Treasury Bill call options cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
Bills with a principal amount corresponding to the option contract size, the
Fund may be hedged from a risk standpoint. In addition, the Fund will maintain
in a segregated account with its Custodian Treasury Bills maturing no later than
those which would be deliverable in the event of an assignment of an exercise
notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. The Fund may purchase and write options on GNMA
Certificates in the over-the-counter market and, to the extent available, on any
Exchange.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call option holding GNMA Certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA Certificates no longer have sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered or substitute cover.
A GNMA Certificate held by the Fund cover a call option the Fund has
written in any but the nearest expiration month may cease to represent cover for
the option in the event of a decline in the GNMA coupon rate at which new pools
are originated under the FHA/VA loan ceiling in effect at any given time. Should
this occur, the Fund will no longer be covered, and the Fund will either enter
into a closing purchase transaction or replace the Certificate with a
Certificate which represents cover. When the Fund closes its option position or
replaces the Certificate, it may realize an unanticipated loss and incur
transaction costs.
FUTURES CONTRACTS
The Fund will enter into futures contracts only for certain bona fide
hedging and risk management purposes and to attempt to enhance return. The Fund
may enter into futures contracts for the purchase or sale of debt securities,
aggregates of debt securities or indices of prices thereof, other financial
indices, U.S. Government securities (or those backed by the full faith and
credit of the U.S. Government), corporate debt securities and certain foreign
government debt securities (collectively, interest rate futures contracts). It
may also enter into futures contracts for the purchase or sale of foreign
currencies or composite foreign currencies (such as the European Currency Unit)
in which securities held or to be acquired by the Fund are denominated, or the
value of which have a high degree of positive correlation to the value of such
currencies as to constitute an appropriate vehicle for hedging. The Fund may
enter into such futures contracts both on U.S. and foreign exchanges.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures contracts are settled on a net cash payment basis rather than by the
sale and delivery of the securities or currency underlying the futures contract.
U.S. futures contracts have been designed by exchanges that have been designated
as "contract markets" by the Commodity Futures Trading Commission (the CFTC), an
agency of the U.S. Government, and must be executed through a futures commission
merchant (i.e., a brokerage firm) which is a member of the relevant contract
market. Futures contracts trade on these contract markets and the exchange's
affiliated clearing organization guarantees performance of the contracts as
between the clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment (initial margin). It is expected that
the initial margin on U.S. exchanges will vary from one-half of 1% to 4% of the
face value of the contract. Under certain circumstances, however, such as during
periods of high volatility, the Fund may be required by an exchange to increase
the level of its initial margin payment. Thereafter, the futures contract is
valued daily and the payment in cash of "variation margin" may be required, a
process known as "mark-to-the-market." Each day the Fund is required to provide
or is entitled to receive variation margin in an amount equal to any change in
the value of the contract since the preceding day.
Although futures contracts by their terms may call for the actual delivery
or acquisition of underlying assets, in most cases the contractual obligation is
extinguished by offset before the expiration of the contract. The offsetting of
a contractual obligation is accomplished by buying (to offset an earlier sale)
or selling (to offset an earlier purchase) an identical futures contract calling
for delivery in the same month. Such a transaction cancels the obligation to
make or take delivery of the underlying commodity. When the Fund purchases or
sells futures contracts, the Fund will incur brokerage fees and related
transaction costs.
The ordinary spreads between values in the cash and futures markets, due to
differences in the character of those markets, are subject to distortions. In
addition, futures contracts entail risks. First, all participants in the futures
market are subject to initial
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and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing price distortions. Third,
from the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Increased participation by speculators in the futures market may cause
temporary price distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the investment adviser may still not
result in a successful transaction.
If the Fund seeks to hedge against a decline in the value of its portfolio
securities and sells futures contracts on other securities which historically
have had a high degree of positive correlation to the value of the portfolio
securities, the value of its portfolio securities might decline more rapidly
than the value of a poorly correlated futures contract rises. In that case, the
hedge will be less effective than if the correlation had been greater. In a
similar but more extreme situation, the value of the futures position might in
fact decline while the value of the portfolio securities holds steady or rises.
This would result in a loss that would not have occurred but for the attempt to
hedge.
OPTIONS ON FUTURES CONTRACTS
The Fund will also enter into options on futures contracts for certain bona
fide hedging and risk management purposes and to attempt to enhance return. The
Fund may purchase put and call options and write (i.e., sell) "covered" put and
call options on futures contracts that are traded on U.S. and foreign exchanges.
An option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume a short futures position (if the
option is a call) or a long futures position (if the option is a put). Upon
exercise of the option, the assumption of offsetting futures positions by the
writer and holder of the option will be accompanied by delivery of the
accumulated cash balance in the writer's futures margin account which represents
the amount by which the market price of the futures contract at exercise,
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract.
The Fund may only write (i.e., sell) 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 securities or
currency which is deliverable under the futures contract or an option to
purchase that futures contract having a strike price equal to or less than the
strike price of the "covered" option and having an expiration date not earlier
than the expiration date of the "covered" option, or if it segregates and
maintains with its Custodian for the term of the option cash, U.S. Government
securities, equity securities, or other liquid, unencumbered assets,
marked-to-market daily, equal to the fluctuating value of the optioned futures.
The Fund will be considered "covered" with respect to a put option it writes on
a futures contract if it owns an option to sell that futures contract having a
strike price equal to or greater than the strike price of the "covered" option
and having an expiration date not earlier than the expiration date of the
"covered" option, or if it segregates and maintains with its Custodian for the
term of the option cash, U.S. Government securities, equity securities or other
liquid unencumbered assets, marked-to-market daily, at all times equal in value
to the exercise price of the put (less any initial margin deposited by the Fund
with its Custodian with respect to such put option). There is no limitation on
the amount of the Fund's assets which can be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of debt securities the Fund intends to acquire.
If the futures price at expiration of the option is above the exercise price,
the Fund will retain the full amount of the option premium which provides a
partial hedge against any increase that may have occurred in the price of the
debt securities the Fund intends to acquire. If the market price of the
underlying futures contract is below the exercise price when the option is
exercised, the Fund will incur a loss, which may be wholly or partially offset
by the decrease in the value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written call
option is below the exercise price, the Fund will retain the full amount of the
option premium, thereby partially hedging against any decline that may have
occurred in the Fund's holdings of debt securities. If the futures price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be wholly or partially offset by the increase in the
value of the securities in the Fund's portfolio which were being hedged.
The Fund will purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the debt securities it
owns as a result of rising interest rates or fluctuating currency exchange
rates. The Fund will also purchase call
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options on futures contracts as a hedge against an increase in the value of
securities the Fund intends to acquire as a result of declining interest rates
or fluctuating currency exchange rates. If the futures price at expiration of a
written call option is below the exercise price, the Fund will retain the full
amount of the option premium, thereby partially hedging against any decline that
may have occurred in the Fund's holdings of debt securities. If the futures
price when the option is exercised is above the exercise price, however, the
Fund will incur a loss, which may be wholly or partially offset by the increase
of the value of the securities in the Fund's portfolio which were being hedged.
If the investment adviser wishes to shorten the effective average maturity
of the Fund, the Fund may sell a futures contract or a call option thereon, or
purchase a put option on that futures contract. If the investment adviser wishes
to lengthen the effective average maturity of the Fund, the Fund may buy a
futures contract or a call option thereon or sell a put option.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON
The Fund will purchase or sell interest rate futures contracts to take
advantage of or to protect the Fund against fluctuations in interest rates
affecting the value of debt securities which the Fund holds or intends to
acquire. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
a high degree of positive correlation to the values of the Fund's portfolio
securities. Such a sale would have an effect similar to selling an equivalent
value of the Fund's portfolio securities. If interest rates increase, the value
of the Fund's portfolio securities will decline, but the value of the futures
contracts to the Fund will increase at approximately an equivalent rate thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling debt securities
with longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a risk
management technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it is
expected that interest rates may decline. The purchase of futures contracts for
this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make the
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will maintain a segregated asset account with the
Fund's Custodian sufficient to cover the Fund's obligations with respect to such
futures contracts, which will consist of cash, U.S. Government securities,
equity securities, or other liquid, unencumbered assets, marked-to-market daily,
from its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
margin deposited by the Fund with its Custodian with respect to such futures
contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of debt securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of
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correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, the Fund's losses from options on futures
it has written may to some extent be reduced or increased by changes in the
value of its portfolio securities.
At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may have a shorter term than the term of the futures contract and,
consequently, may not in fact have been issued when the futures contract was
entered.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the character of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest rate trends by the investment adviser may still not result in a
successful transaction.
In addition, futures contracts entail risks. Although the Fund believes
that use of such contracts will benefit the Fund, if the investment adviser's
judgment about the general direction of interest rates is incorrect, the Fund's
overall performance would be poorer than if it had not entered into any such
contracts. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds held
in its portfolio and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its bonds which it has hedged
because it will have offsetting losses in its futures positions. In addition,
particularly in such situations, if the Fund has insufficient cash, it may have
to sell bonds from its portfolio to meet daily variation margin requirements.
Such sales of bonds may be, but will not necessarily be, at increased prices
which reflect the rising market. The Fund may have to sell securities at a time
when it may be disadvantageous to do so.
CURRENCY FUTURES AND OPTIONS THEREON
Generally, foreign currency futures contracts and options thereon are
similar to the interest rate futures contracts and options thereon discussed
previously. By entering into currency futures and options thereon on U.S. and
foreign exchanges, the Fund will seek to establish the rate at which it will be
entitled to exchange U.S. dollars for another currency at a future time. By
selling currency futures, the Fund will seek to establish the number of dollars
it will receive at delivery for a certain amount of a foreign currency. In this
way, whenever the Fund anticipates a decline in the value of a foreign currency
against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund can attempt
to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the
price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell (in
the case of a put option) a futures contract at a specified price at any time
during the period before the option expires. If the investment adviser, in
purchasing an option, has been correct in its judgment concerning the direction
in which the price of a foreign currency would move as against the U.S. dollar,
the Fund may exercise the option and thereby take a futures position to hedge
against the risk it had correctly anticipated or close out the option position
at a gain that will offset, to some extent, currency exchange losses otherwise
suffered by the Fund. If exchange rates move in a way the Fund did not
anticipate, however, the Fund will have incurred the expense of the option
without obtaining the expected benefit; any such movement in exchange rates may
also thereby reduce rather than enhance the Fund's profits on its underlying
securities transactions.
OPTIONS ON CURRENCIES
Instead of purchasing or selling futures or forward currency exchange
contracts, the Fund may attempt to accomplish similar objectives by purchasing
put or call options on currencies or by writing put options or covered call
options on currencies either on exchanges or in over-the-counter markets. A put
option gives the Fund the right to sell a currency at the exercise price
B-11
<PAGE>
until the option expires. A call option gives the Fund the right to purchase a
currency at the exercise price until the option expires. Both options serve to
insure against adverse currency price movements in the underlying portfolio
assets designated in a given currency. The Fund's use of options on currencies
will be subject to the same limitations as its use of options or securities,
described above. Currency options may be subject to position limits which may
limit the ability of the Fund to fully hedge its positions by purchasing the
options. Over-the-counter options differ from traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller and do not have as much market liquidity as exchange-traded options. The
Fund will not purchase put or call options on currencies if, as a result
thereof, their value would exceed 5% of the Fund's net assets.
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.
If a decline in any currency is generally anticipated by the investment
adviser, the Fund may not be able to contract to sell the currency at a price
above the level anticipated.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may engage in currency transactions otherwise than on futures
exchanges to protect against future changes in the level of future currency
exchange rates. The Fund will conduct such currency exchange transactions either
on a spot, i.e., cash, basis at the rate then prevailing in the currency
exchange market or on a forward basis, by entering into forward contracts to
purchase or sell currency. A forward contract on foreign currency involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days agreed upon by the parties from the date of the
contract, at a price set on the date of the contract. The risk of shifting of a
forward currency contract will be substantially the same as a futures contract
having similar terms. The Fund's dealing in forward currency exchange will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities and accruals of
interest receivable and Fund expenses. Position hedging is the forward sale of
currency with respect to portfolio security positions denominated or quoted in
or convertible into that currency or in a different currency (cross hedge). The
Fund may also cross hedge its currency exposure under circumstances where the
investment adviser believes that the currency in which a security is denominated
may deteriorate against the dollar and that the possible loss in value can be
hedged, return can be enhanced and risks can be managed by entering into forward
contracts to sell the deteriorating currency and buy a currency that is expected
to appreciate in relation to the dollar.
The Fund may not position hedge with respect to a particular currency for
an amount greater than the aggregate market value (determined at the time of
making any sale of forward currency) of the securities held in its portfolio
denominated or quoted in, or currently convertible into, such currency. If the
Fund enters into a position-hedging transaction, the transaction will be
"covered" by the position being hedged or the Fund's Custodian or sub-custodian
will place cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets in a segregated account of the Fund (less the value of the
"covering" positions, if any) in an amount equal to the value of the Fund's
total assets committed to the consummation of the given forward contract. The
assets placed in the segregated account will be marked-to-market daily, and if
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so that the value of
the account will, at all times, equal the amount of the Fund's net commitment
with respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between the
Fund's entering into a forward contract for the sale of a currency and the date
it enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
purchase is less than the price of the currency it has agreed to sell. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Closing out forward purchase contracts involves similar
offsetting transactions.
B-12
<PAGE>
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions are
involved. The use of foreign currency contracts does not eliminate fluctuations
in the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition, although forward
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result if the
value of the currency increases.
If a decline in any currency is generally anticipated by the investment
adviser, the Fund may not be able to contract to sell the currency at a price
above the level to which the currency is anticipated to decline.
The Fund's ability to enter into foreign forward currency exchange
contracts may be limited by certain requirements for qualifying as a registered
investment company under the Internal Revenue Code. See "Taxes".
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND
FORWARD CONTRACTS
Options, futures contracts, and options thereon and forward contracts
on securities and currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
U.S., may not involve a clearing mechanism and related guarantees, and are
subject to the risk of governmental actions affecting trading in, or the prices
of, foreign securities. The value of such positions also could be adversely
affected by (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the U.S. of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in the foreign markets during non-business hours in the U.S., (iv) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the U.S. and (v) lesser trading volume.
Exchanges on which options, futures and options on futures are traded
may impose limits on the positions that the Fund may take in certain
circumstances.
SPECIAL RISK CONSIDERATIONS RELATING TO FUTURES AND OPTIONS THEREON
Certain risks are inherent in the Fund's use of futures contracts and
options on futures. One such risk arises because the correlation between
movements in the price of futures contracts or options on futures and movements
in the price of the securities hedged or used for cover will not be perfect.
Another risk is that the price of futures contracts or options on futures may
not move inversely with changes in interest rates. If the Fund has sold futures
contracts to hedge securities held by the Fund and the value of the futures
position declines more than the price of such securities increases, the Fund
will realize a loss on the futures contracts which is not completely offset by
the appreciation in the price of the hedged securities. Similarly, if the Fund
has written a call on a futures contract and the value of the call increases by
more than the increase in the value of the securities held as cover, the Fund
may realize a loss on the call which is not completely offset by the
appreciation in the price of the securities held as cover and the premium
received for writing the call.
The Fund's ability to establish and close out positions in futures
contracts and options on futures contracts will be subject to the development
and maintenance of liquid markets. Although the Fund generally will purchase or
sell only those futures contracts and options thereon for which there appears to
be a liquid market, there is no assurance that a liquid market on an exchange
will exist for any particular futures contract or option thereon at any
particular time. In the event no liquid market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it will not
be possible to effect a closing transaction in that contract or to do so at a
satisfactory price and the Fund would have to either make or take delivery under
the futures contract or, in the case of a written option, wait to sell the
underlying securities until the option expires or is exercised or, in the case
of a purchased option, exercise the option. In the case of a futures contract or
an option on a futures contract which the Fund has written and which the Fund is
unable to close, the Fund would be required to maintain margin deposits on the
futures contract or option and to make variation margin payments until the
contract is closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the investment adviser to
predict correctly movements in the direction of interest and foreign currency
rates. If the investment adviser's expectations are not met, the Fund would be
in a worse position than if a hedging strategy had not been pursued. For
example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund will lose
part or all of the benefit of the increased value of its securities because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the
B-13
<PAGE>
Fund has insufficient cash to meet daily variation margin requirements, it may
have to sell securities to meet the requirements. These sales may, but will not
necessarily, be at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it is disadvantageous to do so.
Pursuant to the requirements of the Commodity Exchange Act, as amended,
all U.S. futures contracts and options thereon must be traded on an exchange.
Since a clearing corporation effectively acts as the counterparty on every
futures contract and option thereon, the counterparty risk depends on the
strength of the clearing or settlement corporation associated with the exchange.
Additionally, although the exchanges provide a means of closing out a position
previously established, there can be no assurance that a liquid market will
exist for a particular contract at a particular time. In the case of options on
futures, if such a market does not exist, the Fund, as the holder of an option
on futures contracts, would have to exercise the option and comply with the
margin requirements for the underlying futures contract to realize any profit,
and if the Fund were the writer of the option, its obligation would not
terminate until the option expired or the Fund was assigned an exercise notice.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS
The Fund will engage in transactions in futures contracts and options
thereon only for bona fide hedging, return enhancement and risk management
purposes, in each case in accordance with the rules and regulations of the CFTC,
and not for speculation.
In accordance with CFTC regulations, the Fund may not purchase or sell
futures contracts or options thereon for yield enhancement or risk management
purposes if immediately thereafter the sum of the amounts of initial margin
deposits on the Fund's existing futures and premiums paid for options on futures
would exceed 5% of the liquidation value of the Fund's total assets after taking
into account unrealized profits and unrealized losses on any such contracts;
provided, however, that in the case of an option that is in- the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating the
5% limitation. The above restriction does not apply to the purchase and sale of
futures contracts and options thereon for bona fide hedging purposes. In
instances involving the purchase of futures contracts or call options thereon or
the writing of put options thereon by the Fund, an amount of liquid assets equal
to the market value of the futures contracts and options thereon (less any
related margin deposits), will be deposited in a segregated account with the
Fund's Custodian to cover the position, or alternative cover will be employed,
thereby insuring that the use of such instruments is unleveraged.
The Fund's purchase and sale of futures contracts and purchase and
writing of options on futures contracts will be for the purpose of protecting
its portfolio against anticipated future changes in interest rates or foreign
currency exchange which might otherwise either adversely affect the value of the
Fund's portfolio securities or adversely affect the prices of securities that
the Fund intends to purchase at a later date, to change the effective duration
of the Fund's portfolio and to enhance the Fund's return. The Fund expects that
in 75% of the transactions involving an anticipating hedge it will purchase
securities for its portfolio when it closes out its earlier purchase of futures
or call options thereon or put options it has written thereon. Under unusual
market conditions, however, the Fund may terminate any of such positions without
a corresponding purchase of securities. As an alternative to bona fide hedging
as defined by the CFTC, the Fund may comply with a different standard
established by CFTC rules with respect to futures contracts and options thereon
purchased by the Fund incidental to the Fund's activities in the securities
markets, under which the value of the assets underlying such positions will not
exceed the sum of (i) cash set aside in an identifiable manner or short-term
U.S. Government or other U.S. dollar denominated high-grade short-term debt
securities segregated for this purpose, (ii) cash proceeds on existing
investments due within thirty days and (iii) accrued profits on the particular
futures contract or option thereon.
In addition, CFTC regulations may impose limitations on the Fund's
ability to engage in certain yield enhancement and risk management strategies.
There are no limitations on the Fund's use of futures contracts and options on
futures contracts beyond the restrictions set forth above.
Although the Fund intends to purchase or sell futures and options on
futures only on exchanges where there appears to be an active market, there is
no guarantee that an active market will exist for any particular contract or at
any particular time. If there is not a liquid market at a particular time, it
may not be possible to close a futures position at such time, and, in the event
of adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, when futures positions are used to
hedge portfolio securities, such securities will not be sold until the futures
positions can be liquidated. In such circumstances, an increase in the price of
securities, if any, may partially or completely offset losses on the futures
contracts.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not
B-14
<PAGE>
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). With respect to commercial paper that is issued in reliance on
Section 4(2) of the Securities Act, to be considered liquid (i) it must be rated
in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
The staff of the SEC 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 also will treat non-U.S. Government
IOs and POs as illiquid so long as the staff of the SEC maintains its position
that such securities are illiquid.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, wherein the seller
agrees to repurchase a security from the Fund at a mutually agreed-upon time and
price. The period of maturity is usually quite short, possibly overnight or a
few days, although it may extend over a number of months. The Fund does not
currently intend to invest in repurchase agreements whose maturity exceeds one
year. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money is
invested in the security. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and as the value of instruments
declines, the Fund will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Fund may incur a loss.
The Fund participates in a joint repurchase account with other
investment companies managed by Prudential Investments Fund Management LLC
(PIFM) pursuant to an order of the Securities and Exchange Commission. On a
daily basis, any uninvested cash balances of the Fund may be aggregated with
such of other investment companies and invested in one or more repurchase
agreements. Each fund participates in the income earned or accrued in the joint
account based on the percentage of its investment.
B-15
<PAGE>
PORTFOLIO TURNOVER
The Fund has no fixed policy with respect to portfolio turnover;
however, as a result of the Fund's investment policies, its annual portfolio
turnover rate may exceed 100% although the rate is not expected to exceed 250%.
The portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the Fund's
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs which
will be borne directly by the Fund. The Fund's portfolio turnover rate was 38%
and 203% for the fiscal years ended December 31, 1996 and 1995, respectively,
and was high in 1995 as a result of the Subadviser's attempt to minimize the
impact of rising yields in the global bond market on principal.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental
policies are those which cannot be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities. A "majority of the
Fund's outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin, except such short-term credits
as may be necessary for the clearance of transactions and except that
the Fund may make deposits on margin in connection with futures
contracts and options.
2. Make short sales of, or maintain a short position in,
securities.
3. Issue senior securities, borrow money or pledge its assets,
except that the Fund may borrow from banks up to 20% of the value of
its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, for the clearance of transactions,
or for investment purposes. The Fund may pledge up to 20% of the value
of its total assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or
delayed delivery basis, forward foreign currency exchange contracts and
collateral arrangements relating thereto, and collateral arrangements
with respect to interest rate swap transactions, reverse repurchase
agreements, dollar roll transactions, options, futures contracts and
options thereon and obligations of the Fund to Directors pursuant to
deferred compensation arrangements are not deemed to be a pledge of
assets or the issuance of a senior security.
4. Buy or sell commodities, commodity contracts, real estate or
interests in real estate, except that the Fund may purchase and sell
futures, options on futures contracts and securities secured by real
estate or interests therein. Transactions in foreign currencies and
forward contracts and options on foreign currencies 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 over the issuers of any investments.
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. Invest 25% or more of its assets in any one industry. For this
purpose "industry" does not include the U.S. Government, but does
include foreign government issuers.
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-16
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS AND
NAME AND ADDRESS** (AGE) WITH THE FUND OTHER AFFILIATIONS
- ------------------------ ------------- -------------------------
<S> <C> <C>
Edward D. Beach (72) Director President and Director of BMC Fund, Inc., a closed-end investment
company; previously, Vice Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary and Treasurer of
Broyhill Family Foundation Inc.; Member of the Board of Trustees of
Mars Hill College; Director of The High Yield Income Fund, Inc..
Delayne Dedrick Gold (58) Director Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (50) Director Comptroller (since May 1996) of Prudential Investments; Executive
Vice President and Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM); Senior Vice President (since
March 1987) of Prudential Securities Incorporated (Prudential
Securities); formerly Chief Administrative Officer (July
1990-September 1996), Director (January 1989-September 1996),
Executive Vice President, Treasurer and Chief Financial Officer (June
1987-September 1996) of Prudential Mutual Fund Management, Inc.; Vice
President and Director (since May 1989) of The Asia Pacific Fund,
Inc.; Director of The High Yield Income Fund, Inc.
Donald D. Lennox (78) Director Chairman (since February 1990) and Director (since April 1989) of
International Imaging Materials, Inc. (thermal transfer ribbon
manufacturer); Retired Chairman, Chief Executive Officer and
Director (March 1987-February 1989) of Schlegel Corporation
(industrial manufacturing) ; Director of Gleason Corporation,
Personal Sound Technologies, Inc., and The High Yield Income Fund,
Inc.
Douglas H. McCorkindale (57) Director Vice Chairman (since March 1984) of Gannett Co. Inc. (publishing and
media); Director of Continental Airlines, Inc., Gannett Co. Inc. and
Frontier Corporation.
*Mendel A. Melzer, CFA (36) Director Chief Investment Officer (since October 1996) of Prudential Mutual
751 Broad Street Funds; formerly Chief Financial Officer (November 1995-September
Newark, NJ 07102 1996) of Prudential Investments, Senior Vice President and Chief
Financial Officer (April 1993-November 1995) of Prudential Preferred
Financial Services, Managing Director (April 1991-April 1993) of
Prudential Investment Advisors, and Senior Vice President (July
1989-April 1991) of Prudential Capital Corporation; Chairman and
Director of Prudential Series Fund, Inc.; Director of The High Yield
Income Fund, Inc.
Thomas T. Mooney (55) 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, Monroe County Water
Authority, Rochester Jobs, Inc., Northeast-Midwest Institute, The
Business Council of New York State, Executive Service Corps of
Rochester, Monroe County Industrial Development Corporation, First
Financial Fund, Inc., The High Yield Income Fund, Inc. and The High
Yield Plus Fund, Inc.
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS AND
NAME AND ADDRESS** (AGE) WITH THE FUND OTHER AFFILIATIONS
- ------------------------ ------------- -------------------------
<S> <C> <C>
Stephen P. Munn (54) Director Chairman (since January 1994), Director and President (since 1988)
and Chief Executive Officer (1988-December 1993) of Carlisle
Companies Incorporated (manufacturer of industrial products).
*Richard A. Redeker (53) President Employee of Prudential Investments; formerly President, Chief
751 Broad Street and Director Executive Officer and Director (October 1993-September 1996) of
Newark, NJ 07102 Prudential Mutual Fund Management, Inc., 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 Prudential Investment Corporation and Director
(January 1994-September 1996) of Prudential Mutual Fund Distributors,
Inc. (PMFD) and Prudential Mutual Fund Services, Inc. and Senior
Executive Vice President and Director (September 1978-September 1993)
of Kemper Financial Services, Inc.; President and Director of The High
Yield Income Fund, Inc.
Robin B. Smith (57) Director Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; 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., Springs Industries
Inc. and Kmart Corporation.
Louis A. Weil, III (55) Director Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.; Chairman
of the Board (since January 1996), Publisher and Chief Executive
Officer (August 1991-December 1995) of Phoenix Newspapers, Inc.;
formerly Publisher (May 1989-March 1991) of Time Magazine;
formerly President, Publisher and Chief Executive Officer (February
1986-August 1989) of The Detroit News; formerly member of
the Advisory Board, Chase Manhattan Bank-Westchester; Director
of The High Yield Income Fund, Inc.
Clay T. Whitehead (58) Director President (since May 1983) of National Exchange Inc. (new business
development firm).
Susan C. Cote (42) Vice President Vice President (since February 1997) of Prudential Mutual Funds &
Annuities (PMF & A); Executive Vice President (since February 1997)
and Chief Financial Officer (since May 1996) of PIFM; formerly
Managing Director of Prudential Investments and Vice President
(February 1995-May 1996) of PIC; Senior Vice President (January
1989-January 1995) of Prudential Mutual Fund Management, Inc. and
Senior Vice President (January 1992-January 1995) of
Prudential Securities.
Thomas A. Early (42) Vice President Vice President and General Counsel (since March 1997) of PMF & A;
Executive Vice President, Secretary and General Counsel (since
December 1996) of PIFM; formerly Vice President and General Counsel
(March 1994-March 1997) of Prudential Retirement Services and
Associate General Counsel and Chief Financial Services Officer
(1988-1994) of Frank Russell Company.
</TABLE>
B-18
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS AND
NAME AND ADDRESS** (AGE) WITH THE FUND OTHER AFFILIATIONS
- ------------------------ ------------- -------------------------
<S> <C> <C>
Grace C. Torres (38) Treasurer and First Vice President (since December 1996) of PIFM; First Vice
Principal President (since March 1994) of Prudential Securities; formerly First
Financial and Vice President (March 1994-September 1996) of Prudential Mutual Fund
Accounting Management, Inc. and Vice President (July 1989-March 1994) of Bankers
Officer Trust Corporation.
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of PIFM; Senior Vice
President and Senior Counsel (since July 1992) of Prudential
Securities; formerly Senior Vice President (January 1991-September
1996) and Senior Counsel (June 1987-September 1996) of Prudential
Mutual Fund Management, Inc.
Marguerite E. H. Morrison (41) Assistant Vice President and Associate General Counsel (since December 1996) of
Secretary 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
Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996) of Prudential Investments and the
Treasurer Private Asset Group of The Prudential Insurance Company of America;
formerly First Vice President (February 1993-September 1996) of
Prudential Mutual Fund Management, Inc. and Senior Tax Manager
(1981-January 1993) of Price Waterhouse LLP.
</TABLE>
- -------------------
* "Interested" Director, as defined in the Investment Company Act, by reason
of affiliation with Prudential Securities, Prudential or PIFM.
** 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.
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Directors who is not an affiliated person of
PIFM or Prudential Investments annual compensation of $3000, 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 upon
which the Directors will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Directors' fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Director. The
Fund's obligation to make payments of deferred Board of Directors' fees,
together with interest thereon, is a general obligation of the Fund.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs. Beach
and Lennox are scheduled to retire on December 31, 1999 and 1997, respectively.
Pursuant to the terms of the Management Agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees and expenses of all Directors of the Fund who are affiliated persons of
the Manager.
The 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, 1996 and the aggregate compensation paid to such
Directors for service on the
B-19
<PAGE>
Fund's Board and that of all other funds managed by PIFM (Fund Complex) for the
calendar year ended December 31, 1996. In October 1996, shareholders elected a
new Board of Directors. Below is listed all Directors who have served the Fund
during its most recent fiscal year, as well as the new Directors who took office
after the shareholder meeting in October.
<TABLE>
<CAPTION>
TOTAL 1996
PENSION OR COMPENSATION
RETIREMENT ESTIMATED PAID TO
AGGREGATE BENEFITS ACCRUED ANNUAL DIRECTORS
COMPENSATION AS PART OF FUND BENEFITS UPON FROM FUND
NAME OF DIRECTOR FROM FUND++ EXPENSES RETIREMENT COMPLEX*
---------------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C>
Edward D. Beach .................................... $18,750 None N/A $166,000(21/39)**
Delayne Dedrick Gold ............................... -- None N/A 175,308(21/42)**
Robert F. Gunia+ ................................... -- None N/A --
Harry A. Jacobs, Jr., Former Director+ ............. -- None N/A --
Donald D. Lennox ................................... 18,750 None N/A 90,000(10/22)**
Douglas H. McCorkindale* ........................... 18,750 None N/A 71,208(10/13)**
Mendel A. Melzer+ .................................. -- None N/A --
Thomas T. Mooney* .................................. 18,750 None N/A 135,375(18/36)**
Stephen P. Munn .................................... -- None N/A 49,125( 6/8 )**
Richard A. Redeker+ ................................ -- None N/A --
Robin B. Smith* .................................... -- None N/A 89,957(11/20)**
Louis A. Weil III .................................. 18,750 None N/A 91,250(13/18)**
Clay T. Whitehead .................................. -- None N/A 38,292( 5/7 )**
</TABLE>
* Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1996 includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,034,
$139,869 and $109,294 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.
+ Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A.
Redeker, who are interested Directors, do not receive compensation from the
Fund or any fund in the Fund Complex.
++ Effective January 1997, the annual compensation payable to each Director
was reduced to $3,000 per year in addition to certain out-of-pocket
expenses.
As of June 27, 1997, the Directors and officers of the Fund as a group
owned less than 1% of the outstanding common stock of the Fund.
As of June 27, 1997, Prudential Securities was record holder of
3,731,762 Class A (or 24.9% of the outstanding shares), 38,737 Class B (or 8.1%
of the outstanding shares), 3,290 Class C shares (or 8.07% of the outstanding
shares), and 4,956 Class Z shares (or 99.7% of the outstanding shares) 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 June 27, 1997 the beneficial owners, directly or indirectly,
or more than 5% of the outstanding shares of any class of shares of the Fund
were: Smith Barney Inc., 388 Greenwich Street, New York, NY 10013-2375, who held
1,105,690 Class A shares (7.4%); Prudential Securities, Inc., FA, Richard T.
Letwak TTEE, 26400 La Alameda Ste. 200, Mission Viejo, CA 92691-6318, who held
10,122 Class B shares (21.2%); Mrs. Linda J. Pail, 3647 Forbes Trail Dr,
Murrysville PA 15668-1072, who held 5,714 Class B shares (12%); James D. Schulz,
2319 W. Hoope Road, Unionville, MI 48767-9675, who held 2,754 Class B shares
(5.7%); Carmen Jurado TTEE, FBO Carmen Jurado Living Trust UA DTD 01/15/87, P.O.
Box 431646, Miami, Fl 33243-1646, who held 4,067 Class B shares (8.5%); Mrs.
Esther Greenwood Robinson TTee, or Succ in Trust of the Esther Greenwood
Robinson Rev. Trust UA DTD 01/30/96, 1400 Geary Blvd., Apt. 1405, San Francisco,
CA 94109-6568, who held 4,647 Class B shares (9.7%); Tom Sichler and Ron
Cerwinske CO-TTEES, S&S Tool PS Plan DTD 03/18/97, 7800 Beech St. NE, Fridley,
MN 55423-2513, who held 3,460 Class B shares (7.2%); Leslie R. Smith & Eudema G.
Smith JT WROS, 11413 W 72nd St. Ter, Shawnee, KS 66203-4319, who held 754 Class
C shares (18.5%). Mrs. Mildred Weintraub TTEE, Mildred Weintraub Trust UA DTD
07/30/89, 44300 San Pasqual Ave., Apt. 101, Palm Desert, CA 92260-2921 who held
2,725 Class C shares (66.9%); Dr, Urban Scheuring, 2600 Torrey Pines Rd B-28, La
Jolla, CA 92037-3403 who held 565 Class C shares (13.8%); Mark E. Hemington and
Mrs. Jill L. Hemington CO-TEES, Hemington Landscape PS Plan, 5625 Sierra Real,
El Dorado, CA 95623-4402 who held 255 Class Z shares (5.1%); Prudential
Securities C/F, Kathleen U. Rejent, IRA DTD 02/04/93, 3505 Sherborne Chase,
Marietta, GA 30062-5534 who held 755 Class Z shares (15.1%); Prudential
Securities C/F, Caasimir S. Rejent III, IRA DTD 02/04/93, 3505 Sherborne Chase,
Marietta, GA 30062-5534 who held 1,447 Class Z shares (29%); Virginia
Goodmanson, 737 Sullivan Way, NE, Columbia Hgts, MN 55421-1777 who held 341
Class Z shares (6.8%): Robert E Merry and Celeste A. Merry JT Ten, 4901 E.
McKinley Ave.,Tacoma, WA 98404-2007 who held 902 Class Z shares (18%) and Albert
R. Rinbault TTEE, Delta Masonry Inc PS Plan DTD 04/01/77, P.O. Box 21288,
Concord, CA 94521-0288 who held 1,015 Class Z shares (20.3%).
B-20
<PAGE>
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC
(formerly Prudential Mutual Fund Management LLC) (PIFM or the Manager), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. PIFM serves as
manager to all of the other investment companies that, together with the Fund,
comprise the "Prudential Mutual Funds." See "How the Fund is Managed" in the
Prospectus. As of June 30, 1997, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $
billion and according to the Investment Company Institute, as of December 31,
1996, the Prudential Mutual Funds were the 15th largest family of mutual funds
in the United States.
PIFM is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly owned subsidiary
of PIFM, serves as the transfer agent for the Prudential Mutual Funds and in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM also administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's custodian, and Transfer Agent.
The management services of PIFM for the Fund are not exclusive under the terms
of the Management Agreement and PIFM is free to, and does, render management
services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a
fee at an annual rate of .75 of 1% of the Fund's average daily net assets up to
$1 billion, and .70 of 1% of such assets in excess of $1 billion. The fee is
computed daily and payable monthly. The Management Agreement also provides that,
in the event the expenses of the Fund (including the fees of PIFM, but excluding
interest, taxes, brokerage commissions, distribution fees and litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business) for any fiscal year exceed the lowest
applicable annual expense limitation established and enforced pursuant to the
statutes or regulations of any jurisdiction in which the Fund's shares are
qualified for offer and sale, the compensation due to PIFM will be reduced by
the amount of such excess. No such reductions were required during the fiscal
year ended December 31, 1996. No jurisdiction currently limits the Fund's
expenses.
In connection with its management of the business affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of members of the Board of Directors who are not
affiliated persons of PIFM or the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation, doing business as Prudential Investments (PI or the Subadviser)
pursuant to the subadvisory agreement between PIFM and PI (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Fund and of pricing the Fund's shares, (d) the charges and expenses of legal
counsel and independent accountants for the Fund, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Fund in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade associations of which the Fund
may be a member, (h) the cost of stock certificates representing shares of the
Fund, (i) the cost of fidelity and liability insurance, (j) certain organization
expenses of the Fund and the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Securities and
Exchange Commission and the states under state securities laws, including the
preparation and printing of the Fund's registration statements and prospectuses
for such purposes, (k) allocable communications expenses with respect to
investor services and all expenses of shareholders' and Board of Directors'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders,(l) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business and (m)
distribution fees.
The Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful
B-21
<PAGE>
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act, on May 21, 1997 and by
shareholders of the Fund on April 28, 1988.
PIFM earned management fees of $1,354,632, $2,570,602 and $2,490,259 for
the fiscal years ended December 31, 1996, 1995 and 1994, respectively.
PIFM has entered into the Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that PI will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PI is obligated to keep certain books and records
of the Fund; PIFM continues to have responsibility for all investment advisory
services pursuant to the Management Agreement and supervises PI's performance of
such services. PI is reimbursed by PIFM for the reasonable costs and expenses
incurred by PI in furnishing services to PIFM.
The Subadviser maintains a credit unit which provides credit analysis and
research on taxable fixed-income securities. The portfolio manager routinely
consults with the credit unit in managing the Fund's portfolio. The credit unit
reviews on an ongoing basis issuers of taxable fixed-income obligations,
including prospective purchases and portfolio holdings of the Fund. Credit
analysts have broad access to research and financial reports, data retrieval
services and industry analysts.
Credit analysts review financial statements published by corporate (and
governmental) issuers to examine income statements, balance sheets and cash flow
numbers. They evaluate this data against their expectations of sales, earnings
growth and trends in credit ratios. They study the impact of economic,
regulatory and political developments on companies and industries and look at
the relative value of companies. They are in regular communication both in
person and by telephone with company management, Wall Street analysts and rating
agencies.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Board of Directors who are not parties to the
contract or interested persons of any such party as defined in the Investment
Company Act, on May 21, 1997 and was approved by shareholders of the Fund on
April 28, 1988.
The 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 Subadvisory Agreement may be
terminated by the Fund, PIFM or PI upon not more than 60 days' nor less than 3O
days' written notice. The 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.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor) One Seaport Plaza, New York, New York 10292 acts as the distributor
of the Fund's shares.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), Prudential Securities incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. Prudential
Securities also incurs the expenses of distributing the Fund's Class Z shares
under the Distribution Agreement, none of which are reimbursed by or paid for by
the Fund. See "How the Fund is Managed--Distributor" in the Prospectus.
Prior to January 15, 1996, the Fund operated as a closed-end fund and
offered only one class of shares (the then existing Class A shares). The Board
of Directors, including a majority of the Directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plans or in any agreement related to the Plans (the Rule 12b-1
Directors, last approved the plans on May 21, 1997. The Class A Plan was
approved by shareholders of the Fund on December 6, 1995. The Class B and Class
C Plans were approved by the sole shareholder of each class on January 15, 1996.
CLASS A PLAN. For the fiscal period ended December 31, 1996, Prudential
Securities received payments of $260,520 under the Class A Plan. This amount was
primarily expended for payments of account servicing fees to financial advisers
and other persons who sell Class A shares. For the fiscal period ended December
31, 1996, Prudential Securities also received approximately $13,600 in initial
sales charges.
B-22
<PAGE>
CLASS B PLAN. For the fiscal year ended December 31, 1996, Prudential
Securities received $165 from the Fund under the Class B Plan and spent
approximately $700 in distributing the Fund's Class B shares. It is estimated
that of the latter amount, approximately 30.7% ($215) was spent on printing and
mailing of prospectuses to other than current shareholders; and 69.3% ($485) in
the aggregate for (i) payments of commissions and account servicing fees to
financial advisers (23.6% or $165) and (ii) an allocation of overhead and other
branch office distribution-related expenses for payments of related expenses
(45.7% or $320). The term "overhead and other branch office distribution-related
expenses" represents (a) the expenses of operating Prudential Securities' and
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.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus.
CLASS C PLAN. For the fiscal period ended December 31, 1996, Prudential
Securities received $59 under the Class C Plan and spent approximately $1,100 in
distributing Class C shares. It is estimated that of the latter amount,
approximately 90.9% ($1,000) was spent on printing and mailing of prospectuses
to other than current shareholders; and 9.1% ($100) in the aggregate for (i)
payments for commissions and account servicing fees to financial advisers (2.3%
or $25) and (ii) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses (6.8% or $75).
Prudential Securities also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class C shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may be terminated at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Directors or by the vote of the holders of
a majority of the outstanding shares of the Fund on not more than 30 days'
written notice to any other party to the Plans. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class (by both Class A
and Class B shareholders, voting separately, in the case of material amendments
to the Class A Plan), and all material amendments are required to be approved by
the Board of Directors in the manner described above. Each Plan will
automatically terminate in the event of its assignment. The Fund will not be
contractually obligated to pay expenses incurred under any Plan if they are
terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the federal securities laws. The Distribution Agreement was
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 21, 1997.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In setting the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
B-23
<PAGE>
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director serves as an independent "ombudsman" whom PSI employees
can call anonymously with complaints about ethics and compliance. Prudential
Securities reports any allegations or instances of criminal conduct and material
improprieties to the new director. The new director submits compliance reports
which identify all such allegations or instances of criminal conduct and
material improprieties every three months and will continue to do so for a
three-year period.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund, the
selection of brokers, dealers and futures commission merchants to effect the
transactions and the negotiation of brokerage commissions, if any. (For purposes
of this section, the term "Manager" includes the Subadviser.) On a national
securities exchange, broker-dealers may receive negotiated brokerage commissions
on Fund portfolio transactions, including options, futures, and options on
futures transactions and the purchase and sale of underlying securities upon the
exercise of options. On a foreign securities exchange, commissions may be fixed.
Orders may be directed to any broker or futures commission merchant including,
to the extent and in the manner permitted by applicable law, Prudential
Securities and its affiliates.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments and agency securities may be purchased directly from the
issuer, in which case no commissions or discounts are paid. The Fund will not
deal with Prudential Securities in any transaction in which Prudential
Securities acts as principal. Thus, it will not deal in 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 is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Manager will consider the research and
investment services provided by brokers, dealers or futures commission merchants
who effect or are parties to portfolio transactions of the Fund, the Manager or
the Manager's other clients. Such research and investment services are those
which brokerage houses
B-24
<PAGE>
customarily provide to institutional investors and include statistical and
economic data and research reports on particular companies and industries. Such
services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund, and the services
furnished by such brokers, dealers or futures commission merchants may be used
by the Manager in providing investment management for the Fund. Commission rates
are established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker, dealer or futures commission merchant in the light of
generally prevailing rates. The Manager's policy is to pay higher commissions to
brokers and futures commission merchants, other than Prudential Securities, for
particular transactions than might be charged if a different broker had been
selected, on occasions when, in the Manager's opinion, this policy furthers the
objective of obtaining best price and execution. In addition, the Manager is
authorized to pay higher commissions on brokerage transactions for the Fund to
brokers and futures commission merchants other than Prudential Securities in
order to secure research and investment services described above, subject to
review by the Fund's Board of Directors from time to time as to the extent and
continuation of this practice. The allocation of orders among brokers and
futures commission merchants and the commission rates paid are reviewed
periodically by the Fund's Board of Directors. Portfolio securities may not be
purchased from any underwriting or selling syndicate of which Prudential
Securities (or any affiliate), during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the Securities and Exchange Commission. This
limitation, in the opinion of the Fund, will not significantly affect the Fund's
ability to pursue its present investment objective. However, in the future, in
other circumstances, the Fund may be at a disadvantage because of this
limitation in comparison to other funds with similar objectives but not subject
to such limitations.
Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a broker or futures commission merchant for the Fund. In
order for Prudential Securities (or any affiliate) to effect any portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by Prudential Securities (or any affiliate) must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other such brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or futures contracts being purchased or sold on an
exchange or board of trade during a comparable period of time. This standard
would allow Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
non-interested Directors, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities for transactions effected by the Fund during
the applicable period. Brokerage transactions with Prudential Securities (or any
affiliate) are also subject to such fiduciary standards as may be imposed upon
Prudential Securities (or such affiliates) by applicable law.
The Fund paid no brokerage commissions for the fiscal years ended December
31, 1996, 1995 and 1994.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis(Class B or Class C shares). Class Z shares of the Fund
are offered to a limited group of investors at net asset value without any sales
charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees (except for Class Z
shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (ii) each class has exclusive
voting rights with respect to any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Distributor" and
"Shareholder Investment Account--Exchange Privilege."
B-25
<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%
and Class B,* Class C* and Class Z** shares are sold at net asset value. Using
net asset values at December 31, 1996, the maximum offering price of the Fund's
shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share ......................... $7.63
Maximum sales charge (4.0% of offering price) .................................. .32
-----
Offering price to public ....................................................... $7.95
=====
CLASS B
Net asset value, offering price and redemption price per Class B share* ........ $7.64
=====
CLASS C
Net asset value, offering price and redemption price per Class C share* ........ $7.64
=====
CLASS Z
Net asset value, redemption price and offering price per Class Z share** ....... $7.63
=====
</TABLE>
- ----------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
** Class Z shares did not exist on December 31, 1996.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be controlled
by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include a
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
B-26
<PAGE>
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "Net Asset Value" in the Prospectus. The
Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Rights of accumulation are
not available to individual participants in any retirement or group plans.
LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant 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 retirment 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 charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. If the goal
is exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
B-27
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES.
The contingent deferred sales charge is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust, a
copy of the grantor's death certificate,
plus a copy of the trust agreement
identifying the grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a letter
unable to engage in any substantial from a physician on the physician's
gainful activity by reason of any letterhead stating that the shareholder
medically determinable physical or (or, in the case of a trust, the grantor)
mental impairment which can be is permanently disabled. The letter must
expected to result in death or to be also indicate the date of disability.
of long-continued and indefinite
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the
Custodial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that
the shareholder is over age 59-1/2 and is
taking a normal distribution--signed by
the shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee on
company letterhead indicating the amount
of the excess and whether or not taxes
have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to the
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value on the record date. An investor may direct the Transfer Agent in writing
not less than five (5) full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
In the case of recently purchased shares for which registration instructions
have not been received on the record date, cash payment will be made directly to
the dealer. Any shareholder who receives a cash payment representing a dividend
or distribution may reinvest such distribution at net asset value 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 net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholder will receive credit for any contingent deferred sales charge 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
B-28
<PAGE>
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
relative net asset value next determined after receipt of an order in proper
form. An exchange will be treated as a redemption and purchase for tax purposes.
Shares may be exchanged for shares of another fund only if shares of such fund
may legally be sold under applicable state laws. For retirement and group plans
having a limited menu of Prudential Mutual Funds, the Exchange Privilege is
available for those funds eligible for investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
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 for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, Inc. No CDSC may be payable upon such exchange, but a CDSC may be payable
upon the redemption of Class B and Class C shares acquired as a result of the
exchange. The applicable sales charge will be that imposed by the Fund in which
shares were initially purchased and the purchase date will be deemed to be the
first day of the month after of the initial purchase, rather than the date of
the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, 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.
B-29
<PAGE>
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. 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 that it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years ................ $ 110 $ 165 $ 220 $ 275
20 Years ................ 176 264 352 440
15 Years ................ 296 444 592 740
10 Years ................ 555 833 1,110 1,388
5 Years ................ 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
- ----------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
B-30
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the applicable sales charges to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, the administration, custodial fees and other details are available
from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS.
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, and 8% rate of return and a 39.6% federal income tax
bracket and shows how much more retirement income can accumulate within an IRA
as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
Contributions Personal
Made Over: Savings IRA
------------- -------- --------
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
B-31
<PAGE>
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. A Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. Net asset value is calculated separately for each class. The
Fund computes its net asset value 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 net asset
value. In the event the New York Stock Exchange closes early on any business
day, the net asset value of the Fund's shares shall be determined at a time
between such closing and 4:15 P.M., New York time. The New York Stock Exchange
is closed on the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of the
Fund's portfolio will be determined as follows:
Government securities for which quotations are available will be based on
the prices provided by independent pricing services. Pricing services consider
such factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations. Other portfolio securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed to be over-the-counter, will be valued at the average of the quoted bid
and asked prices provided by an independent pricing service or by principal
market makers. Any security for which the primary market is on an exchange is
valued at the last sale price on such exchange on the day of valuation or, if
there was no sale on such day, the last bid price quoted on such day. Quotations
of foreign securities in a foreign currency will be converted to U.S. dollar
equivalents at the spot currency value. Forward currency exchange contracts will
be valued at the current cost of covering or offsetting the contract. Options
will be valued at their last sale price as of the close of options trading on
the applicable exchanges. If there is no sale on the applicable options exchange
on a given day, options will be valued at the average of the quoted bid and
asked prices as of the close of the applicable exchange. The Fund may engage
pricing services to obtain such prices. Over-the-counter options will be valued
at the average of the bid and asked prices provided by principal market makers.
Options will be valued at market value or fair value if no market exists.
Futures contracts are marked to market daily, and options thereon are valued at
their last sale price, as of the close of trading on the applicable commodities
exchanges. Short-term instruments which mature in 60 days or less are valued at
amortized cost, if their original maturity was 60 days or less, or by amortizing
their value on the 61st day prior to maturity, unless the Fund's Manager
determines that such valuation does not represent fair value. Repurchase
agreements will be valued at cost plus accrued interest. Securities or other
assets for which reliable market quotations are not readily available 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 Manger or Subadviser (or Valuation Committee or Board of Directors), does
not represent fair value, are valued by the Valuation Committee or Board in
consultation with the Manager and Subadviser.
Net asset value is calculated separately for each class. As long as the
Fund declares dividends daily, the NAV of the Class A, Class B, Class C and
Class Z shares will generally be the same. It is expected, however, that the
Fund's dividends will differ by approximately the amount of any distribution
and/or service fee expense accrual differential among the classes.
B-32
<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. See "How the Fund
Calculates Performance" in the Prospectus.
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 at the end of the one, five or ten
year periods (or fractional portion thereof) of a hypothetical
$1,000 investment made at the beginning of the one, five or
ten year periods.
Average annual total return does not take into account any federal or state
income taxes that may be payable upon redemption.
The average annual total returns for Class A shares for the one, five year
and since inception (July 31, 1987) periods ended December 31, 1996 were 9.46%,
8.86% and 9.04%, respectively. The average annual total returns for the Class B
and Class C shares for the period since inception (January 15, 1996) through
December 31, 1996 were 7.86% and 11.86%, respectively. No Class Z shares were
outstanding during this period. The Fund was a closed-end investment company
prior to January 15, 1996.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV-P
--- -
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one, five or ten year periods
(or fractional portion thereof) at the end of the one, five
or ten year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption.
The Fund's aggregate total returns for Class A shares for the one, five
year and since inception periods ended December 31, 1996 were 14.02%, 59.28% and
136.67%, respectively. The aggregate total return for the Class B and Class C
shares for the period since inception (January 15, 1996) through December 31,
1996 was 12.86% and 12.86%, respectively. The Fund was a closed-end investment
company prior to January 15, 1996.
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:
(a - b ) 6
YIELD = 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.
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 30-day yields for the 30 days ended December 31, 1996, were 5.09%,
4.69% and 4.67% for the Class A, Class B and Class C shares, respectively.
From time to time, the performance of the fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
B-33
<PAGE>
[CHART]
Performance Comparison of Different Types of Investments over the Long-Term
(1/1926-03/1997)
Common Stocks-10.7%
Long-Term Government Bonds-5.0%
Inflation-3.1%
(1) Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation--1997
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). All rights reserved. Common stock returns are based on the
Standard & Poor's 500 Stock Index, a market-weighted, unmanaged index of 500
common stocks in a variety of industry sectors. It is a commonly used indicator
of broad stock price movements. This chart is for illustrative purposes only,
and is not intended to represent the performance of any particular investment or
fund. Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL. The Fund has qualified and intends to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code for
each taxable year. Accordingly, the Fund must, among other things, (a) derive at
least 90% of its annual gross income (without reduction for losses from the sale
or other disposition of securities or foreign currencies) from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or 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 foreign currencies; (b) derive less than 30% of its gross income from gains
(without reduction for losses) from the sale or other disposition of securities,
options thereon, futures contracts and options thereon, forward contracts and
currencies held less than three months (except for foreign securities directly
related to the Fund's business of investing in foreign securities); (c)
diversify its holdings so that, at the end of each fiscal quarter, (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 (d) distribute to its shareholders at least 90%
of its net investment income and net short-term gains (i.e. the excess of net
short-term capital gains over net long-term capital losses) in each year.
The Fund declares daily and pay monthly dividends in an amount based on
actual net investment income determined in accordance with generally accepted
accounting principles. A portion of such dividend may also include projected net
investment income. Such dividends will be payable in additional shares of the
Fund unless otherwise requested by the shareholder.
Net capital gains, if any, will be distributed at least annually. In
determining the amount of capital gains to be distributed, any capital loss
carryforwards from prior years will be offset against capital gains. The Fund
had a capital loss carryforward for federal income tax purposes at December 31,
1996 of approximately $3,166,900 which will expire in 2002.
Distributions, if any, will be paid in additional Fund shares based on the
net asset value unless the shareholder elects in writing not less than 5 full
business days prior to the record date to receive such distributions in cash.
B-34
<PAGE>
The per share dividends on Class B and Class C shares typically will be
lower than the per share dividends on Class A 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 and Class C shares. See "Net Asset Value."
Distributions of net investment income, net currency gains and net
short-term capital gains will be taxable to the shareholder at ordinary income
rates regardless of whether the shareholder receives such distributions in
additional shares or in cash. Distributions of net capital gains (i.e., the
excess of net long-term capital gains over net short-term capital losses), if
any, are taxable as long-term capital gains regardless of how long the investor
has held his or her Fund shares. However, if a shareholder holds shares in the
Fund for not more than six months, then any loss recognized on the sale of such
shares will be treated as long-term capital loss to the extent of any
distribution on the shares which was treated as long-term capital gain. To the
extent that, in a given year, distributions to shareholders exceed recognized
net investment income and recognized short-term and long-term capital gains for
the year, shareholders will receive a return of capital in respect of such year
and, in an annual statement, will be notified of the amount of any return of
capital for such year. Shareholders will be notified annually by the Fund as to
the federal tax status of dividends and distributions made by the Fund. A 4%
nondeductible excise tax will be imposed on the Fund to the extent the Fund does
not meet certain distribution requirements by the end of each calendar year.
Distributions may be subject to additional state and local taxes. See "Taxes,
Dividends and Distributions" in the Prospectus.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on forward foreign
currency exchange contracts or dispositions of debt securities denominated in a
foreign currency attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security and the date of
disposition also are treated as ordinary gain or loss. These gains, referred to
under the Code as "Section 988" gains or losses, increase or decrease the amount
of the Fund's investment company taxable income available to be distributed to
its shareholders as ordinary income, rather than increasing or decreasing the
amount of the Fund's net capital gain, as was the case prior to 1987. If Section
988 losses exceed other investment company taxable income during a taxable year,
the Fund would not be able to make any taxable ordinary dividend distributions,
or distributions made before the losses were realized would be recharacterized
as a return of capital to shareholders, rather than as an ordinary dividend,
reducing each shareholder's basis in his or her shares.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Distributions of net investment income made to a nonresident alien
individual fiduciary of a foreign estate or trust or foreign corporation or
foreign partnership (foreign shareholder) will be subject to U.S. withholding
tax at a rate of 30% (or lower treaty rate), unless the dividends are
effectively connected with the U.S. trade or business of the shareholder. Gains
realized upon the sale or redemption of shares of the Fund by a foreign
shareholder, and distributions of net long-term capital gains to a foreign
shareholder will generally not be subject to U.S. income tax unless the gain is
effectively connected with a trade or business carried on by the shareholder
within the United States or, in the case of a shareholder who is a nonresident
alien individual, the shareholder is present in the United States for more than
182 days during the taxable year and certain other conditions are met. In the
case of a foreign shareholder who is a nonresident alien individual, the Fund
may be required to withhold U.S. federal income tax at the rate of 31% of
distributions of net long-term capital gains unless IRS Form W-8 is provided. If
distributions are effectively connected with a U.S. trade or business carried on
by a foreign shareholder, distributions of net investment income and net
long-term capital gains will be subject to U.S. income tax at the graduated
rates applicable to U.S. citizens or domestic corporations. The tax consequences
to a foreign shareholder entitled to claim the benefits of an applicable tax
treaty may be different from those described herein. Foreign shareholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested in
various countries is not known.
If the Fund is liable for foreign taxes, the Fund expects to meet the
requirements of the Internal Revenue Code for "passing-through" to its
shareholders foreign taxes paid, but there can be no assurance that the Fund
will be able to do so. Under the Internal Revenue Code, if more than 50% of the
value of the Fund's total assets at the close of its taxable year consists of
stock
B-35
<PAGE>
or securities of foreign corporations, the Fund will be eligible and may file an
election with the Internal Revenue Service to "pass-through" to the Fund's
shareholders the amount of foreign taxes paid by the Fund. Pursuant to this
election shareholders will be required to: (i) include in gross income (in
addition to taxable dividends actually received) their pro rata share of the
foreign taxes paid by the Fund; (ii) treat their pro rata share of foreign taxes
as paid by them; and (iii) either deduct their pro rata share of foreign taxes
in computing their taxable income or, subject to certain limitations, use it as
a foreign tax credit against U.S. income taxes. No deduction for foreign taxes
may be claimed by a shareholder who does not itemize deductions. A shareholder
that is a nonresident alien individual or foreign corporation may be subject to
U.S. withholding tax on the income resulting from the election described in this
paragraph, but may not be able to claim a credit or deduction against such tax
for the foreign taxes treated as having been paid by such shareholder. A
tax-exempt shareholder will not ordinarily benefit from this election. The
amount of foreign taxes for which a shareholder may claim a credit in any year
will generally be subject to various limitations including a separate limitation
for "passive income," which includes, among other things, dividends, interest
and certain foreign currency gains.
Each shareholder will be notified within 60 days after the close of the
Fund's taxable year whether the foreign taxes paid by the Fund will
"pass-through" for that year and, if so, such notification will designate (a)
the shareholder's portion of the foreign taxes paid to each such country and (b)
the portion of the dividend which represents income derived from sources within
each such country.
LISTED OPTIONS AND FUTURES. Exchange-traded futures contracts, listed
options on futures contracts and listed options on U.S. Government securities
constitute "Section 1256 contracts" under the Internal Revenue Code. Section
1256 contracts are required to be "marked-to-market" at the end of the Fund's
tax year; that is, treated as having been sold at market value. Except with
respect to certain forward foreign currency exchange contracts, sixty percent of
any gain or loss recognized as a result of such "deemed sales" will be treated
as long-term capital gain or loss and the remainder will be treated as
short-term capital gain or loss.
BACKUP WITHHOLDING. With limited exceptions, the Fund is required to
withhold federal income tax at the rate of 31% of all taxable distributions
payable to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certification or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Any amounts withheld may be credited against a shareholder's
federal income tax liability.
OTHER TAXATION. Distributions may also be subject to state, local and
foreign taxes depending on each shareholder's particular situation. Shareholders
are advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING
AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash, and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States. See "How
the Fund is Managed--Custodian and Transfer and Dividend Disbursing Agent" in
the Prospectus.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, PMFS receives an annual fee per
shareholder account, a new account set-up fee for each manually-established
account and a monthly inactive zero balance account fee per shareholder account.
PMFS is also reimbursed for its out-of-pocket expenses, including but not
limited to postage, stationery, printing, allocable communications expenses and
other costs. For the fiscal period ended December 31, 1996, the Fund incurred
fees of approximately $248,000 for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
B-36
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE GLOBAL GOVERNMENT PLUS
DECEMBER 31, 1996 FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION US$ VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--89.7%
- ------------------------------------------------------------
AUSTRALIA--6.6%
A$ 4,700 New South Wales Treasury
Corporation,
6.50%, 5/1/06 $ 3,444,626
6,500 Queensland Treasury Corporation,
6.50%, 6/14/05 4,820,648
------------
8,265,274
- ------------------------------------------------------------
CANADA--8.7%
C$ 5,000 British Columbia Provincial
Bond,
7.75%, 6/16/03 3,957,923
Canadian Government Bonds,
5,200(a) 9.00%, 12/1/04 4,449,180
2,800(a) 9.00%, 6/1/25, Ser. A-76 2,514,140
------------
10,921,243
- ------------------------------------------------------------
CZECH REPUBLIC--1.3%
CZK 25,000 International Finance
Corporation,
10.50%, 11/30/98 912,419
20,000 Skoda Finance,
11.625%, 2/9/98 732,504
------------
1,644,923
- ------------------------------------------------------------
DENMARK--6.4%
Danish Government Bonds,
DKr 16,000(a) 7.00%, 12/15/04 2,827,549
28,250 8.00%, 3/15/06 5,257,617
------------
8,085,166
- ------------------------------------------------------------
FRANCE--1.7%
FF 10,000 National Bank of Hungary,
8.00%, 11/12/99 2,093,559
- ------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) DESCRIPTION US$ VALUE (NOTE 1)
- ------------------------------------------------------------
GERMANY--11.4%
German Government Bonds,
DM 10,000(a) 6.75%, 4/22/03 $ 6,975,689
5,300(a) 7.375%, 1/3/05 3,807,066
2,500(a) 6.25%, 1/4/24 1,534,846
3,000 Republic of Colombia,
7.25%, 12/21/00 2,044,084
------------
14,361,685
- ------------------------------------------------------------
ITALY--4.9%
Lira 2,500,000 Bayerische Landesanstalt Bank,
10.625%, 5/12/00 1,829,168
6,250,000 Italian Government Bond,
7.4375%, 8/1/99 4,295,873
------------
6,125,041
- ------------------------------------------------------------
NETHERLANDS--6.0%
Dutch Government Bonds,
NLG 10,000(a) 7.00%, 6/15/05 6,303,443
2,000(a) 7.50%, 1/15/23 1,303,444
------------
7,606,887
- ------------------------------------------------------------
NEW ZEALAND--2.1%
NZ$ 3,700 New Zealand Government Bond,
8.00%, 2/15/01 2,703,071
- ------------------------------------------------------------
POLAND--0.6%
PLZ 1,250 General Electric Capital
Corporation,
18.25%, 2/27/98 427,329
1,000 Government of Poland,
16.00%, 10/12/98 327,985
------------
755,314
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE GLOBAL GOVERNMENT PLUS
DECEMBER 31, 1996 FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION US$ VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
SPAIN--4.3%
Spanish Government Bonds,
Pts 200,000 10.30%, 6/15/02 $ 1,823,936
425,000(a) 8.20%, 2/28/09 3,577,143
------------
5,401,079
- ------------------------------------------------------------
UNITED KINGDOM--7.2%
BP 1,500 Guaranteed Export Finance
Corporation,
7.25%, 12/15/98 2,572,712
United Kingdom Treasury Bonds,
1,850 7.75%, 9/8/06 3,211,594
1,700 8.75%, 8/25/17 3,226,597
------------
9,010,903
- ------------------------------------------------------------
UNITED STATES--28.5%
CORPORATE BONDS--6.1%
US$ 1,250 Banco Nacional de Commercio
Exterior, SNC (Mexico),
7.50%, 7/1/00 1,216,250
3,100 Empresas La Moderna SA,
(Mexico),
11.375%, 1/25/99 3,255,000
2,550 Financiera Energetica Nacional
(Colombia),
9.00%, 11/8/99 2,660,925
500 Petroleas Mexicano (Mexico),
6.50%, 3/8/99, FRN 489,062
------------
7,621,237
------------
SOVEREIGN BONDS--7.6%
980 Republic of Argentina,
6.625%, 3/31/05, Ser. L, FRN 852,600
1,820 Republic of Brazil,
6.6875%, 1/1/01, IDU, FRN 1,763,125
PRINCIPAL
AMOUNT
(000) DESCRIPTION US$ VALUE (NOTE 1)
- ------------------------------------------------------------
Republic of Poland,
US$ 1,000 4.00%, 10/27/14 $ 842,500
Discount Note,
3,500 6.50%, 10/27/24, FRN 3,399,375
750 Rio de Janeiro Municipality
(Brazil)
10.375%, 7/12/99 774,375
2,000 United Mexican States,
7.5625%, 8/6/01, FRN 2,004,800
------------
9,636,775
------------
SUPRANATIONAL BOND--3.3%
4,100 Corporacion Andina de Formento,
7.375%, 7/21/00 4,171,750
------------
U.S. GOVERNMENT OBLIGATION--11.5%
13,250(a) United States Treasury Note,
7.875%, 11/15/04 14,459,062
------------
35,888,824
------------
Total long-term investments
(cost US$105,422,950) 112,862,969
------------
SHORT-TERM INVESTMENTS--8.7%
- ------------------------------------------------------------
CZECH REPUBLIC--0.3%
CZK 10,000 ING Bank, Euro Commercial Paper,
12.25%(b), 2/20/97 360,138
- ------------------------------------------------------------
INDONESIA--0.3%
INR 1,000,000 Bank Tabungan Negara,
13.45%(b), 11/7/97 378,949
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
THE GLOBAL GOVERNMENT PLUS FUND, INC.
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1996
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION US$ VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------
POLAND--0.7%
Polish Treasury Bills,
PLZ 1,000 19.00%(b), 1/22/97 $ 345,386
1,000 19.00%(b), 1/29/97 344,076
750 19.00%(b), 2/5/97 257,191
------------
946,653
- ------------------------------------------------------------
SPAIN--1.5%
Pts 230,000 Republic of Argentina,
12.80%, 12/9/97 1,828,622
- ------------------------------------------------------------
REPURCHASE AGREEMENT--5.9%
US$ 7,394 Joint Repurchase Agreement
Account,
6.61%, 1/02/97 (Note 5) 7,394,000
------------
Total short-term investments
(cost US$10,994,689) 10,908,362
------------
- ------------------------------------------------------------
TOTAL INVESTMENTS--98.4%
(cost $116,417,639; Note 4) 123,771,331
Other assets in excess of
liabilities--1.6% 1,952,674
------------
Net Assets--100% $125,724,005
------------
------------
</TABLE>
- ---------------
Portfolio securities are classified according to the security's currency
denomination.
(a) Principal amount segregated as collateral for forward currency contracts.
(b) Percentages quoted represent yields to maturity as of purchase date.
(c) Rate shown reflects current rate of variable rate instrument.
FRB--Floating Rate Bond.
FRN--Floating Rate Note.
IDU--Interest Due and Unpaid.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-39
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES THE GLOBAL GOVERNMENT PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
ASSETS DECEMBER 31, 1996
-----------------
<S> <C>
Investments, at value (cost $116,417,639)............................................................... $ 123,771,331
Foreign currency, at value (cost $551,723).............................................................. 547,877
Interest receivable..................................................................................... 3,083,854
Receivable for investments sold......................................................................... 644,220
Forward curreny contracts - amount receivable from counterparties....................................... 240,954
Receivable for Fund shares sold......................................................................... 19,163
Other assets............................................................................................ 4,750
-----------------
Total assets......................................................................................... 128,312,149
-----------------
LIABILITIES
Bank overdraft.......................................................................................... 1,859,069
Accrued expenses and other liabilities.................................................................. 329,005
Payable for Fund shares reacquired...................................................................... 233,045
Management fee payable.................................................................................. 83,808
Forward currency contracts - amount payable to counterparties........................................... 66,157
Distribution fee payable................................................................................ 17,060
-----------------
Total liabilities.................................................................................... 2,588,144
-----------------
NET ASSETS.............................................................................................. $ 125,724,005
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 164,794
Paid-in capital in excess of par..................................................................... 120,060,067
-----------------
120,224,861
Undistributed net investment income.................................................................. 1,471,527
Accumulated net realized loss on investments......................................................... (3,463,805)
Net unrealized appreciation on investments and foreign currencies.................................... 7,491,422
-----------------
Net assets, December 31, 1996........................................................................... $ 125,724,005
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($125,636,694 / 16,468,002 shares of common stock issued and outstanding)......................... $7.63
Maximum sales charge (4.0% of offering price)........................................................ .32
-----------------
Maximum offering price to public..................................................................... $7.95
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($74,696 / 9,782 shares of common stock issued and outstanding)................................... $7.64
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($12,615 / 1,652 shares of common stock issued and outstanding)................................... $7.64
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-40
<PAGE>
THE GLOBAL GOVERNMENT PLUS FUND, INC.
STATEMENT OF OPERATIONS
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR
ENDED
NET INVESTMENT INCOME DECEMBER 31, 1996
-----------------
<S> <C>
Income
Interest and discount earned (net of
foreign withholding taxes of
$53,523).............................. $14,329,185
-----------------
Expenses
Management fee........................... 1,354,632
Distribution fee--Class A................ 260,520
Distribution fee--Class B................ 165
Distribution fee--Class C................ 59
Transfer agent's fees and expenses....... 274,000
Reports to shareholders.................. 240,000
Custodian's fees and expenses............ 205,000
Registration fees........................ 147,000
Directors' fees.......................... 79,000
Audit fees and expenses.................. 62,000
Legal fees and expenses.................. 25,000
Insurance expense........................ 20,000
Miscellaneous............................ 6,737
-----------------
Total expenses........................ 2,674,113
-----------------
Net investment income....................... 11,655,072
-----------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain on:
Investment transactions.................. 10,762,074
Foreign currency transactions............ 6,849,155
-----------------
17,611,229
-----------------
Net change in unrealized appreciation on:
Investments.............................. (10,144,774)
Foreign currencies....................... 851,788
-----------------
(9,292,986)
-----------------
Net gain on investments and foreign
currencies............................... 8,318,243
-----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................... $19,973,315
-----------------
-----------------
</TABLE>
THE GLOBAL GOVERNMENT PLUS FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED DECEMBER 31,
IN NET ASSETS --------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Operations
Net investment income..... $11,655,072 $ 21,840,656
Net realized gain on
investment and foreign
currency
transactions........... 17,611,229 28,051,264
Net change in unrealized
appreciation on
investments and foreign
currency
transactions........... (9,292,986) 23,236,542
----------------- -----------------
Net increase in net assets
resulting from
operations............. 19,973,315 73,128,462
----------------- -----------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................ (14,407,707) (21,840,656)
Class B................ (1,274) --
Class C................ (459) --
----------------- -----------------
(14,409,440) (21,840,656)
----------------- -----------------
Distributions in excess of
net investment income
Class A................ (6,550,634) (9,652,194)
Class B................ (4,741) --
Class C................ (747) --
----------------- -----------------
(6,556,122) (9,652,194)
----------------- -----------------
Fund share transactions
Net proceeds from shares
sold................... 25,036,772 --
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 3,183,726 --
Cost of shares
reacquired............. (251,843,155)(a) --
----------------- -----------------
Net decrease in net assets
from Fund share
transactions........... (223,622,657) --
----------------- -----------------
Total increase (decrease).... (224,614,904) 41,635,612
NET ASSETS
Beginning of year............ 350,338,909 308,703,297
----------------- -----------------
End of year.................. $ 125,724,005 $ 350,338,909
----------------- -----------------
----------------- -----------------
</TABLE>
- ---------------
(a) Net of $4,291,995 redemption fee retained by the the Fund.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL GOVERNMENT PLUS FUND, INC.
- --------------------------------------------------------------------------------
The Global Government Plus Fund, Inc. (the "Fund") was organized in Maryland
on April 20, 1987, as a closed-end, non-diversified management investment
company. Investment operations commenced on July 31, 1987. On December 6, 1995
shareholders approved the conversion of the Fund to an open-end Fund. Effective
January 15, 1996, the Fund began operating as an open-end Fund.
The Fund's investment objective is to seek total return, the components of which
are current income and capital appreciation. The Fund invests primarily in debt
securities issued or guaranteed by governments, semi-governmental entities,
governmental agencies, supranational entities and other governmental entities in
the United States and in other countries and denominated in the currencies of
such countries. The 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 in unrated securities of equivalent quality. 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.
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
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, as the case may be under triparty repurchase agreements, takes
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
adequecy 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, realized foreign currency gains (losses) are included in the
reported net realized gains on investment transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains 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, U.S. and foreign taxes recorded
on the Fund's books and the US dollar equivalent amounts actually received or
paid. Net currency gains (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 on investments and
foreign currencies.
- --------------------------------------------------------------------------------
B-42
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL GOVERNMENT PLUS FUND, INC.
- --------------------------------------------------------------------------------
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current 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 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.
Dividends and Distributions: Dividends are declared quarterly. Distributions of
long-term 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 currencies and loss deferrals.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income and increase
accumulated net realized losses on investments by $8,027,649 for foreign
currency gains realized and recognized during the year ended December 31, 1996.
Net investment income, net realized gains and net assets were not affected by
this change.
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.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management LLC
(``PMF''). Pursuant to this agreement PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF 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.
Effective January 15, 1996, the management fee paid PMF is computed daily and
payable monthly at an annual rate of .75 of 1% of the Fund's average daily net
assets. Prior thereto, the management fee was computed on the Fund's average
weekly net assets. Amendments to the management and subadvisory agreements to
reflect the provision by PMF and PIC of certain services necessary for the
operation of the Fund as an open-end investment company were approved by
shareholders of the Fund on December 6, 1995.
Effective January 15, 1996, the Fund began operations as an open-end fund and
entered into a distribution agreement with Prudential Securities Incorporated
(``PSI''), which acts as distributor of the Class A, Class B and Class C shares
of the Fund. The Fund compensates PSI for distributing and servicing the Fund's
Class A, Class B, and Class C shares, pursuant to a plan of distribution, (the
``Class A, B and C Plan'') regardless of expenses actually incurred by them. The
distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plan, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B, and C shares
- --------------------------------------------------------------------------------
B-43
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL GOVERNMENT PLUS FUND, INC.
- --------------------------------------------------------------------------------
respectively. Such expenses under the Plans were .15 of 1%, .75 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the period January 15, 1996 through December 31, 1996.
PSI has advised the Fund that it has received approximately $13,600 in front-end
sales charges resulting from sales of Class A shares during the period January
15, 1996 through December 31, 1996. From these fees, PSI paid such sales charges
to Pruco Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to sales-persons and incurred other distribution costs.
A redemption fee, paid to the Fund, of 2% was imposed on redemptions of shares
acquired prior to the conversion during the first six months after the
conversion (through July 12, 1996). The aggregate amount of the fee was
$4,291,995.
PSI, PMF, and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (``Prudential'').
The Fund, along with other affiliated registered investment companies (the
``Funds''), entered into a credit agreement (the ``Agreement'') on December 31,
1996 with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. 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 has not borrowed any amounts pursuant to the Agreement as of December 31,
1996. 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.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Effective January 15, 1996, Prudential Mutual Fund Services LLC (``PMFS''), a
wholly-owned subsidiary of PMF, began serving as the Fund's transfer agent.
During the period January 15, 1996 through December 31, 1996, the Fund incurred
fees of approximately $212,000 for the services of PMFS. As of December 31, 1996
approximately $18,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1996 aggregated $60,487,316 and $258,591,222,
respectively.
At December 31, 1996, the Fund had outstanding forward currency contracts to
sell foreign currencies, as follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT APPRECIATION
PURCHASE CONTRACTS PAYABLE VALUE (DEPRECIATION)
- ------------------- --------------- ----------- ---------------
<S> <C> <C> <C>
British Pounds,
expiring
1/29/97.......... $ 1,487,578 $ 1,519,406 $ 31,828
Netherlands
Guilders,
expiring
1/29/97.......... 1,942,290 1,954,218 11,928
--------------- ----------- ---------------
$ 3,429,868 $ 3,473,624 $ 43,756
--------------- ----------- ---------------
--------------- ----------- ---------------
</TABLE>
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT APPRECIATION
SALE CONTRACTS RECEIVABLE VALUE (DEPRECIATION)
- ------------------- --------------- ----------- ---------------
<S> <C> <C> <C>
Australian Dollars,
expiring
1/29/97.......... $ 980,172 $ 981,578 $ (1,406)
French Francs,
expiring
3/17/97.......... 5,870,613 5,794,268 76,345
German Deut-
schemarks,
expiring
1/29/97.......... 6,976,029 7,010,069 (34,040)
Japanese Yen,
expiring
1/29/97.......... 3,365,810 3,294,652 71,158
Netherlands
Guilders,
expiring
1/29/97.......... 20,341,039 20,371,750 (30,711)
Swiss Francs,
expiring
1/29/97.......... 5,351,690 5,301,995 49,695
--------------- ----------- ---------------
$42,885,353 $42,754,312 $ 131,041
--------------- ----------- ---------------
--------------- ----------- ---------------
</TABLE>
The United States federal income tax basis of the Fund's investments at December
31, 1996 was $116,485,512 and, accordingly, net unrealized appreciation for
United States federal income tax purposes was $7,285,819 (gross unrealized
appreciation--$8,035,393; gross unrealized depreciation--$749,574).
For federal income tax purposes, the Fund had a capital loss carryforward as of
December 31, 1996 of approximately $3,166,900 which will expire in 2002. Such
carryforward is after utilization of $9,464,400 to offset the Fund's net taxable
gains recognized in the year ended December 31, 1996. Accordingly, no capital
gains distribution is expected to be paid to shareholders until net gains have
been realized in excess of such amount.
- --------------------------------------------------------------------------------
B-44
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL GOVERNMENT PLUS FUND, INC.
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
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, 1996, the
Fund had a .68% undivided interest in the joint account. The undivided interest
for the Fund represented $7,394,000 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., 6.75%, in the principal amount of $341,000,000,
repurchase price $341,127,875, due 1/2/97. The value of the collateral including
accrued interest was $349,151,276.
Goldman, Sachs & Co., 6.60%, in the principal amount of $341,000,000, repurchase
price $341,125,033, due 1/2/97. The value of the collateral including accrued
interest was $347,820,889.
J.P. Morgan Securities, Inc., 6.60%, in the principal amount of $341,000,000,
repurchase price $341,125,033, due 1/2/97. The value of the collateral including
accrued interest was $347,822,540.
Sanwa Securities USA, 6.00%, in the principal amount of $68,014,000, repurchase
price $68,036,671, due 1/2/97. The value of the collateral including accrued
interest was $69,375,117.
- ------------------------------------------------------------
NOTE 6. CAPITAL
On December 6, 1995, the existing shareholders approved the conversion of the
Fund to an open-end investment company which offers three classes of shares.
Offering of Class A (the existing shares prior to open-ending), Class B and
Class C shares commenced on January 15, 1996. Class A shares are sold with a
front-end sales charge of up to 4%. Class B shares are sold with a contingent
deferred sales charge which declines from 5% to zero depending on the period of
time the shares are held. Class C shares are sold with a contingent deferred
sales charge of 1% during the first year. Class B shares 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. Beginning approximately March 21,
1997, the Fund will offer Class Z shares. Class Z shares are not subject to any
sales or redemption charge and are offered exclusively for sale to a limited
group of investors.
There are 2 billion shares of common stock, $.01 par value per share, authorized
divided into four classes, designated Class A, Class B, Class C and Class Z
common stock, consisting of 500 million shares of each class. As of December 31,
1996 Prudential owned 11,000 Class A shares.
Transactions in shares of common stock for the period January 15, 1996 through
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- --------------------------------- ----------- -------------
<S> <C> <C>
Shares sold...................... 3,220,486 $ 24,951,678
Shares issued in reinvestment of
dividends and distributions.... 414,016 3,178,814
Shares reacquired................ (32,809,008) (251,843,149)(a)
----------- -------------
Net decrease in shares
outstanding.................... (29,174,506) $(223,712,657)
----------- -------------
----------- -------------
<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
Shares sold...................... 9,299 $ 73,644
Shares issued in reinvestment of
dividends and distributions.... 484 3,719
Shares reacquired................ (1) (6)
----------- -------------
Net increase in shares
outstanding.................... 9,782 $ 77,357
----------- -------------
----------- -------------
<CAPTION>
Class C
- ---------------------------------
<S> <C> <C>
Shares sold...................... 1,497 $ 11,450
Shares issued in reinvestment of
dividends and distributions.... 155 1,193
----------- -------------
Net increase in shares
outstanding.................... 1,652 $ 12,643
----------- -------------
----------- -------------
</TABLE>
- ---------------
(a) Net of $4,291,995 redemption fee retained by the Fund.
- --------------------------------------------------------------------------------
B-45
<PAGE>
FINANCIAL HIGHLIGHTS THE GLOBAL GOVERNMENT PLUS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
CLASS A(D) ------------
------------------------------------------------------------ JANUARY 15,
1996(C)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------------------------------------ DECEMBER 31,
1996 1995 1994 1993 1992 1996,
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 7.68 $ 6.76 $ 7.84 $ 7.38 $ 8.28 $ 7.72
-------- -------- -------- -------- -------- ------------
Net investment income...................... .56 .48 .45 .55 .67 .52
Net realized and unrealized gain (loss) on
investments and foreign currencies...... .28 1.13 (.97) .74 (.70) .25
-------- -------- -------- -------- -------- ------------
Total from investment operations........ .84 1.61 (.52) 1.29 (.03) .77
-------- -------- -------- -------- -------- ------------
Dividends from net investment income....... (.67) (.48) (.23) (.23) (.67) (.63)
Distributions from net realized capital
gains................................... -- -- (.10) (.54) (.20) --
Distributions in excess of net investment
income.................................. (.40) (.21) -- -- -- (.40)
Distributions in excess of net capital
gains................................... -- -- -- (.06) -- --
Tax return of capital distributions........ -- -- (.23) -- -- --
-------- -------- -------- -------- -------- ------------
Total dividends and distributions....... (1.07) (.69) (.56) (.83) (.87) (1.03)
-------- -------- -------- -------- -------- ------------
Redemption fee retained by Fund(f)......... .18 -- -- -- -- .18
-------- -------- -------- -------- -------- ------------
Net asset value, end of period............. $ 7.63 $ 7.68 $ 6.76 $ 7.84 $ 7.38 $ 7.64
-------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- ------------
Per share market price, end of year........ N/A $ 7.375 $ 5.625 $ 7.00 $ 7.00 N/A
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL INVESTMENT RETURN BASED ON(a):
Market price............................ N/A 44.39% (12.04)% 11.57% 1.25% N/A
Net asset value......................... 14.02% 25.14% (5.62)% 18.38% (0.08)% 12.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $125,637 $350,339 $308,703 $357,783 $336,780 $75
Average net assets (000)................... $180,588 $342,741 $331,421 $361,374 $364,037 $23
Ratios to average net assets:
Expenses, including distribution fees... 1.48%(e) 1.05% 1.11% 1.07% 1.15% 2.09%(b)
Expenses, excluding distribution fees... 1.34%(e) 1.05% 1.11% 1.07% 1.15% 1.34%(b)
Net investment income................... 6.45%(e) 6.37% 6.21% 6.93% 8.36% 5.85%(b)
Portfolio turnover rate.................... 38% 203% 526% 441% 346% 38%
<CAPTION>
CLASS C
------------
JANUARY 15,
1996(C)
THROUGH
DECEMBER 31,
1996
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 7.72
------------
Net investment income...................... .52
Net realized and unrealized gain (loss) on
investments and foreign currencies...... .25
------------
Total from investment operations........ .77
------------
Dividends from net investment income....... (.63)
Distributions from net realized capital
gains................................... --
Distributions in excess of net investment
income.................................. (.40)
Distributions in excess of net capital
gains................................... --
Tax return of capital distributions........ --
------------
Total dividends and distributions....... (1.03)
------------
Redemption fee retained by Fund(f)......... .18
------------
Net asset value, end of period............. $ 7.64
------------
------------
Per share market price, end of year........ N/A
TOTAL INVESTMENT RETURN BASED ON(a):
Market price............................ N/A
Net asset value......................... 12.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $13
Average net assets (000)................... $8
Ratios to average net assets:
Expenses, including distribution fees... 2.09%(b)
Expenses, excluding distribution fees... 1.34%(b)
Net investment income................... 5.85%(b)
Portfolio turnover rate.................... 38%
</TABLE>
- ---------------
(a) Total investment return based on net asset value is calculated assuming a
purchase of common stock at the current net asset value on the first day and
a sale at the current net asset value on the last day of each period
reported. Total return does not consider the effect of sales load. Prior to
January 15, 1996 the Fund operated as a closed-end investment company and
total investment return was calculated based on market value assuming a
purchase of common stock at the current market value on the first day and a
sale at the current market value on the last day of each period reported.
Dividends and distributions are assumed for purposes of this calculation to
be reinvested at prices obtained under the dividend reinvestment plan. This
calculation does not reflect brokerage commissions. Total return for periods
of less than one full year are not annualized.
(b) Annualized.
(c) Commencement of offering of Class B and Class C shares.
(d) Prior to January 15, 1996 the Fund operated as a closed-end, non-diversified
management investment company.
(e) Because of the event referred to in (d) and the timing of such, the ratios
for the Class A shares are not necessarily comparable to those of prior
periods.
(f) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS THE GLOBAL GOVERNMENT PLUS FUND, INC.
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
The Global Government Plus 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 Government Plus Fund,
Inc. (the ``Fund'') at December 31, 1996, 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, 1996 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 26, 1997
B-47
<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.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
- --------------------------------------------------------------------------------
CHART
Value of $1.00 invested on 1/1/26 through 12/31/96
Small Stocks ......... $4,495.99
Common Stocks ........ $1,340.95
Long-Term Bonds ...... $ 33.73
Treasury Bills ....... $ 13.54
Inflation ............ $ 8.87
- --------------------------------------------------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. This chart is for illustrative purposes only and is not
intended to represent the past, present or future performance of any asset class
or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
are usually more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1996. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
<TABLE>
<CAPTION>
Historical Total Returns of Different Bond Market Sectors
- -------------------------------------------------------------------------------------------------------------------------
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5 % 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7%
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7 % 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4%
- -------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1 % 18.5% 8.7% 12.2% (3.9)% 2.3% 3.3%
- -------------------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4%
- -------------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3 % 16.2% 4.8% 15.1% 6.0 % 19.6% 4.1%
=========================================================================================================================
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7%
- -------------------------------------------------------------------------------------------------------------------------
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150 public issues of the U.S. Treasury
having maturities of at least one year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that includes over 600 15- and 30-year
fixed-rate mortgage-backed securities of the Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate, nonconvertible investment-grade bonds.
All bonds are U.S. dollar-denominated issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in the index have maturities of at least one
year.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over 750 public, fixed-rate, nonconvertible
bonds that are rated Ba1 or lower by Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5) SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds issued by various foreign governments or
agencies, excluding those in the U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy, Australia,
Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All bonds in the index have maturities of at least one
year.
</TABLE>
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
- --------------------------------------------------------------------------------
CHART
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1996)
- --------------------------------------------------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex Sinquefield). Used
with permission. All rights reserved. The chart illustrates the historical yield
of the long-term U.S. Treasury Bond from 1926-1996. Yields represent that of an
annually renewed one-bond portfolio with a remaining maturity of approximately
20 years. This chart is for illustrative purposes and should not be construed to
represent the yields of any Prudential Mutual Fund.
II-3
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--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,
1995 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,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 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 ensures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. Prudential provides auto insurance for more than 1.7 million
cars and insures more than 1.4 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. In July
1996, Institutional Investor ranked Prudential the fifth largest institutional
money manager of the 300 largest money management organizations in the United
States as of December 31, 1995. As of December 31, 1995, Prudential had more
than $314 billion in assets under management. Prudential Investments, a business
group of Prudential (of which Prudential Mutual Funds is a key part) manages
over $190 billion in assets of institutions and individuals.
Real Estate. Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.(2)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1996, Prudential Investments Fund Management was the
fifteenth 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.
- ----------
(1) Prudential Investments, a business group of PIC, serves as the Subadviser
to substantially all of the Prudential Mutual funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Prudential Active
Balanced Fund, a portfolio of Prudential Dryden Fund, Mercator Asset
Management LP as the subadviser to International Stock Series, a portfolio
of Prudential World Fund, Inc. and BlackRock Financial Management, Inc. as
subadviser to The BlackRock Government Income Trust. There are multiple
subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1994
III-1
<PAGE>
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.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., 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 the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wire data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
- ----------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-U.S. accounts
managed by Prudential Mutual Fund Investment Management, a division of PIC,
for the year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General US. Government and Mortgage Funds.
(6) As of December 31, 1994.
III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities Financial Advisor
training programs receive a grade of A- (compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investors magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects(SM), a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
(7) As of December 31, 1994.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighing them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS:
(1) Financial Statements included in the Prospectus
constituting Part A of this Registration Statement:
Financial Highlights
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at December 31, 1996
Statement of Assets and Liabilities at December 31, 1996
Statement of Operations for the Fiscal Year Ended December 31, 1996
Statement of Changes in Net Assets for the Fiscal Years ended
December 31, 1996 and 1995
Notes to Financial Statements
Financial Highlights
Report of Independent Accountants
(b) EXHIBITS:
1. (a) Articles of Amendment and Restatement.*
(b) Articles Supplementary.*
2. By-Laws.*
3. Not Applicable.
4. Instruments defining rights of shareholders. Incorporated by
reference to Registration Statement on Form N-1A
filed via EDGAR on November 3, 1995 (File No. 33-63945).
5. (a) Management Agreement between the Registrant and
Prudential Mutual Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential
Mutual Fund Management, Inc. and The Prudential
Investment Corporation.*
6. (a) Distribution Agreement between the Registrant and Prudential
Securities Incorporated.*
(b) Form of Selected Dealer Agrement. Incorporated by reference to
Exhibit 6(b) to the Registration Statement on Form N-1A filed via
EDGAR on November 3, 1995 (File No 33-63945).
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank
and Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. Not Applicable
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A Shares.*
(b) Distribution and Service Plan for Class B Shares.*
(c) Distribution and Service Plan for Class C Shares.*
16. Schedule of Computation of Performance Quotations.
Incorporated by reference to Exhibit 16 to the
Registration Statement on Form N-1A filed via EDGAR on November 3,
1995 (File No. 33-63945).
17. Financial Data Schedules filed as Exhibit 27 for electronic
purposes in the Registration Statement on Form
N-1A filed via EDGAR on February 28, 1997 (File No. 33-63945).
18. Rule 18f-3 Plan. Incorporated herein by reference to Exhibit 18
to the Registration Statement on Form N-1A
filed via EDGAR on February 28, 1997 (File No. 33-63945).
-----------
*Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
C-1
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of June 27, 1997 there were approximately 11,986 Class A, 28 Class B, 5
Class C and 12 Class Z shareholders of record.
ITEM 27. INDEMNIFICATION
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (1940 Act) and pursuant to Article VII of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any stockholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit 6(a) to
the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
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 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC
See "How the Fund is Managed--Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
C-2
<PAGE>
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Brian Storms Officer-in-Charge; President, Prudential Mutual Funds & Annuities (PMF & A);
President, Chief Officer-in-Charge, President, Chief Executive Officer and
Executive Officer and Chief Operating Officer, PIFM
Chief Operating Officer
Susan C. Cote Executive Vice President Vice President of Finance; PMF & A; Executive Vice President
and, Chief Financial Officer and, Chief Financial Officer, PIFM
Thomas A. Early Executive Vice President, Vice President and General Connsel, PMF & A; Executive Vice
Secretary and General Counsel President, Secretary and General Counsel, PIFM
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice
and Treasurer President and Treasurer, PIFM; Senior Vice President,
Prudential Securities Incorporated (Prudential Securities)
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, PMF & A;
Executive Vice President, PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF & A; Executive Vice President,
PIFM
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive
officers are as set forth below. The address of each person is Prudential Plaza,
Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer, Prudential Investments of The
President and Chief Prudential Insurance Company of America (Prudential)
Executive Officer and
Director
Jonathan M. Greene Senior Vice President and President--Investment Management of Prudential Investments of
Director Prudential; Senior Vice President and Director, PIC
John R. Strangfeld, Jr. Vice President and Director Senior Vice President, Prudential; Vice President
and Director, PIC
</TABLE>
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities is distributor for The BlackRock Government Income
Trust, Command Government Fund, Command Money Fund, Command Tax-Free Fund, The
Global Government Plus Fund, Inc., The Global Total Return Fund, Inc., Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund), Prudential Allocation Fund, Prudential California Municipal Fund,
Prudential Diversified Bond Fund, Inc., Prudential Distressed Securities Fund,
Inc., Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc., Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund,
Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity
Fund, Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust, Prudential High Yield Fund, Inc., Prudential Institutional
Liquidity Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc.,
Prudential Jennison Series Fund, Inc., Prudential MoneyMart Assets, Inc.,
Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc,. Prudential Small Company Value Fund, Inc.,
Prudential Special Money Market Fund, Inc., Prudential Structured Maturity Fund,
Inc., Prudential Tax Free Money Fund, Inc., Prudential Utility Fund, Inc.,
Prudential World Fund, Inc. and The Target Portfolio Trust. Prudential
Securities is also a depositor for the following unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
- --------------
(b) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ------------ ------------
<S> <C> <C>
Alan D. Hogan ............. Executive Vice President and Director None
George A. Murray .......... Executive Vice President and Director None
Leland B. Paton ........... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff ......... Executive Vice President, Chief Financial Officer and Director None
Vincent T. Pica, II ....... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons .......... Chief Executive Officer, President and Director None
Lee B. Spencer, Jr. ....... Executive Vice President, Secretary, General Counsel and Director None
Brian Storms .............. Director None
</TABLE>
- -------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
C-4
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, The Prudential Investment Corporation, Prudential
Plaza, 745 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway
Center Three, Newark, New Jersey 07102, and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Three
Gateway Center, documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at
Gateway Center Three and the remaining accounts, books and other documents
required by such other pertinent provisions of Section 31(a) and the Rules
promulgated thereunder will be kept by State Street Bank and Trust Company and
Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed--Distributor" in the Prospectus
and the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post
Effective Amendment to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Newark, and State of
New Jersey, on the 10th day of July, 1997.
THE GLOBAL GOVERNMENT PLUS FUND, INC.
/s/ RICHARD A. REDEKER
-----------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GRACE C. TORRES Treasurer and Principal Financial July 10, 1997
- ------------------------------- and Accounting Officer
GRACE C. TORRES
/s/ RICHARD A. REDEKER President and Director July 10, 1997
- -------------------------------
RICHARD A. REDEKER
/s/ EDWARD D. BEACH Director July 10, 1997
- -------------------------------
EDWARD D. BEACH
/s/ DELAYNE DEDRICK GOLD Director July 10, 1997
- -------------------------------
DELAYNE DEDRICK GOLD
/s/ ROBERT F. GUNIA Director July 10, 1997
- -------------------------------
ROBERT F. GUNIA
/s/ DONALD D. LENNOX Director July 10, 1997
- -------------------------------
DONALD D. LENNOX
/s/ DOUGLAS H. MCCORKINDALE Director July 10, 1997
- -------------------------------
DOUGLAS H. MCCORKINDALE
/s/ MENDEL A. MELZER Director July 10, 1997
- -------------------------------
MENDEL A. MELZER
/s/ THOMAS T. MOONEY Director July 10, 1997
- -------------------------------
THOMAS T. MOONEY
/s/ STEPHEN P. MUNN Director July 10, 1997
- -------------------------------
STEPHEN P. MUNN
/s/ ROBIN B. SMITH Director July 10, 1997
- -------------------------------
ROBIN B. SMITH
/s/ LOUIS A. WEIL, III Director July 10, 1997
- -------------------------------
LOUIS A. WEIL, III
- ------------------------------- Director July 10, 1997
CLAY T. WHITEHEAD
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1. (a) Articles of Amendment and Restatement.*
(b) Articles Supplementary.*
2. By-Laws.*
3. Not Applicable.
4. Instruments defining rights of shareholders. Incorporated by
reference to Registration Statement on Form N-1A filed via EDGAR
on November 3, 1995 (File No. 33-63945).
5. (a) Management Agreement between the Registrant and
Prudential Mutual Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.*
6. (a) Distribution Agreement between the Registrant and Prudential
Securities Incorporated.*
(b) Form of Selected Dealer Agreement. Incorporated by reference to
Exhibit 6(b) to the Registration Statement on Form N-1A filed
via EDGAR on November 3, 1995 (File No. 33-63945)
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. Not Applicable.
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A Shares.*
(b) Distribution and Service Plan for Class B Shares.*
(c) Distribution and Service Plan for Class C Shares.*
16. Schedule of Computation of Performance Quotations. Incorporated
by reference to Exhibit 16 to the Registration Statement on Form
N-1A filed via EDGAR on November 3, 1995 (File No. 33-63945).
17. Financial Data Schedules filed as Exhibit 27 for electronic
purposes in the Registration Statement on Form N-1A filed via EDGAR
on February 28, 1997 (File No. 33-63945).
18. Rule 18f-3 Plan. Incorporated herein by reference to Exhibit 18
to the Registration Statement on Form N-1A filed via EDGAR on
February 28, 1997 (File No. 33-63945).
---------------
*Filed herewith.
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
THE GLOBAL GOVERNMENT PLUS FUND, INC.
The Global Government Plus Fund, Inc. ((hereinafter called the
"Corporation"), a Maryland corporation having its principal offices in the city
of Baltimore, Maryland and New York, New York, hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended and restated in
its entirety effective as of January 15, 1996 to read as follows:
ARTICLE I.
The name of the Corporation is The Global Government Plus Fund, Inc.
ARTICLE II.
Purposes
The purpose for which the Corporation is formed is to act as an open-end
investment company of the management type registered as such with the Securities
and Exchange Commission pursuant to the Investment Company Act of 1940, as
amended (the Investment Company Act) and to exercise and generally to enjoy all
of the powers, rights and privileges granted to, or conferred upon, corporations
by the General Laws of the State of Maryland now or hereinafter in force.
ARTICLE III.
Address in Maryland
The post office address of the place at which the principal
<PAGE>
office of the Corporation in the State of Maryland is located is c/o CT
Corporation System, 32 South Street Baltimore, Maryland 21202.
The name of the Corporation's resident agent is The Corporation Trust
Incorporated, and its post office address is 32 South Street, Baltimore Maryland
21202. Said resident agent is a corporation of the State of Maryland.
ARTICLE IV.
Common Stock
Section 1. The total number of shares of capital stock which the
Corporation shall have authority to issue is 2,000,000,000 shares of the par
value of $.0l per share and of the aggregate par value of $20,000,000 to be
divided into three classes, consisting of 1,000,000,000 shares of Class A
Common Stock, 500,000,000 shares of Class B Common Stock and 500,000,000 shares
of Class C Common Stock. The shares of Common Stock issued and outstanding will
be reclassified Class A Common Stock. The shares of Common Stock issued and
outstanding on the date Class B and Class C shares are first issued will be
reclassified Class A Common Stock.
(a) Each share of Class A, Class B and Class C Common Stock of the
Corporation shall represent the same interest in the Corporation and have
identical voting, dividend, liquidation and other rights, except that (i)
expenses related to the distribution of a class of shares shall be borne solely
by such class; (ii) the bearing of any such expenses solely by shares of a class
shall be
2
<PAGE>
appropriately reflected (in the manner determined by the Board of Directors) in
the net asset value, dividends, distribution and liquidation rights of the
shares of such class; (iii) the Class A Common Stock shall be subject to a
front-end sales load and a Rule 12b-l distribution fee as determined by the
Board of Directors from time to time; (iv) the Class B Common Stock shall be
subject to a contingent deferred sales charge and a Rule 12b-l distribution fee
as determined by the Board of Directors from time to time; and (v) the Class C
Common Stock shall be subject to a contingent deferred sales charge and a Rule
12b-l distribution fee as determined by the Board of Directors from time to
time. All shares of a particular class shall represent an equal proportionate
interest in that class, and each share of any particular class shall be equal to
each other share of that class.
(b) Each share of the Class B Common Stock of the Corporation shall be
converted automatically, and without any action or choice on the part of the
holder thereof, into shares (including fractions thereof) of the Class A Common
Stock of the Corporation (computed in the manner hereinafter described), at the
applicable net asset value of each Class, at the time of the calculation of the
net asset value of such Class B Common Stock at such times, which may vary
between shares originally issued for cash and shares purchased through the
automatic reinvestment of dividends and distributions with respect to Class B
Common Stock (each a Conversion Date), determined by the Board of Directors in
accordance with applicable laws, rules, regulations and interpretations of the
Securities and
3
<PAGE>
Exchange Commission and the National Association of Securities Dealers, Inc. and
pursuant to such procedures as may be established from time to time by the Board
of Directors and disclosed in the Corporation's then current prospectus for such
Class A and Class B Common Stock.
(c) The number of shares of the Class A Common Stock of the Corporation
into which a share of the Class B Common Stock is converted pursuant to
Paragraph (1) (b) hereof shall equal the number (including for this purpose
fractions of a share) obtained by dividing the net asset value per share of the
Class B Common Stock for purposes of sales and redemptions thereof at the time
of the calculation of the net asset value on the Conversion Date by the net
asset value per share of the Class A Common Stock for purposes of sales and
redemptions thereof at the time of the calculation of the net asset value on the
Conversion Date.
(d) On the Conversion Date, the shares of the Class B Common Stock of the
Corporation converted into shares of the Class A Common Stock will cease to
accrue dividends and will no longer be outstanding and the rights of the holders
thereof will cease (except the right to receive declared but unpaid dividends to
the Conversion Date).
(e) The Board of Directors shall have full power and authority to adopt
such other terms and conditions concerning the conversion of shares of the Class
B Common Stock to shares of the Class A Common Stock as they deem appropriate;
provided such terms and conditions are not inconsistent with the terms contained
in
4
<PAGE>
this Section 1 and subject to any restrictions or requirements under the
Investment Company Act of 1940 and the rules, regulations and interpretations
thereof promulgated or issued by the Securities and Exchange Commission, and
conditions or limitations contained in an order issued by the Securities and
Exchange Commission applicable to the Corporation, or any restrictions or
requirements under the Internal Revenue Code of 1986, as amended, and the rules,
regulations and interpretations promulgated or issued thereunder.
Section 2. The Board of Directors may, in its discretion, classify and
reclassify any unissued shares of the capital stock of the Corporation into one
or more additional or other classes or series by setting or changing in any one
or more respects the designations, conversion or other rights, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of such shares and pursuant to such classification or reclassification to
increase or decrease the number of authorized shares of any existing class or
series. If designated by the Board of Directors, particular classes or series of
capital stock may relate to separate portfolios of investments.
Section 3. Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, the holders of each class and series of capital stock of the
Corporation shall be entitled to dividends and distributions in such amounts and
at such times as may be determined by the Board of Directors, and the dividends
and distributions paid with respect to the various
5
<PAGE>
classes or series of capital stock may vary among such classes or series.
Expenses related to the distribution of, and other identified expenses that
should properly be allocated to, the shares of a particular class or series of
capital stock may be charged to and borne solely by such class or series and the
bearing of expenses solely by a class or series may be appropriately reflected
(in a manner determined by the Board of Directors) and cause differences in the
net asset value attributable to, and the dividend, redemption and liquidation
rights of, the shares of each such class or series of capital stock.
Section 4. Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, on each matter submitted to a vote of stockholders, each
holder of a share of capital stock of the Corporation shall be entitled to one
vote for each share standing in such holder's name on the books of the
Corporation, irrespective of the class or series thereof, and all shares of all
classes and series shall vote together as a single class; provided, however,
that (a) as to any matter with respect to which a separate vote of any class or
series is required by the Investment Company Act of 1940, as amended, and in
effect from time to time, or any rules, regulations or orders issued thereunder,
or by the Maryland General Corporation Law, such requirement as to a separate
vote by that class or series shall apply in lieu of a general vote of all
classes and series as described above; (b) in the event that the separate vote
requirements referred to in (a)
6
<PAGE>
above apply with respect to one or more classes or series, then subject to
paragraph (c) below, the shares of all other classes and series not entitled to
a separate vote shall vote together as a single class; and (c) as to any matter
which in the judgment of the Board of Directors (which shall be conclusive) does
not affect the interest of a particular class or series, such class or series
shall not be entitled to any vote and only the holders of shares of the one or
more affected classes and series shall be entitled to vote.
Section 5. Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, in the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, holders of shares of capital
stock of the Corporation shall be entitled, after payment or provision for
payment of the debts and other liabilities of the Corporation (as such
liabilities may affect one or more of the classes of shares of capital stock of
the Corporation), to share ratably in the remaining net assets of the
Corporation; provided, however, that in the event the capital stock of the
Corporation shall be classified or reclassified into series, holders of any
shares of capital stock within such series shall be entitled to share ratably
out of assets belonging to such series pursuant to the provisions of Section
7(c) of this Article IV.
Section 6. Each share of any class of the capital stock of the
Corporation, and in the event the capital stock of the
7
<PAGE>
Corporation shall be classified or reclassified into series, each share of any
class of capital stock of the Corporation within such series shall be subject to
the following provisions:
(a) The net asset value of each outstanding share of capital stock
of the Corporation (or of a class or series, in the event the capital
stock of the Corporation shall be so classified or reclassified into
series), subject to subsection (b) of this Section 6, shall be the
quotient obtained by dividing the value of the net assets of the
Corporation (or the net assets of the Corporation attributable or
belonging to that class or series as designated by the Board of Directors
pursuant to Articles Supplementary) by the total number of outstanding
shares of capital stock of the Corporation (or of such class or series, in
the event the capital stock of the Corporation shall be classified or
reclassified into series). Subject to subsection (b) of this Section 6,
the value of the net assets of the Corporation (or of such class or
series, in the event the capital stock of the Corporation shall be
classified or reclassified into series) shall be determined pursuant to
the procedures or methods (which procedures or methods, in the event the
capital stock of the Corporation shall be classified or reclassified into
series, may differ from class to class or from series to series)
prescribed or approved by the Board of Directors in its discretion, and
shall be determined at the time or
8
<PAGE>
times (which time or times may, in the event the capital stock of the
Corporation shall be classified into classes or series, differ from series
to series) prescribed or approved by the Board of Directors in its
discretion. In addition, subject to subsection (b) of this Section 6, the
Board of Directors, in its discretion, may suspend the daily determination
of net asset value of any share of any series or class of capital stock of
the Corporation.
(b) The net asset value of each share of the capital stock of the
Corporation or any class or series thereof shall be determined in
accordance with any applicable provision of the Investment Company Act,
any applicable rule, regulation or order of the Securities and Exchange
Commission thereunder, and any applicable rule or regulation made or
adopted by any securities association registered under the Securities
Exchange Act of 1934.
(c) All shares now or hereafter authorized shall be subject to
redemption and redeemable at the option of the stockholder pursuant to the
applicable provisions of the Investment Company Act and laws of the State
of Maryland, including any applicable rules and regulations thereunder.
Each holder of a share of any class or series, upon request to the
Corporation (if such holder's shares are certificated, such request being
accompanied
9
<PAGE>
by surrender of the appropriate stock certificate or certificates in
proper form for transfer), shall be entitled to require the Corporation to
redeem all or any part of such shares outstanding in the name of such
holder on the books of the Corporation (or as represented by share
certificates surrendered to the Corporation by such redeeming holder) at a
redemption price per share determined in accordance with subsection (a) of
this Section 6.
(d) Notwithstanding subsection (c) of this Section 6, the Board of
Directors of the Corporation may suspend the right of the holders of
shares of any or all classes or series of capital stock to require the
Corporation to redeem such shares or may suspend any purchase of such
shares:
(i) for any period (A) during which the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or (B) during
which trading on the New York Stock Exchange is restricted;
(ii) for any period during which an emergency, as defined by the
rules of the Securities and Exchange Commission or any successor thereto,
exists as a result of which (A) disposal by the Corporation of securities
owned by it and belonging to the affected series of capital stock (or the
Corporation, if the shares of capital stock of the Corporation have not
been classified
10
<PAGE>
or reclassified into series) is not reasonably practicable, or (B) it is
not reasonably practicable for the Corporation fairly to determine the
value of the net assets of the affected series of capital stock; or
(iii) for such other periods as the Securities and Exchange
Commission or any successor thereto may by order permit for the protection
of the holders of shares of capital stock of the Corporation.
(e) All shares of the capital stock of the Corporation now or
hereafter authorized shall be subject to redemption and redeemable at the
option of the Corporation. The Board of Directors may by resolution from
time to time authorize the Corporation to require the redemption of all or
any part of the outstanding shares of any class or series upon the sending
of written notice thereof to each holder whose shares are to be redeemed
and upon such terms and conditions as the Board of Directors, in its
discretion, shall deem advisable, out of funds legally available therefor,
at the net asset value per share of that class or series determined in
accordance with subsections (a) and (b) of this Section 6 and take all
other steps deemed necessary or advisable in connection therewith.
(f) The Board of Directors may by resolution from time to time
authorize the purchase by the Corporation, either directly or through an
agent, of shares of any
11
<PAGE>
class or series of the capital stock of the Corporation upon such terms
and conditions and for such consideration as the Board of Directors, in
its discretion, shall deem advisable out of funds legally available
therefor at prices per share not in excess of the net asset value per
share of that class or series determined in accordance with subsections
(a) and (b) of this Section 6 and to take all other steps deemed necessary
or advisable in connection therewith.
(g) Except as otherwise permitted by the Investment Company Act,
payment of the redemption price of shares of any class or series of the
capital stock of the Corporation surrendered to the Corporation for
redemption pursuant to the provisions of subsection (c) of this Section 6
or for purchase by the Corporation pursuant to the provisions of
subsection (e) or (f) of this Section 6 shall be made by the Corporation
within seven days after surrender of such shares to the Corporation for
such purpose. Any such payment may be made in whole or in part in
portfolio securities or in cash, as the Board of Directors, in its
discretion, shall deem advisable, and no stockholder shall have the right,
other than as determined by the Board of Directors, to have his or her
shares redeemed in portfolio securities.
(h) In the absence of any specification as to the purposes for which
shares are redeemed or repurchased by
12
<PAGE>
the Corporation, all shares so redeemed or repurchased shall be deemed to
be acquired for retirement in the sense contemplated by the laws of the
State of Maryland. Shares of any class or series retired by repurchase or
redemption shall thereafter have the status of authorized but unissued
shares of such class or series.
Section 7. In the event the Board of Directors shall authorize the
classification or reclassification of shares into classes or series, the Board
of Directors may (but shall not be obligated to) provide that each class or
series shall have the following powers, preferences and voting or other special
rights, and the qualifications, restrictions and limitations thereof shall be as
follows:
(a) All consideration received by the Corporation for the issue or
sale of shares of capital stock of each series, together with all income,
earnings, profits, and proceeds received thereon, including any proceeds
derived from the sale, exchange or liquidation thereof, and any funds or
payments derived from any reinvestment of such proceeds in whatever form
the same may be, shall irrevocably belong to the series with respect to
which such assets, payments or funds were received by the Corporation for
all purposes, subject only to the rights of creditors, and shall be so
handled upon the books of account of the Corporation. Such assets,
payments and funds, including any proceeds derived from the sale,
13
<PAGE>
exchange or liquidation thereof, and any assets derived from any
reinvestment of such proceeds in whatever form the same may be, are herein
referred to as "assets belonging to" such series.
(b) The Board of Directors may from time to time declare and pay
dividends or distributions, in additional shares of capital stock of such
series or in cash, on any or all series of capital stock, the amount of
such dividends and the means of payment being wholly in the discretion of
the Board of Directors.
(i) Dividends or distributions on shares of any series shall be paid
only out of earned surplus or other lawfully available assets belonging to
such series.
(ii) Inasmuch as one goal of the Corporation is to qualify as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended, or any successor or comparable statute thereto, and Regulations
promulgated thereunder, and inasmuch as the computation of net income and
gains for federal income tax purposes may vary from the computation
thereof on the books of the Corporation, the Board of Directors shall have
the power, in its discretion, to distribute in any fiscal year as
dividends, including dividends designated in whole or in part as capital
gains distributions, amounts sufficient, in the opinion of the Board of
Directors, to enable the Corporation to qualify as a regulated investment
company
14
<PAGE>
and to avoid liability for the Corporation for federal income tax in
respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a series has a net capital loss for a fiscal
year, and to the extent that the net capital loss offsets net capital
gains from such series, the amount to be deemed available for distribution
to that series with the net capital gain may be reduced by the amount
offset.
(c) In the event of the liquidation or dissolution of the
Corporation, holders of shares of capital stock of each series shall be
entitled to receive, as a series, out of the assets of the Corporation
available for distribution to such holders, but other than general assets
not belonging to any particular series, the assets belonging to such
series; and the assets so distributable to the holders of shares of
capital stock of any series shall be distributed, subject to the
provisions of subsection (d) of this Section 7, among such stockholders in
proportion to the number of shares of such series held by them and
recorded on the books of the Corporation. In the event that there are any
general assets not belonging to any particular series and available for
distribution, such distribution shall be made to the holders of all series
in proportion to the net asset value of the respective series determined
in accordance with the charter of the Corporation.
15
<PAGE>
(d) The assets belonging to any series shall be charged with the
liabilities in respect to such series, and shall also be charged with its
share of the general liabilities of the Corporation, in proportion to the
asset value of the respective series determined in accordance with the
charter of the Corporation. The determination of the Board of Directors
shall be conclusive as to the amount of liabilities, including accrued
expenses and reserves, as to the allocation of the same as to a given
series, and as to whether the same or general assets of the Corporation
are allocable to one or more classes.
Section 8. Any fractional shares shall carry proportionately all the
rights of a whole share, excepting any right to receive a certificate
evidencing such fractional share, but including, without limitation, the right
to vote and the right to receive dividends.
Section 9. No holder of shares of Common Stock of the Corporation shall,
as such holder, have any pre-emptive right to purchase or subscribe for any
shares of the Common Stock of the Corporation of any class or series which it
may issue or sell (whether out of the number of shares authorized by the
Articles of Incorporation, or out of any shares of the Common Stock of the
Corporation acquired by it after the issue thereof, or otherwise).
Section 10. All persons who shall acquire any shares of capital stock of
the Corporation shall acquire the same subject to
16
<PAGE>
the provisions of the charter and By-Laws of the Corporation.
Section 11. Notwithstanding any provisions of law requiring action to be
taken or authorized by the affirmative vote of the holders of a designated
proportion greater than a majority of the outstanding shares of all classes or
of the outstanding shares of a particular class or classes, as the case may be,
such action shall be valid and effective if taken or authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all classes or series or of the total number of shares of such class or classes
or series, as the case may be, outstanding and entitled to vote thereupon
pursuant to the provisions of these Articles of Incorporation.
ARTICLE V.
Directors
The By-Laws of the Corporation may fix the number of directors at no less
than three and may authorize the Board of Directors, by the vote of a majority
of the entire Board of Directors, to increase or decrease the number of
directors within a limit specified in the By-Laws (provided that, if there are
no shares outstanding, the number of directors may be less than three but not
less than one), and to fill the vacancies created by any such increase in the
number of directors. Unless otherwise provided by the By-Laws of the
Corporation, the directors of the Corporation need not be stockholders.
The By-Laws of the Corporation may divide the directors of the Corporation
into classes and prescribe the tenure of office of the
17
<PAGE>
several classes; but no class shall be elected for a period shorter than one
year or for a period longer than five years, and the term of office of at least
one class shall expire each year.
ARTICLE VI.
Indemnification of Directors and Officers
Section 1. The Corporation shall indemnify to the fullest extent permitted
by law (including the Investment Company Act), as currently in effect or as the
same may hereafter be amended, any person made or threatened to be made a party
to any action, suit or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that such person or such person's testator
or intestate is or was a director or officer of the Corporation or serves or
served at the request of the Corporation any other enterprise as a director or
officer. To the fullest extent permitted by law (including the Investment
Company Act), as currently in effect or as the same may hereafter be amended,
expenses incurred by any such person in defending any such action, suit or
proceeding shall be paid or reimbursed by the Corporation promptly upon receipt
by it of an undertaking of such person to repay such expenses if it shall
ultimately be determined that such person is not entitled to be indemnified by
the Corporation. The rights provided to any person by this Article VI shall be
enforceable against the Corporation by such person who shall be presumed to have
relied upon it in serving or continuing to serve as a director or officer as
provided above. No amendment of this Article VI shall impair the rights of any
person arising at
18
<PAGE>
any time with respect to events occurring prior to such amendment. For purposes
of this Article VI, the term "Corporation" shall include any predecessor of the
Corporation and any constituent corporation (including any constituent of a
constituent) absorbed by the Corporation in a consolidation or merger; the term
"other enterprise" shall include any corporation, partnership, joint venture,
trust or employee benefit plan; service "at the request of the Corporation"
shall include service as a director or officer of the Corporation which imposes
duties on, or involves services by, such director or officer with respect to an
employee benefit plan, its participants or beneficiaries; any excise taxes
assessed on a person with respect to an employee benefit plan shall be deemed to
be indemnifiable expenses; and action by a person with respect to any employee
benefit plan which such person reasonably believes to be in the interest of the
participants and beneficiaries of such plan shall be deemed to be action not
opposed to the best interests of the Corporation.
Section 2. A director or officer of the Corporation shall not be liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director or officer, except to the extent such exemption from
liability or limitation thereof is not permitted by law (including the
Investment Company Act of 1940) as currently in effect or as the same may
hereafter be amended.
No amendment modification or repeal of this Article VI shall adversely
affect any right or protection of a director or officer
19
<PAGE>
that exists as the time of such amendment, modification or repeal.
ARTICLE VII.
Miscellaneous
The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and for creating,
defining, limiting and regulating the powers of the Corporation, the directors
and the stockholders.
Section 1. The Board of Directors shall have the management and control of
the property, business and affairs of the Corporation and is hereby vested with
all the powers possessed by the Corporation itself so far as is not inconsistent
with law or these Articles of Incorporation. In furtherance and without
limitation of the foregoing provisions, it is expressly declared that, subject
to these Articles of Incorporation, the Board of Directors shall have power:
(a) To make, alter, amend or repeal from time to time the By-Laws of
the Corporation except as such power may otherwise be limited in the
By-Laws.
(b) To issue shares of any class or series of the capital stock of
the Corporation.
(c) To authorize the purchase of shares of any class or series in
the open market or otherwise, at prices not in excess of their net asset
value for shares of that class, series or class within such series
determined in accordance with subsections (a) and (b) of Section 6 of
Article IV hereof, provided that the Corporation has assets legally
20
<PAGE>
available for such purpose, and to pay for such shares in cash, securities
or other assets then held or owned by the Corporation.
(d) To declare and pay dividends and distributions from funds
legally available therefor on shares of such class or series, in such
amounts, if any, and in such manner (including declaration by means of a
formula or other similar method of determination whether or not the amount
of the dividend or distribution so declared can be calculated at the time
of such declaration) and to the holders of record as of such date, as the
Board of Directors may determine.
(e) To take any and all action necessary or appropriate to maintain
a constant net asset value per share for shares of any class, series or
class within such series.
Section 2. Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted accounting
principles applied by or pursuant to the direction of the Board of Directors or
as otherwise required or permitted by the Securities and Exchange Commission,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of shares, past, present and future, of each class or series, and shares
are issued and sold on the condition and undertaking, evidenced by acceptance of
certificates for such shares by, or confirmation of such shares being held for
the account of, any stockholder, that any and all such determinations shall be
binding as aforesaid.
21
<PAGE>
Nothing in this Section 2 shall be construed to protect any director or
officer of the Corporation against liability to the Corporation or its
stockholders to which such director or officer would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
Section 3. The directors of the Corporation may receive compensation for
their services, subject, however, to such limitations with respect thereto as
may be determined from time to time by the holders of shares of capital stock of
the Corporation.
Section 4. Except as required by law, the holders of shares of capital
stock of the Corporation shall have only such right to inspect the records,
documents, accounts and books of the Corporation as may be granted by the Board
of Directors of the Corporation.
Section 5. Any vote of the holders of shares of capital stock of the
Corporation authorizing liquidation of the Corporation or proceedings for its
dissolution may authorize the Board of Directors to determine, as provided
herein, or if provision is not made herein, in accordance with generally
accepted accounting principles, which assets are the assets belonging to the
Corporation or any series thereof available for distribution to the holders of
shares of capital stock of the Corporation or any series thereof (pursuant to
the provisions of Section 7 of Article IV hereof) and may divide, or authorize
the Board of Directors to divide, such assets among the stockholders of the
shares of capital
22
<PAGE>
stock of the Corporation or any series thereof in such manner as to ensure that
each such holder receives an amount from the proceeds of such liquidation or
dissolution that such holder is entitled to, as determined pursuant to the
provisions of Sections 3 and 7 of Article IV hereof.
ARTICLE VIII.
Amendments
The Corporation reserves the right from time to time to amend, alter or
repeal any of the provisions of these Articles of Incorporation (including any
amendment that changes the terms of any of the outstanding shares by
classification, reclassification or otherwise), and to add or insert any other
provisions that may, under the statutes of the State of Maryland at the time in
force, be lawfully contained in articles of incorporation, and all rights at any
time conferred upon the stockholders of the Corporation by these Articles of
Incorporation are subject to the provisions of this Article VIII.
SECOND: The foregoing amendment and restatement of the Articles of
Incorporation of the Corporation has been advised by the Board of Directors and
approved by a majority of the shareholders of the Corporation.
THIRD: (a) As of immediately before the amendment the total number of
shares of Common Stock which the Corporation had authority to issue was
200,000,000 shares of Common Stock, par value of $.0l per share, having an
aggregate par value of $2,000,000.
23
<PAGE>
(b) As amended, the total number of shares of stock of all classes
which the Corporation has authority to issue is 2,000,000,000 shares, all of
which are Common Stock, par value $.01 per share.
(c) The aggregate par value of all shares having a par value was
$2,000,000 before the amendment and $20,000,000 as amended.
(d) A description of the Class A, Class B and Class C Common Stock
is as set forth herein above.
24
<PAGE>
IN WITNESS WHEREOF, THE GLOBAL GOVERNMENT PLUS FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President and
attested by its Assistant Secretary on January 10, 1996.
THE GLOBAL GOVERNMENT PLUS FUND, INC.
By /s/ Richard A. Redeker
-------------------------------------
Richard A. Redeker
President
Attest: /s/ Marguerite E. H. Morrison
-----------------------------
Marguerite E. H. Morrison
Assistant Secretary
25
<PAGE>
The undersigned, President of The Global Government Plus Fund, Inc., who
executed on behalf of said Corporation the foregoing amendment to the Articles
of Incorporation of which this certificate is made a part, hereby acknowledges
the foregoing amendment and restatement of the Articles of Incorporation to be
the act of the Corporation, and further certifies that, to the best of his
knowledge, information and belief, all matters and facts set forth therein are
true in all material respects and that this statement is made under the
penalties of perjury.
/s/ Richard A. Redeker
-------------------------
Richard A. Redeker
26
ARTICLES SUPPLEMENTARY
OF
THE GLOBAL GOVERNMENT PLUS FUND, INC.
* * *
Pursuant to Section 2-208.1
of the Maryland General Corporation Law
* * *
The Global Government Plus Fund, Inc., a Maryland corporation having its
principal offices in Baltimore, Maryland and Newark, New Jersey (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940.
SECOND: The total number of shares of all classes of stock which the
Corporation has authority to issue is 2 billion shares of common stock, par
value of $.01 each, having an aggregate par value of $2,000,000, and the total
number of shares of common stock that the Corporation has authority to issue is
not being increased or decreased.
THIRD: Heretofore, the number of authorized shares of which the
Corporation has authority to issue was divided into three classes of shares,
consisting of 1 billion Class A shares, 500 million Class B shares and 500
million Class C shares.
FOURTH: In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to a resolution duly adopted by the Board of
Directors of the Corporation at a meeting held on May 8, 1996, the number of
authorized shares of which the Corporation has authority to issue is hereby
divided into four classes of shares, consisting of 500 million Class A shares,
500 million Class B shares, 500 million Class C shares and 500 million Class Z
shares.
FIFTH: The Class Z shares shall represent the same interest in the
Corporation and have identical voting, dividend, liquidation and other rights as
the Class A, Class B and Class C shares except that (i) expenses related to the
distribution of each class of shares shall be borne solely by such class; (ii)
the bearing of such expenses solely by shares of each class shall be
appropriately reflected (in the manner determined by the Board of Directors) in
the net asset value, dividends, distribution and liquidation rights of the
shares of such class; (iii) the Class A Common Stock shall be subject to a
front-end sales load and a Rule 12b-l distribution fee as determined by the
Board of Directors from time to time; (iv) the Class B Common Stock shall be
subject to a contingent deferred sales charge and a Rule 12b-l distribution fee
as determined by the Board of Directors from time to time; (v) the Class C
Common Stock shall be subject to a contingent deferred sales charge and a Rule
12b-1 distribution fee as determined by the Board of Directors from time to time
and (vi) the Class Z Common Stock shall not be subject to a front-end sales
load, a contingent deferred sales charge nor a 12b-l distribution fee. All
shares of each particular
<PAGE>
class shall represent an equal proportionate interest in that class, and each
share of any particular class shall be equal to each other share of that class.
IN WITNESS WHEREOF, THE GLOBAL GOVERNMENT PLUS FUND, INC., has caused
these presents to be signed in its name and on its behalf by its President and
attested by its Assistant Secretary on February 21, 1997.
THE GLOBAL GOVERNMENT PLUS FUND,
INC.
By /s/ Richard A. Redeker
---------------------------
Richard A. Redeker
President
Attest: /s/ Marguerite E. H. Morrison
----------------------------
Marguerite E. H. Morrison
Assistant Secretary
THE UNDERSIGNED, President of The Global Government Plus Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles Supplementary to be the
corporate act of said Corporation and hereby certifies that to the best of his
knowledge, information and belief the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
/s/ Richard A. Redeker
---------------------------
Richard A. Redeker
President
2
THE GLOBAL GOVERNMENT PLUS FUND, INC.
By-Laws
ARTICLE I.
Stockholders
Section 1. Place of Meeting. All meetings of the stockholders shall be
held at the principal office of the Corporation in the State of Maryland or at
such other place within the United States as may from time to time be designated
by the Board of Directors and stated in the notice of such meeting.
Section 2. Annual Meetings. The annual meeting of the stockholders of the
Corporation shall be held on a date and at such hour as may from time to time be
designated by the Board of Directors and stated in the notice of such meeting,
within the month ending four months after the end of the Corporation's fiscal
year, for the transaction of such business as may properly be brought before the
meeting; provided, however, that an annual meeting shall not be required to be
held in any year in which the election of directors is not required to be acted
on by stockholders under the Investment Company Act of 1940.
Section 3. Meetings. Meetings of the stockholders for any purpose or
purposes, including for purposes of voting on the removal of one or more
Directors, may be called by the Chairman of the Board, the President or a
majority of the Board of Directors,
<PAGE>
and shall be called by the Secretary upon receipt of the request in writing
signed by stockholders holding not less than 10% of the common stock issued and
outstanding and entitled to vote thereat. Such request shall state the purpose
or purposes of the proposed meeting. The Secretary shall inform such
stockholders of the reasonably estimated costs of preparing and mailing such
notice of meeting and upon payment to the Corporation of such costs, the
Secretary shall give notice stating the purpose or purposes of the meeting as
required in this Article and by-law to all stockholders entitled to notice of
such meeting. No meeting need be called upon the request of the holders of
shares entitled to cast less than a majority of all votes entitled to be cast at
such meeting to consider any matter which is substantially the same as a matter
voted upon at any meeting of stockholders held during the preceding twelve
months.
Section 4. Notice of Meetings of Stockholders. Not less than ten days' and
not more than ninety days' written or printed notice of every meeting of
stockholders, stating the time and place thereof and the general nature of the
business proposed to be transacted thereat, shall be given to each stockholder
entitled to vote thereat by leaving the same with such stockholder or at such
2
<PAGE>
stockholder's residence or usual place of business or by mailing it, postage
prepaid, and addressed to such stockholder at such stockholder's address as it
appears upon the books of the Corporation. If mailed, notice shall be deemed to
be given when deposited in the United States mail addressed to the stockholder
as aforesaid.
No notice of the time, place or purpose of any meeting of stockholders
need be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with the records of the meeting,
either before or after the holding thereof, waives such notice.
Section 5. Record Dates. The Board of Directors may fix, in advance, a
date not exceeding ninety days preceding the date of any meeting of
stockholders, any dividend payment date or any date for the allotment of rights,
as a record date for the determination of the stockholders entitled to notice of
and to vote at such meeting or entitled to receive such dividends or rights, as
the case may be; and only stockholders of record on such date shall be entitled
to notice of and to vote at such meeting or to receive such dividends or rights,
as the case may be. In the case of a meeting of stockholders, such date shall
not be less than ten days prior to
3
<PAGE>
the date fixed for such meeting.
Section 6. Quorum, Adjournment of Meetings. The presence in person or by
proxy of the holders of record of one-third of the shares of the common stock of
the Corporation issued and outstanding and entitled to vote thereat shall
constitute a quorum at all meetings of the stockholders except as otherwise
provided in the Articles of Incorporation. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the holders of a
majority of the stock present in person or by proxy shall have power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until stockholders owning the requisite amount of stock entitled to
vote at such meeting shall be present. At such adjourned meeting at which
stockholders owning the requisite amount of stock entitled to vote thereat shall
be represented, any business may be transacted which might have been transacted
at the meeting as originally notified.
Section 7. Voting and Inspectors. At all meetings, stockholders of record
entitled to vote thereat shall have one vote for each share of common stock
standing in his name on the books of the Corporation (and such stockholders of
record holding fractional shares, if any, shall have proportionate voting
rights) on the date
4
<PAGE>
for the determination of stockholders entitled to vote at such meeting, either
in person or by proxy appointed by instrument in writing subscribed by such
stockholder or his duly authorized attorney.
All elections shall be had and all questions decided by a majority of the
votes cast at a duly constituted meeting, except as otherwise provided by
statute or by the Articles of Incorporation or by these By-Laws.
At any election of directors, the Chairman of the meeting may, and upon
the request of the holders of ten percent (10%) of the stock entitled to vote at
such election shall, appoint two inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of director shall be appointed such
inspector.
Section 8. Conduct of Stockholders' Meetings. The meetings of the
stockholders shall be presided over by the Chairman of the Board, or if he or
she is not present, by the President, or if he or she is not present, by a
Vice-President, or if none of them is
5
<PAGE>
present, by a Chairman to be elected at the meeting. The Secretary of the
Corporation, if present, shall act as a Secretary of such meetings, or if he or
she is not present, an Assistant Secretary shall so act; if neither the
Secretary nor the Assistant Secretary is present, then the meeting shall elect
its Secretary.
Section 9. Concerning Validity of Proxies, Ballots, etc. At every meeting
of the stockholders, all proxies shall be received and taken in charge of and
all ballots shall be received and canvassed by the Secretary of the meeting, who
shall decide all questions concerning the qualification of voters, the validity
of the proxies and the acceptance or rejection of votes, unless inspectors of
election shall have been appointed by the Chairman of the meeting, in which
event such inspectors of election shall decide all such questions.
ARTICLE II.
Board of Directors
Section 1. Number and Tenure of Office. The business and affairs of the
Corporation shall be conducted and managed by a Board of Directors of not less
than three nor more than twelve directors, as may be determined from time to
time by vote of a majority of the directors then in office, provided that if
there is
6
<PAGE>
no stock outstanding the number of directors may be less than three but not less
than one. Directors need not be stockholders.
Section 2. Vacancies. In case of any vacancy in the Board of Directors
through death, resignation or other cause, other than an increase in the number
of directors, a majority of the remaining directors, although a majority is less
than a quorum, by an affirmative vote, may elect a successor to hold office
until the next meeting of stockholders or until his successor is chosen and
qualifies.
Section 3. Increase or Decrease in Number of Directors. The Board of
Directors, by the vote of a majority of the entire Board, may increase the
number of directors and may elect directors to fill the vacancies created by any
such increase in the number of directors until the next meeting of stockholders
or until their successors are duly chosen and qualified. The Board of Directors,
by the vote of a majority of the entire Board, may likewise decrease the number
of directors to a number not less than three.
Section 4. Place of Meeting. The directors may hold their meetings, have
one or more offices, and keep the books of the Corporation, outside the State of
Maryland, at any office or offices of the Corporation or at any other place as
they may from
7
<PAGE>
time to time by resolution determine, or in the case of meetings, as they may
from time to time by resolution determine or as shall be specified or fixed in
the respective notices or waivers of notice thereof.
Section 5. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such time and on such notice as the directors may from time to
time determine.
Section 6. Special Meetings. Special meetings of the Board of Directors
may be held from time to time upon call of the Chairman of the Board, the
President, the Secretary or two or more of the directors, by oral or telegraphic
or written notice duly served on or sent or mailed to each director not less
than one day before such meeting. No notice need be given to any director who
attends in person or to any director who, in writing executed and filed with the
records of the meeting either before or after the holding thereof, waives such
notice. Such notice or waiver of notice need not state the purpose or purposes
of such meeting.
Section 7. Quorum. One-third of the directors then in office shall
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two directors. If at any meeting of the Board
there shall be less than a quorum present,
8
<PAGE>
a majority of those present may adjourn the meeting from time to time until a
quorum shall have been obtained. The act of the majority of the directors
present at any meeting at which there is a quorum shall be the act of the
directors, except as may be otherwise specifically provided by statute or by the
Articles of Incorporation or by these By-Laws.
Section 8. Executive Committee. The Board of Directors may, by the
affirmative vote of a majority of the whole Board, appoint from the directors an
Executive Committee to consist of such number of directors (not less than three)
as the Board may from time to time determine. The Chairman of the Committee
shall be elected by the Board of Directors. The Board of Directors by such
affirmative vote shall have power at any time to change the members of such
Committee and may fill vacancies in the Committee by election from the
directors. When the Board of Directors is not in session, to the extent
permitted by law, the Executive Committee shall have and may exercise any or all
of the powers of the Board of Directors in the management of the business and
affairs of the Corporation. The Executive Committee may fix its own rules of
procedure, and may meet when and as provided by such rules or by resolution of
the Board of Directors, but in every case the presence of a majority
9
<PAGE>
shall be necessary to constitute a quorum. During the absence of a member of the
Executive Committee, the remaining members may appoint a member of the Board of
Directors to act in his place.
Section 9. Other Committees. The Board of Directors, by the affirmative
vote of a majority of the whole Board, may appoint from the directors other
committees which shall in each case consist of such number of directors (not
less than two) and shall have and may exercise such powers as the Board may
determine in the resolution appointing them. A majority of all the members of
any such committee may determine its action and fix the time and place of its
meetings, unless the Board of Directors shall otherwise provide. The Board of
Directors shall have power at any time to change the members and powers of any
such committee, to fill vacancies and to discharge any such committee.
Section 10. Telephone Meetings. Members of the Board of Directors or a
committee of the Board of Directors may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Participation
in a meeting by these means constitutes presence in person at the meeting unless
otherwise provided by the Investment Company Act of
10
<PAGE>
1940.
Section 11. Action Without a Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting, if a written consent to such action is signed by all
members of the Board or of such committee, as the case may be, and such written
consent is filed with the minutes of the proceedings of the Board or such
committee, unless otherwise provided by the Investment Company Act of 1940.
Section 12. Compensation of Directors. No director shall receive any
stated salary or fees from the Corporation for his services as such if such
director is, other than by reason of being such director, an interested person
(as such term is defined by the Investment Company Act of 1940) of the
Corporation or of its investment adviser, administrator or principal
underwriter. Except as provided in the preceding sentence, directors shall be
entitled to receive such compensation from the Corporation for their services as
may from time to time be voted by the Board of Directors.
Section 13. Removal of Directors. No director shall continue to hold
office after the holders of record of not less than
11
<PAGE>
two-thirds of the Corporation's outstanding common stock of all series have
declared that that director be removed from office either by declaration in
writing filed with the Corporation's secretary or by votes cast in person or by
proxy at a meeting called for the purpose. The directors shall promptly call a
meeting of stockholders for the purpose of voting upon the question of removal
of any director or directors when requested in writing to do so by the record
holders of not less than 10 percent of the Corporation's outstanding common
stock of all series.
ARTICLE III.
Officers
Section 1. Executive Officers. The executive officers of the Corporation
shall be chosen by the Board of Directors. These may include a Chairman of the
Board of Directors (who shall be a director) and shall include a President (who
shall be a director), one or more Vice-Presidents (the number thereof to be
determined by the Board of Directors), a Secretary and a Treasurer. The Board of
Directors or the Executive Committee may also in its discretion appoint
Assistant Secretaries, Assistant Treasurers and other officers, agents and
employees, who shall have such authority and perform such duties as the Board or
the Executive Committee may
12
<PAGE>
determine. The Board of Directors may fill any vacancy which may occur in any
office. Any two offices, except those of President and Vice-President, may be
held by the same person, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity, if such instrument is required by law or
these By-Laws to be executed, acknowledged or verified by two or more officers.
Section 2. Term of Office. The term of office of all officers shall be one
year and until their respective successors are chosen and qualified. Any officer
may be removed from office at any time with or without cause by the vote of a
majority of the whole Board of Directors.
Section 3. Powers and Duties. The officers of the Corporation shall have
such powers and duties as generally pertain to their respective offices, as well
as such powers and duties as may from time to time be conferred by the Board of
Directors or the Executive Committee.
ARTICLE IV.
Capital Stock
Section 1. Certificates for Shares. Each stockholder of the
Corporation shall be entitled to a certificate or certificates for
13
<PAGE>
the full shares of stock of the Corporation owned by him in such form as the
Board from time to time prescribe.
Section 2. Transfer of Shares. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by his duly authorized attorney or legal representative, upon surrender and
cancellation of certificates, if any, for the same number of shares, duly
endorsed or accompanied by proper instruments of assignment and transfer, with
such proof of the authenticity of the signature as the Corporation or its agents
may reasonably require; in the case of shares not represented by certificates,
the same or similar requirements may be imposed by the Board of Directors.
Section 3. Stock Ledgers. The stock ledgers of the Corporation, containing
the names and addresses of the stockholders and the number of shares held by
them respectively, shall be kept at the principal office of the Corporation or,
if the Corporation employs a Transfer Agent, at the office of the Transfer Agent
of the Corporation.
Section 4. Lost, Stolen or Destroyed Certificates. The Board of
Directors or the Executive Committee may determine the conditions upon which
a new certificate of stock of the Corporation
14
<PAGE>
of any class may be issued in place of a certificate which is alleged to have
been lost, stolen or destroyed; and may, in its discretion, require the owner of
such certificate or such owner's legal representative to give bond, with
sufficient surety, to the Corporation and each Transfer Agent, if any, to
indemnify it and each such Transfer Agent against any and all loss or claims
which may arise by reason of the issue of a new certificate in the place of the
one so lost, stolen or destroyed.
ARTICLE V.
Corporate Seal
The Board of Directors may provide for a suitable corporate seal, in such
form and bearing such inscriptions as it may determine.
15
<PAGE>
ARTICLE VI.
Fiscal Year
The fiscal year of the Corporation shall be fixed by the Board of
Directors.
ARTICLE VII.
Indemnification
Directors, officers, employees and agents of the Corporation shall not be
liable to the Corporation, any stockholder, officer, director, employee or other
person for any action or failure to act except for willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office. The Corporation shall indemnify directors, officers,
employees and agents of the Corporation against judgments, fines, settlements
and expenses to the fullest extent authorized and in the manner permitted by
applicable federal and state law. The Corporation may purchase insurance to
protect itself and its directors, officers, employees and agents against
judgments, fines, settlements and expenses to the fullest extent authorized and
in the manner permitted by applicable federal and state law. Nothing contained
in this Article VII shall be construed to indemnify directors, officers,
employees and agents of the Corporation
16
<PAGE>
against, nor to permit the Corporation to purchase insurance that purports to
protect against, any liability to the Corporation or any stockholder, officer,
director, employee, agent or other person to whom he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
ARTICLE VIII.
Custodian
Section 1. The Corporation shall have as custodian or custodians one or
more trust companies or banks of good standing, each having a capital, surplus
and undivided profits aggregating not less than fifty million dollars
($50,000,000), and, to the extent required by the Investment Company Act of
1940, the funds and securities held by the Corporation shall be kept in the
custody of one or more such custodians, provided such custodian or custodians
can be found ready and willing to act, and further provided that the Corporation
may use as subcustodians, for the purpose of holding any foreign securities and
related funds of the Corporation, such foreign banks as shall be permitted by
law.
Section 2. The Corporation shall upon the resignation or inability to
serve of its custodian or upon change of the
17
<PAGE>
custodian:
(a) in case of such resignation or inability to serve, use its best
efforts to obtain a successor custodian;
(b) require that the cash and securities owned by the Corporation be
delivered directly to the successor custodian; and
(c) in the event that no successor custodian can be found, submit to
the stockholders before permitting delivery
of the cash and securities owned by the Corporation otherwise than to a
successor custodian, the question whether or not this Corporation shall be
liquidated or shall function without a custodian.
ARTICLE IX.
Amendment of By-Laws
The By-Laws of the Corporation may be altered, amended, added to or
repealed by the stockholders or by majority vote of the entire Board of
Directors; but any such alteration, amendment, addition or repeal of the By-Laws
by action of the Board of Directors may be altered or repealed by stockholders.
As amended on: September 13, 1995.
18
THE GLOBAL GOVERNMENT PLUS FUND, INC.
Management Agreement
Agreement made this 13th day of September, 1995 between The Global
Government Plus Fund, Inc., a Maryland corporation (the Fund), and Prudential
Mutual Fund Management, Inc., a Delaware corporation (the Manager).
WITNESSETH
WHEREAS, the Fund is a non-diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the 1940 Act); and
WHEREAS, the Fund desires to retain the Manager to render or
contract to obtain as hereinafter provided investment advisory services to the
Fund and the Fund also desires to avail itself of the facilities available to
the Manager with respect to the administration of its day to day corporate
affairs, and the Manager is willing to render such investment advisory and
administrative services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the
Fund and administrator of its corporate affairs for the period and on the terms
set forth in this Agreement. The Manager accepts such appointment and agrees to
render the services herein
<PAGE>
described, for the compensation herein provided. The Manager is authorized to
enter into an agreement with The Prudential Investment Corporation (PIC or the
Subadviser) pursuant to which PIC shall furnish to the Fund the investment
advisory services in connection with the management of the Fund (the Subadvisory
Agreement). The Manager will continue to have responsibility for all investment
advisory services furnished pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund,
the Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or loaned by
2
<PAGE>
the Fund, and what portion of the assets will be invested or held
uninvested as cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus (hereinafter defined) of the Fund
and with the instructions and directions of the Board of Directors of the
Fund and will conform to and comply with the requirements of the 1940 Act
and all other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts
to be purchased or sold by the Fund and will place orders pursuant to its
determinations with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) in conformity with the policy with respect to brokerage as
set forth in the Fund's Registration Statement and Prospectus (hereinafter
defined) or as the Board of Directors may direct from time to time. In
providing the Fund with investment supervision, it is recognized that the
Manager will give primary consideration to securing the most favorable
price and efficient execution. Consistent with this policy, the Manager
may consider the financial responsibility, research and
3
<PAGE>
investment information and other services provided by brokers, dealers or
futures commission merchants who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager
may be a party. It is understood that Prudential Securities Incorporated
may be used as a broker for securities transactions but that no formula
has been adopted for allocation of the Fund's investment transaction
business. It is also understood that it is desirable for the Fund that the
Manager have access to supplemental investment and market research and
security and economic analysis provided by brokers or futures commission
merchants and that such brokers may execute brokerage transactions at a
higher cost to the Fund than may result when allocating brokerage to other
brokers or futures commission merchants on the basis of seeking the most
favorable price and efficient execution. Therefore, the Manager is
authorized to pay higher brokerage commissions for the purchase and sale
of securities and futures contracts for the Fund to brokers or futures
commission merchants who provide such research and analysis, subject to
review by the Fund's Board of Directors from time to time with respect to
the extent and continuation of this practice. It is understood that the
services provided by such broker or futures commission
4
<PAGE>
merchant may be useful to the Manager in connection with its services to
other clients.
On occasions when the Manager deems the purchase or sale of a
security or a futures contract to be in the best interest of the Fund as
well as other clients of the Manager or the Subadviser, the Manager, to
the extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities or futures contracts to
be so sold or purchased in order to obtain the most favorable price or
lower brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the
Manager in the manner it considers to be the most equitable and consistent
with its fiduciary obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to
the Fund's portfolio transactions and shall render to the Fund's Board of
Directors such periodic and special reports as the Board may reasonably
request.
(e) The Manager shall be responsible for the financial and
accounting records to be maintained by the Fund (including those being
maintained by the Fund's Custodian).
5
<PAGE>
(f) The Manager shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets.
(g) The investment management services of the Manager to the Fund
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the
Secretary of State of Maryland (such Articles of Incorporation, as in
effect on the date hereof and as amended from time to time, are herein
called the "Articles of Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund
authorizing the appointment of the Manager and approving the form of this
agreement;
(d) Registration Statement under the 1940 Act and the
6
<PAGE>
Securities Act of 1933, as amended, on Form N-1A (the Registration
Statement), as filed with the Securities and Exchange Commission (the
Commission) relating to the Fund and shares of the Fund's Common Stock and
all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of the Fund
to serve in the capacities in which they are elected. All services to be
furnished by the Manager under this Agreement may be furnished through the
medium of any such directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to
be maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request,
provided however
7
<PAGE>
that the Manager may retain a copy of such records. The Manager further agrees
to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such
records as are required to be maintained by the Manager pursuant to Paragraph 2
hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Fund and the
Manager except the fees and expenses of directors who are not affiliated
persons of the Manager or the Fund's investment adviser,
(ii) 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 herein, and
(iii) the costs and expenses payable to PIC pursuant to the
Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with
the management of the investment and reinvestment of the Fund's assets,
(b) the fees and expenses of directors who are not affiliated
persons of the Manager or the Fund's investment adviser,
8
<PAGE>
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Fund and
the providing of any such records to the Manager useful to the Manager in
connection with the Manager's responsibility for the accounting records of
the Fund pursuant to Section 31 of the 1940 Act and the rules promulgated
thereunder, (iii) the pricing of the shares of the Fund, including the
cost of any pricing service or services which may be retained pursuant to
the authorization of the Board of Directors of the Fund, and (iv) for both
mail and wire orders, the cashiering function in connection with the
issuance and redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable
to the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to
9
<PAGE>
federal, state or other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a
member,
(i) the cost of stock certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Securities and
Exchange Commission, registering the Fund as a broker or dealer and
qualifying its shares under state securities laws, including the
preparation and printing of the Fund's registration statements,
prospectuses and statements of additional information for filing under
federal and state securities laws for such purposes,
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and directors' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other
10
<PAGE>
extraordinary expenses not incurred in the ordinary course of the Fund's
business, and
(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year
(including the fees payable to 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) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of any
jurisdictions in which shares of the Fund are then qualified for offer and sale,
the compensation due the Manager will be reduced by the amount of such excess,
or, if such reduction exceeds the compensation payable to the Manager, the
Manager will pay to the Fund the amount of such reduction which exceeds the
amount of such compensation.
8. For the services provided and the expenses assumed pursuant to
this Agreement, the Fund will pay to the Manager as full compensation therefor a
fee at an annual rate of 0.75 of 1% of the Fund's average daily net assets up to
US $1 billion and .70 of
11
<PAGE>
1% of such assets in excess of US $1 billion. This fee will be computed daily
and will be paid to the Manager monthly. Any reduction in the fee payable and
any payment by the Manager to the Fund pursuant to paragraph 7 shall be made
monthly. Any such reductions or payments are subject to readjustment during the
year.
9. The Manager shall not be liable for any error of judgment or for
any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section
36(b)(3) of the 1940 Act) or loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more
than two years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the requirements of
the 1940 Act; provided, however, that this Agreement may be terminated by the
Fund at any time, without the payment of any penalty, by the Board of Directors
12
<PAGE>
of the Fund or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, or by the Manager at any time, without the
payment of any penalty, on not more than 60 days' nor less than 30 days' written
notice to the other party. This Agreement shall terminate automatically in the
event of its assignment (as defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the right of
any director, officer or employee of the Manager who may also be a director,
officer or employee of the Fund to engage in any other business or to devote his
or her time and attention in part to the management or other aspects of any
business, whether of a similar or dissimilar nature, nor limit or restrict the
right of the Manager to engage in any other business or to render services of
any kind to any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the Board
of Directors of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
13. During the term of this Agreement, the Fund agrees to furnish
the Manager at its principal office all prospectuses,
13
<PAGE>
proxy statements, reports to shareholders, sales literature, or other material
prepared for distribution to shareholders of the Fund or the public, which refer
in any way to the Manager, prior to use thereof and not to use such material if
the Manager reasonably objects in writing within five business days (or such
other time as may be mutually agreed) after receipt thereof. In the event of
termination of this Agreement, the Fund will continue to furnish to the Manager
copies of any of the above mentioned materials which refer in any way to the
Manager. Sales literature may be furnished to the Manager hereunder by
first-class or overnight mail, facsimile transmission equipment or hand
delivery. The Fund shall furnish or otherwise make available to the Manager such
other information relating to the business affairs of the Fund as the Manager at
any time, or from time to time, reasonably requests in order to discharge its
obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent
of the Fund must be obtained in conformity with the requirements of the 1940
Act.
15. Any notice or other communication required to be given pursuant
to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Manager at One Seaport Plaza, New
York, N.Y. 10292, Attention:
14
<PAGE>
Secretary; or (2) to the Fund at One Seaport Plaza, New York, N.Y. 10292,
Attention: President.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
THE GLOBAL GOVERNMENT PLUS FUND, INC.
By /s/ Richard A. Redeker
-------------------------------------
Richard A. Redeker
President
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ ROBERT F. GUNIA
-------------------------------------
15
THE GLOBAL GOVERNMENT PLUS FUND, INC.
Subadvisory Agreement
Agreement made as of this 13th day of September, 1995 between Prudential
Mutual Fund Management Inc., a Delaware Corporation (PMF or the Manager), and
The Prudential Investment Corporation, a New Jersey Corporation (the
Subadviser).
WHEREAS, the Manager has entered into a Management Agreement, dated
September 13, 1995 (the Management Agreement), with The Global Government Plus
Fund, Inc. (the Fund), a Maryland corporation and a non-diversified open-end
management investment company registered under the Investment Company Act of
1940 (the 1940 Act), pursuant to which PMF will act as Manager of the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Fund, the Subadviser shall manage the investment
operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance
with the Fund's investment objectives, policies and restrictions as stated
in the Prospectus, (such Prospectus and Statement of Additional
Information as currently in effect and as amended or supplemented from
time to time, being herein called the "Prospectus"), and subject to the
following understandings:
(i) The Subadviser shall provide supervision of the Fund's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the Fund,
and what portion of the assets will be invested or held uninvested
as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Subadviser shall act in conformity with the
Articles of Incorporation,
<PAGE>
By-Laws and Prospectus of the Fund and with the instructions and
directions of the Manager and of the Board of Directors of the Fund
and will conform to and comply with the requirements of the 1940
Act, the Internal Revenue Code of 1986 and all other applicable
federal and state laws and regulations.
(iii) The Subadviser shall determine the securities and
futures contracts to be purchased or sold by the Fund and will place
orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential
Securities Incorporated) to carry out the policy with respect to
brokerage as set forth in the Fund's Registration Statement and
Prospectus or as the Board of Directors may direct from time to
time. In providing the Fund with investment supervision, it is
recognized that the Subadviser will give primary consideration to
securing the most favorable price and efficient execution. Within
the framework of this policy, the Subadviser may consider the
financial responsibility, research and investment information and
other services provided by brokers, dealers or futures commission
merchants who may effect or be a party to any such transaction or
other transactions to which the Subadviser's other clients may be a
party. It is understood that Prudential Securities Incorporated may
be used as a broker for securities transactions but that no formula
has been adopted for allocation of the Fund's investment transaction
business. It is also understood that it is desirable for the Fund
that the Subadviser have access to supplemental investment and
market research and security and economic analysis provided by
brokers or futures commission merchants who may execute brokerage
transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers on the basis of seeking the
most favorable price and efficient execution. Therefore, the
Subadviser is authorized to place orders for the purchase and sale
of securities and futures contracts for the Fund with such brokers
or futures commission merchants, subject to review by the Fund's
Board of Directors from time to time with respect to the extent and
continuation of this practice. It is
2
<PAGE>
understood that the services provided by such brokers or futures
commission merchants may be useful to the Subadviser in connection
with the Subadviser's services to other clients.
On occasions when the Subadviser deems the purchase or sale of
a security or futures contract to be in the best interest of the
Fund as well as other clients of the Subadviser, the Subadviser, to
the extent permitted by applicable laws and regulations, may, but
shall be under no obligation to, aggregate the securities or futures
contracts to be sold or purchased in order to obtain the most
favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities or futures
contracts so purchased or sold, as well as the expenses incurred in
the transaction, will be made by the Subadviser in the manner the
Subadviser considers to be the most equitable and consistent with
its fiduciary obligations to the Fund and to such other clients.
(iv) The Subadviser shall maintain all books and records with
respect to the Fund's portfolio transactions required by
subparagraphs (b)(5), (6), (7), (9), (10) and (11) and paragraph (f)
of Rule 31a-1 under the 1940 Act and shall render to the Fund's
Board of Directors such periodic and special reports as the
Directors may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian on each
business day with information relating to all transactions
concerning the Fund's assets and shall provide the Manager with such
information upon request of the Manager.
(vi) The investment management services provided by the
Subadviser hereunder are not to be deemed exclusive, and the
Subadviser shall be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of the
Fund to serve in the capacities
3
<PAGE>
in which they are elected. Services to be furnished by the Subadivser
under this Agreement may be furnished through the medium of any of such
directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records required to be
maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall
timely furnish to the Manager all information relating to the Subadviser's
services hereunder needed by the Manager to keep the other books and
records of the Fund required by Rule 31a-1 under the 1940 Act. The
Subadviser agrees that all records which it maintains for the Fund are the
property of the Fund and the Subadviser will surrender promptly to the
Fund any of such records upon the Fund's request, provided however that
the Subadviser may retain a copy of such records. The Subadviser further
agrees to preserve for the periods prescribed by Rule 31a-2 of the
Commission under the 1940 Act any such records as are required to be
maintained by it pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all services to
be provided to the Fund pursuant to the Management Agreement and shall
oversee and review the Subadviser's performance of its duties under this
Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs and
expenses incurred by the Subadviser determined in a manner acceptable to
the Manager in furnishing the services described in paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or for any
loss suffered by the Fund or the Manager in connection with the matters to
which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Subadviser's part in the
performance of its duties or from its reckless disregard of its
obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the
requirements of the 1940 Act; provided, however, that this Agreement may
be terminated by the Fund at
4
<PAGE>
any time, without the payment of any penalty, by the Board of Directors of
the Fund or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, or by the Manager or the Subadviser
at any time, without the payment of any penalty, on not more than 60 days'
nor less than 30 days' written notice to the other party. This Agreement
shall terminate automatically in the event of its assignment (as defined
in the 1940 Act) or upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Subadviser's directors, officers, or employees who may also be a
director, officer or employee of the Fund to engage in any other business
or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar
nature, nor limit or restrict the Subadviser's right to engage in any
other business or to render services of any kind to any other corporation,
firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements,
reports to stockholders, sales literature or other material prepared for
distribution to stockholders of the Fund or the public, which refer to the
Subadviser in any way, prior to use thereof and not to use material if the
Subadviser reasonably objects in writing five business days (or such other
time as may be mutually agreed) after receipt thereof. Sales literature
may be furnished to the Subadviser hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery.
5
<PAGE>
8. This Agreement may be amended by mutual consent, but the consent of the
Fund must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
BY /s/ Robert F. Gunia
-----------------------------------
Robert F. Gunia
Executive Vice President
THE PRUDENTIAL INVESTMENT CORPORATION
BY /s/ MENDEL A. MELZER
-----------------------------------
6
THE GLOBAL GOVERNMENT PLUS FUND, INC.
Distribution Agreement
Agreement made as of September 13, 1996 between The Global
Government Plus Fund, Inc. a Maryland corporation (the Fund), and Prudential
Securities Incorporated, a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering of the Fund's
Shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Shares; and
WHEREAS, upon approval by the holders of the respective classes
and/or series of Shares of the Fund it is contemplated that the Fund will adopt
a plan (or plans) of distribution pursuant to Rule 12b-1 under the Investment
Company Act with respect to certain of its classes and/or series of Shares (the
Plans) authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell Shares to the
public on behalf of the Fund and the Distributor hereby accepts such appointment
and agrees to act hereunder. The Fund hereby agrees during the term of this
Agreement to sell Shares of the Fund through the Distributor on the terms and
conditions set forth below.
<PAGE>
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares
of the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean the
Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the
Fund and delivered by the Distributor or selected dealers, as described in
Section 6.4 hereof, to investors at the offering price as set forth in the
Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as may
be determined by the Board
2
<PAGE>
of Directors. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding Shares may be tendered for redemption at
any time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Articles of Incorporation as amended from time to time, and
in accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may
be suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
3
<PAGE>
Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board of Directors and the shareholders, all necessary
action to fix the number of authorized Shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Shares for sales under the
securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Shares in any
state from the terms set forth in its Registration Statement, to qualify as a
foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its
Shares. Any such qualification may be withheld, terminated or withdrawn by the
Fund at any time in its discretion. As provided in Section 9 hereof, the expense
of qualification and maintenance of qualification shall be borne by the Fund.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such qualifications.
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to
effect sales of Shares, but shall not be obligated to sell any specific number
of Shares. Sales of the
4
<PAGE>
Shares shall be on the terms described in the Prospectus. The Distributor may
enter into like arrangements with other investment companies. The Distributor
shall compensate the selected dealers as set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD. Shares sold to selected dealers shall be
for resale by such dealers only at the offering price determined as set forth in
the Prospectus.
Section 7. Payments to the Distributor
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Rule 2830 of the Conduct Rules of the NASD Rules of Fair Practice. Payment of
these amounts to the Distributor is not contingent upon the adoption or
continuation of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not
contingent upon the adoption or continuation of any Plan.
5
<PAGE>
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions and account
servicing fees with respect to the relevant class and/or series of Shares to be
paid by the Distributor to account executives of the Distributor and to
broker-dealers and financial institutions which have dealer agreements with the
Distributor. So long as a Plan (or any amendment thereto) is in effect, at the
request of the Board of Directors or any agent or representative of the Fund,
the Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
The Fund shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and periodic reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a broker or dealer, in such states of the United States
or other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5.4 hereof and the cost and expense payable to each such
state for continuing qualification therein until the Fund decides to discontinue
such qualification pursuant to Section 5.4 hereof. As set forth in Section 8
above, the Fund shall also bear the expenses it assumes pursuant to any Plan, so
long as such Plan is in effect.
Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such
6
<PAGE>
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which the Distributor, its officers, directors or any such
controlling person may incur under the Securities Act, or under common law or
otherwise, arising out of or based upon any untrue statement of a material fact
contained in the Registration Statement or Prospectus or arising out of or based
upon any alleged omission to state a material fact required to be stated in
either thereof or necessary to make the statements in either thereof not
misleading, except insofar as such claims, demands, liabilities or expenses
arise out of or are based upon any such untrue statement or omission or alleged
untrue statement or omission made in reliance upon and in conformity with
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus; provided, however, that this indemnity
agreement shall not inure to the benefit of any such officer, director, trustee
or controlling person unless a court of competent jurisdiction shall determine
in a final decision on the merits, that the person to be indemnified was not
liable by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of directors or trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and directors or trustees and any such controlling
person as aforesaid is expressly conditioned upon the Fund's being promptly
notified of any action brought against the Distributor, its officers or
directors or trustees, or any such controlling person, such notification to be
given by letter or telegram addressed to the Fund at its principal business
office. The Fund agrees promptly to notify the Distributor of the commencement
of any litigation or proceedings against it or any of its officers or directors
in connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and Directors or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's
7
<PAGE>
agreement to indemnify the Fund, its officers and Directors and any such
controlling person as aforesaid, is expressly conditioned upon the Distributor's
being promptly notified of any action brought against the Fund, its officers and
Directors or any such controlling person, such notification being given to the
Distributor at its principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date first
above written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of those Directors who are
not parties to this Agreement or interested persons of any such parties and who
have no direct or indirect financial interest in this Agreement or in the
operation of any of the Fund's Plans or in any agreement related thereto
(Independent Directors), cast in person at a meeting called for the purpose of
voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Independent Directors or by vote of
a majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when used
in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such amendment
is specifically approved by (a) the Board of Directors of the Fund, or by the
vote of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the Independent
Directors cast in person at a meeting called for the purpose of voting on such
amendment.
Section 13. Separate Agreement as to Classes and/or Series
The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
8
<PAGE>
Section 14. Governing Law
The provisions of this Agreement shall be construed and interpreted
in accordance with the laws of the State of New York as at the time in effect
and the applicable provisions of the Investment Company Act. To the extent that
the applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year above written.
Prudential Securities Incorporated
By: /s/ Robert F. Gunia
----------------------------
Robert F. Gunia
Senior Vice President
The Global Government Plus Fund, Inc.
By: /s/ Richard A. Redeker
----------------------------
Richard A. Redeker
President
9
CUSTODIAN CONTRACT
This Contract between The Global Government Plus Fund, Inc., a
corporation organized and existing under the laws of Maryland, having its
principal place of business at One Seaport Plaza, New York, New York 10292,
hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts corporation, having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110, hereinafter called the "Custodian"
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its
assets, including securities it desires to be held in places within the United
States ("domestic securities") and securities it desires to be held outside the
United States ("foreign securities") pursuant to the provisions of the Articles
of Incorporation. The Fund agrees to deliver to the Custodian all securities and
cash owned by it, and all payments of income, payments of principal or capital
distributions received by it
<PAGE>
with respect to all securities owned by the Fund from time to time, and the cash
consideration received by it for such shares of common stock, $0.01 par value
("Shares") of the Fund as may be issued or sold from time to time. The Custodian
shall not be responsible for any property of the Fund held or received by the
Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
4), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the Board of Directors of the Fund, and provided that the Custodian shall have
no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodians
for the Fund's securities and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held
by the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property, to be
held by it in the United States, including all domestic securities
owned by the Fund, other than securities which are maintained
pursuant to Section 2.10 in a clearing agency which acts as a
securities depository or in a book-entry system authorized by the
U.S. Department of the
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<PAGE>
Treasury, collectively referred to herein as "Securities System".
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund, held by the Custodian or in a
Securities System account of the Custodian, only upon receipt of
Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
-3-
<PAGE>
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominee
name of any agent appointed pursuant to Section 2.9 or into
the name or nominee of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
-4-
<PAGE>
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any
-5-
<PAGE>
borrowings by the Fund requiring a pledge of assets by the
Fund, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon the receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders
-6-
<PAGE>
of Shares in connection with distributions in kind, as may be
described from time to time in the Fund's currently effective
prospectus and statement of additional information
("prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive
Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, specifying the
securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purposes to
be proper corporate purposes, and naming the person or persons
to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the
name of the Fund or in the name of any nominee of the Fund or of any
nominee of the Custodian which nominee shall be assigned exclusively
to the Fund, unless the Fund has authorized in writing the
appointment of a nominee to be used in common with other registered
investment companies having the same
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<PAGE>
investment adviser as the Fund, or in the name or nominee name of
any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1.
All securities accepted by the Custodian on behalf of the Fund under
the terms of this Contract shall be in "street name" or other good
delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to
the terms of this Contract, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it
from or for the account of the Fund, other than cash maintained by
the Fund in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940, as amended (the
"1940 Act"). Funds held by the Custodian for the Fund may be
deposited by it to its credit as Custodian in the Banking Department
of the Custodian or in such other banks or trust companies as it may
in its discretion deem necessary or desirable; provided, however,
that every such bank or trust company shall be qualified to act as a
custodian under the 1940 Act and that each such bank or trust
company and the funds to be deposited with each such bank or trust
company shall be approved by vote of a majority of the Board of
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<PAGE>
Directors of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by
the Custodian only in that capacity.
2.5 Investment and Availability of Federal Funds. Upon mutual agreement
between the Fund and the Custodian, the Custodian shall, upon the
receipt of Proper Instructions:
1) invest in such instruments as may be set forth in such
instructions on the same day as received all federal
funds received after a time agreed upon between the
Custodian and the Fund; and
2) make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment
for Shares of the Fund which are deposited into the
Fund's account.
2.6 Collection of Income. The Custodian shall collect on a timely basis
all income and other payments with respect to United States
registered securities held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the securities
business, and shall collect on a timely basis all income and other
payments with respect to United States bearer securities if, on the
date of payment by the issuer, such securities are held by the
Custodian or agent
-9-
<PAGE>
thereof and shall credit such income, as collected, to the Fund's
custodian account. Without limiting the generality of the foregoing,
the Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they become
due and shall collect interest when due on securities held
hereunder. Income due the Fund on United States securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the
Fund with such information or data as may be necessary to assist the
Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out monies of the Fund in
the following cases only:
1) Upon the purchase of domestic securities, futures contracts or
options on futures contracts for the account of the Fund but
only
(a) against the delivery of such securities, or evidence of
title to futures contracts or options on futures contracts, to
the Custodian (or any bank, banking firm or trust company
doing business in the United States or abroad which is
qualified
-10-
<PAGE>
under the 1940 Act, to act as a custodian and has been
designated by the Custodian as its agent for this purpose)
registered in the name of the Fund or in the name of a nominee
of the Custodian referred to in Section 2.3 hereof or in
proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section 2.10 hereof or (c) in the case
of repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of the NASD, (i) against delivery of the securities
either in certificates form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Fund;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability
-11-
<PAGE>
incurred by the Fund, including but not limited to the
following payments for the account of the Fund: interest,
taxes, management, accounting, transfer agent and legal fees
and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive
Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. In any and every case where payment for purchase of
domestic securities for the account of the Fund is made by the
Custodian in advance of receipt of the securities purchased in
the absence
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<PAGE>
of specific written instructions from the Fund to so pay in advance,
the Custodian shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been received
by the Custodian, except that in the case of repurchase agreements
entered into by the Fund with a bank which is a member of the
Federal Reserve System, the Custodian may transfer funds to the
account of such bank prior to the receipt of written evidence that
the securities subject to such repurchase agreement have been
transferred by book-entry into a segregated non-proprietary account
of the Custodian maintained with the Federal Reserve Bank of Boston
or of the safekeeping receipt, provided that such securities have in
fact been so transferred by book-entry.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the 1940 Act, to act
as a custodian, as its agent to carry out such of the provisions of
this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities
hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a
clearing agency
-13-
<PAGE>
registered with the Securities and Exchange Commission under Section
17A of the Exchange Act, which acts as a securities depository, or
in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary custodian or
otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities belonging
to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment
-14-
<PAGE>
and transfer for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of the Fund
upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account
of the Fund. Copies of all advices from the Securities System
of transfers of domestic securities for the account of the
Fund shall identify the Fund, be maintained for the Fund by
the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in the form
of a written advice or notice and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the
Fund.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
domestic securities deposited in the Securities System;
5) The Custodian shall have received the initial or
-15-
<PAGE>
annual certificate, as the case may be, required by Article 13
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the Securities System or any
other person which the Custodian may have as a consequence of
any such loss or damage if and to the extent that the Fund has
not been made whole for any such loss or damage.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained
in an account by the Custodian pursuant to Section 2.10 hereof, (i)
in accordance with the provisions of any agreement among the Fund,
the Custodian and a
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<PAGE>
broker-dealer registered under the Exchange Act and a member of the
NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of
The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or
any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection
with transactions by the Fund, (ii) for purposes of segregating cash
or government securities in connection with options purchased, sold
or written by the Fund or commodity futures contracts or options
thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in
the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of
Directors or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
setting forth the purpose or purposes of such segregated account and
-17-
<PAGE>
declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Fund held by it
and in connection with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the
registered holder of such securities, if the securities are
registered otherwise than in the name of the Fund or a nominee of
the Fund, all proxies, without indication of the manner in which
such proxies are to be voted, and shall promptly deliver to the Fund
such proxies; all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. The Custodian
shall transmit promptly to the Fund all written information
(including, without limitation, pendency of calls and maturities of
domestic securities and expirations of rights in connection
therewith and notices of exercise of put and call options written by
the Fund and the maturity of futures contracts purchased or sold by
the Fund) received by the Custodian from issuers of the domestic
securities being held for the Fund. With respect to tender or
exchange
-18-
<PAGE>
offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the
domestic securities whose tender or exchange is sought and from the
party (or his agents) making the tender or exchange offer. If the
Fund desires to take action with respect to any tender offer,
exchange offer or any other similar transaction, the Fund shall
notify the Custodian at least three business days prior to the date
on which the Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian
shall provide the Fund, at such times as the Fund may reasonably
require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including domestic securities deposited and/or maintained
in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports, which shall be of
sufficient scope and in sufficient detail, as may reasonably be
required by the Fund, to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and,
if there are no such inadequacies, shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
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<PAGE>
3.1 Appointment of Foreign Sub-Custodians.
The Custodian is authorized and instructed to employ as
sub-custodians, for the Fund's securities and other assets
maintained outside of the United States, the foreign banking
institutions and foreign securities depositories designated on
Schedule A hereto ("foreign sub-custodians"). Upon receipt of Proper
Instructions, together with a certified resolution of the Fund's
Board of Directors, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign
banking institutions and foreign securities depositories to act as
sub-custodians. Upon receipt of Proper Instructions from the Fund,
the Custodian shall cease the employment of any one or more of such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of the foreign sub-custodians
to: (a) "foreign securities", as defined in paragraph (c) (1) of
Rule 17f-5 under the 1940 Act, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be
reasonably necessary to effect the Fund's foreign securities
transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be
agreed upon in writing by the Custodian and the Fund, assets of
the Fund shall be maintained in
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<PAGE>
foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books
as belonging to the Fund, the foreign securities of the Fund held by
each foreign sub-custodian. Each agreement pursuant to which the
Custodian employs a foreign banking institution shall require that
such institution establish a custody account for the Custodian on
behalf of the Fund and physically segregate in that account,
securities and other assets of the Fund, and, in the event that such
institution deposits the Fund's securities in a foreign securities
depository, that it shall identify on its books as belonging to the
Custodian, as agent for the Fund, the securities so deposited (all
collectively referred to as the Account).
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) the Fund's
assets will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking
institution or its creditors, except a claim of payment for their
safe custody or administration; (b) beneficial ownership for the
Fund's assets will be freely transferable without the payment of
money or
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<PAGE>
value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Fund;
(d) officers of or auditors employed by, or other representatives of
the Custodian, including to the extent permitted under applicable
law the independent public accountants for the Fund, will be given
access to the books and records of the foreign banking institution
relating to its actions under its agreement with the Custodian and
(e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the
books and records of any foreign banking institution employed as a
foreign sub-custodian insofar as such books and records relate to
the performance of any such foreign banking institution under its
agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Fund's securities and other assets
and advices or notifications of any
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<PAGE>
transfers of securities to or from each custodial account maintained
by a foreign banking institution for the Custodian on behalf of the
Fund indicating, as to securities acquired for the Fund, the
identity of the entity having physical possession of such
securities.
3.8 Transactions in Foreign Custody Accounts. (a) Upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, the Custodian shall make or cause its
foreign sub-custodian to transfer, exchange or deliver foreign
securities owned by the Fund, but except to the extent explicitly
provided herein only in any of the cases specified in Section 2.2.
(b) Upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out or cause its foreign sub-custodians to pay out monies
of the Fund, but except to the extent explicitly provided herein
only in any of the cases specified in Section 2.8. (c)
Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of
the Fund and delivery of securities maintained for the account of
the Fund may be effected in accordance with the customary or
established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering
securities to
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<PAGE>
the purchaser thereof or to a dealer therefor (or an agent for such
purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or
dealer. (d) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's nominee
to the same extent as set forth in Section 2.3 of this Contract and
the Fund agrees to hold any such nominee harmless from any liability
as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a
foreign sub-custodian shall require the institution to exercise
reasonable care in the performance of its duties and to indemnify,
and hold harmless, the Custodian and the Fund from and against any
loss, damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations.
At the election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims against a
foreign banking institution as a consequence of any such loss,
damage, cost, expense, liability or claim if and to the extent that
the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable
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<PAGE>
for the acts or omissions of a foreign banking institution to the
same extent as set forth with respect to sub-custodians generally in
Section 1 of the Custodian contract and, regardless of whether
assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S.
bank as contemplated by Section 3.12 hereof, the Custodian shall not
be liable for any loss, damage, cost, expense, liability or claim
resulting from, or caused by, the direction of or authorization by
the Fund to maintain custody of any securities or cash of the Fund
in a foreign country including, but limited to, losses resulting
from nationalization, expropriation, currency restrictions, or acts
of war or terrorism.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the
foreign sub-custodians employed by the Custodian. Such information
shall be similar in kind and scope to that furnished to the Fund in
connection with the initial approval of this Contract. In addition,
the Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial
condition of a foreign sub-custodian or is notified by a foreign
banking institution employed as a foreign sub-custodian that there
appears to be a substantial likelihood that
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<PAGE>
its shareholders' equity will decline below $200 million (U.S.
dollar or the equivalent thereof) or that its shareholders' equity
has declined below $200 million (in each case computed in accordance
with generally accepted U.S. accounting principles).
3.12 Branches of U.S. Banks. Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Fund assets maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2 (a) (5) of the
1940 Act which meets the qualification set forth in Section 26 (a)
of said Act. The appointment of any such branch as a sub-custodian
shall be governed by Article 1 of this Contract.
4. Proper Instructions
Proper Instructions as used herein means a writing signed or
initialled by one or more person or persons as the Board of Directors shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be confirmed
in writing. Upon receipt of a certificate of the Secretary or an Assistant
Secretary as to the authorization by
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<PAGE>
the Board of Directors of the Fund accompanied by a detailed description of
procedures approved by the Board of Directors, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board of Directors and the Custodian are satisfied
that such procedures afford adequate safeguards for the Fund's assets.
5. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from
the Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Directors of the Fund.
6. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other
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<PAGE>
instrument or paper believed by it to be genuine and to have been properly
executed by or on behalf of the Fund. The Custodian may receive and accept a
certified copy of a vote of the Board of Directors of the Fund as conclusive
evidence (a) of the authority of any person to act in accordance with such vote
or (b) of any determination or of any action by the Board of Directors pursuant
to the Articles of Incorporation as described in such vote, and such vote may be
considered as in full force and effect until receipt by the Custodian of written
notice to the contrary.
7. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information
to the entity or entities appointed by the Board of Directors of the Fund to
keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
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<PAGE>
8. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the 1940 Act, with particular attention to Section
31 thereof and Rules 31a-l and 31a-2 thereunder, applicable federal and state
tax laws and any other law or administrative rules or procedures which may be
applicable to the Fund. All such records shall be the property of the Fund and
shall at all times during the regular business hours of the Custodian be open
for inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by the Fund and held by the Custodian and shall, when requested to do so
by the Fund and for such compensation as shall be agreed upon between the Fund
and the Custodian, include certificate numbers in such tabulations.
9. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-2 and Form N-SAR or other
annual reports to the Securities and Exchange Commission and with respect to any
other requirements of such Commission.
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<PAGE>
10. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
11. Responsibility of Custodian
So long as and to the extent that it is in the exercise of
reasonable care, the Custodian shall not be responsible for the title, validity
or genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice. Notwithstanding the foregoing, the responsibility of the Custodian with
respect to redemptions effected by check shall be in accordance with a separate
agreement entered into between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in
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<PAGE>
Article 1 hereof with respect to sub-custodians located in the United States
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody of any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions
or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect
to securities, which action involves the payment of money or which action may,
in the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for
any purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the
-31-
<PAGE>
Fund fail to repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of the Fund assets to the extent necessary
to obtain reimbursement.
12. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however, that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors of the Fund have approved the initial use
of a particular Securities System and the receipt of an annual certificate of
the Secretary or an Assistant Secretary that the Board of Directors have
reviewed the use by the Fund of such Securities System, as required in each case
by Rule 17f-4 under the 1940 Act; provided further, however, that the Fund shall
not amend or terminate this Contract in contravention of any applicable federal
or state regulations, or any provision of the Articles of Incorporation, and
further provided, that the Fund may at any time by action of its Board of
Directors (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian or (ii) immediately terminate
the Contract in the event of the
-32-
<PAGE>
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the
Custodian such compensation as may be due as of the date of such termination and
shall likewise reimburse the Custodian for its costs, expenses and
disbursements.
13. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors of the Fund, the Custodian shall, upon termination, deliver to such
successor custodian at the office of the Custodian, duly endorsed and in the
form for transfer, all securities then held by it hereunder and shall transfer
to an account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Directors of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Directors shall have been delivered
to the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the 1940 Act, doing
-33-
<PAGE>
business in Boston, Massachusetts, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held by
the Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract and to transfer to an account of
such successor custodian all of the Fund's securities held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of vote referred to or of the
Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
14. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both
-34-
<PAGE>
parties and shall be annexed hereto, provided that no such interpretive or
additional provisions shall contravene any applicable federal or state
regulations or any provision of the Articles of Incorporation of the Fund. No
interpretive or additional provisions made as provided in the preceding sentence
shall be be deemed to be an amendment of this Contract.
15. Massachusetts Law to Apply
This Contact shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
16. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
-35-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 23 day of July, 1987.
ATTEST THE GLOBAL GOVERNMENT PLUS FUND, INC.
/s/ S. JANE ROSE By /s/ ROGER E. PYLE
- ---------------------------- -------------------------------------
Secretary President
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ [Illegible] By /s/ R. O'CONNELL
- ---------------------------- -------------------------------------
Assistant Secretary Vice President
<PAGE>
PRUDENTIAL MUTUAL FUNDS
State Street
Global Custody Network
SECURITIES DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- ---------------
Argentina Citibank, N.A. Caja de Valores S.A.
Australia Westpac Banking Austraclear Limited; and
Corporation Reserve Bank Information
and Transfer System (RITS)
Austria GiroCredit Bank Oesterreichische
Aktiengesellschaft Kontrollbank AG
der Sparkassen (Wertpapiersammelbank
Division)
Bangladesh* Standard Chartered Bank None
Belgium Generale Bank Caisse Interprofessionnelle
de Depots et de Virements
de Titres S.A. (CIK); Banque
Nationale de Belgique
Brazil Citibank, N.A. Bolsa de Valores de Sao
Paulo (Bovespa); Banco
Central do Brasil, Systema
Especial de Liquidacaoe
Custodia (SELIC)
Canada Canada Trustco The Canadian Depository for
Mortgage Company Securities Limited (CDS)
Chile Citibank, N.A. None
China The HongKong and Shanghai Shanghai Securities
Banking Corporation Limited, Central Clearing and
Shanghai and Shenzhen branches Registration Corporation
(SSCCRC)
Shenzhen Securities
Central Clearing Co.,
Ltd. (SSCC)
Columbia Cititrust Columbia S.A. None
Sociedad Fiduciaria
<PAGE>
SECURITIES DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- ---------------
Cyprus* Barclays Bank PLC None
Cyprus Offshore Banking Unit
Czech Republic Ceskoclovenska Obchodni Stredisko Cennych Papiru
Banka A.S. (SCP); Czech National Bank
(CNB)
Denmark Den Danske Bank Vaerdipapircentralen,
The Danish Securities
Center (VP)
Egypt* National Bank of Egypt None
Finland Merita Bank Limited The Central Share Register
of Finland
France Banque Paribas Societe Interprofessionnelle
pour la Compensation
des Valeurs Mobilieres
(SICOVA) Banque de
France, Saturne System
Germany Dresdner Bank AG The Deutscher Kassenverei;
AG
Greece National Bank of Greece S.A. The Central Depository
(Apothetirio Titlon A.E.)
Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System (CCASS)
Hungary Citibank Budapest Rt. The Central Depository and
Clearing House (Budapest)
Ltd. (KELLER Ltd.)
India The HongKong and Shanghai None
Banking Corporation Limited
Deutsche Bank AG
Indonesia Standard Chartered Bank None
Ireland Bank of Ireland The Central Bank of Ireland
The Gilt Settlement Office
(GSO)
2
<PAGE>
SECURITIES DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- ---------------
Israel Bank Hapoalim B.M. The Clearing House of the
Tel Aviv Stock Exchange
Italy Morgan Guaranty Monte Titoli, S.p.A.;
Trust Company Banca d'Italia
Banque Paribas
Japan The Daiwa Bank, Limited Japan Securities Depository
Center (JASDEC); Bank of
Sumitomo Trust & Banking Japan Net System
Co., Ltd.
The Fuji Bank, Limited
Korea SEOULBANK Korea Securities Depository
(KSD)
Luxembourg -- Cedel
Malaysia Standard Chartered Bank Malaysian Central Depository
Malaysia Berhad Sdn. Bhd. (MCD)
Mexico Citibank Mexico, N.A. S.D.INDEVAL, S.A. de C.V.
(Instituto para el Deposito
de Valores); Banco de Mexico
Morocco* Banque Commerciale du Maroc None
Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B.V.
(NECIGEF)
New Zealand ANZ Banking Group New Zealand Central
(New Zealand) Limited Securities Depository
Limited (NZCSD)
Norway Christiania Bank og Verdipapirsentralen,
Kreditkasse The Norwegian Registry
of Securities (VPS)
Pakistan Deutsche Bank AG None
Peru Citibank, N.A. Caja de Valores (CAVAL)
3
<PAGE>
SECURITIES DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- ---------------
Philippines Standard Chartered Bank None
Poland Citibank Poland, S.A. The National Depository of
Securities(Krajowy Depozyt
Papierow Wartosciowych);
National Bank of Poland
Portugal Banco Comercial Portugues Central de Valores
Mobiliarios (Central)
Singapore The Development Bank The Central Depository
of Singapore Ltd. (Pte) Limited (CDP)
Slovak Republic Cekoslovenska Obchodna Stredisko Cennych Papiero
Banka A.S. (SCP); National Bank of
Slovakia
South Africa Standard Bank of The Central Depository
South Africa Ltd. Limited
Spain Banco Santander, S.A. Servicio de Compensacion
Liquidacion de Valores
(SCLV); Banco de Espana
Anotaciones en Cuenta
Sri Lanka* The HongKong and Shanghai The Central Depository
Banking Corporation Limited System (Pvt) Limited
Sweden Skandinaviska Vardepapperscentralen,
Enskilda Banken VPC, AB, The Swedish
Securities Depository
Switzerland Union Bank of Switzerland Schweizerische Effekten-
Giro AG (SEGA)
Taiwan Central Trust of China The Taiwan Securities
Central Depository Company
Ltd. (TSCD)
Thailand Standard Chartered Bank Thailand Securities Central
Depository Company, Ltd.
(TSCD)
4
<PAGE>
SECURITIES DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- ---------------
Turkey Citibank. N.A. Takas ve Saklama Bankasi
A.S. (TAKASBANK); Central
Bank of Turkey
Transnational -- The Euroclear System
Cedel
United Kingdom State Street Bank and The Bank of England,
Trust Company, London The Central Gilts Office
branch, and State Street (CGO); The Central London
Limited, a subsidiary Moneymarkets Office
of State Street Bank (CMO)
and Trust Company
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. None
- --------------------------------------------------------------------------------
* Funds marked by an asterisk have been approved only for The Target Portfolio
Trust
5
<PAGE>
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
NAME OF FUND BOARD APPROVAL DATE:
- ------------ --------------------
Global Utility Fund, Inc. August 29, 1996
Prudential Allocation Fund August 28, 1996
Prudential Equity Fund, Inc. August 28, 1996
Prudential Equity Income Fund August 28, 1996
Prudential Diversified Bond Fund, Inc. July 9, 1996
Prudential Distressed Securities Fund, Inc. August 27, 1996
Prudential Emerging Growth Fund, Inc. October 12, 1996
Prudential Global Genesis Fund, Inc. August 28, 1996
Prudential Global Limited Maturity Fund, Inc. July 11, 1996
Prudential Intermediate Global Income Fund, Inc. August 27, 1996
Prudential Jennison Series Fund, Inc. July 9, 1996
Prudential Multi-Sector Fund, Inc. August 28, 1996
Prudential Natural Resources Fund, Inc. August 28, 1996
Prudential Pacific Growth Fund, Inc. July 11, 1996
Prudential Small Companies Fund, Inc. August 27, 1996
Prudential Utility Fund, Inc. July 10, 1996
Prudential World Fund, Inc. July 11, 1996
The Target Portfolio Trust July 9, 1996
The Global Government Plus Fund, Inc. August 28, 1996
The Global Total Return Fund, Inc. August 29, 1996
/s/ S. JANE ROSE
- ------------------------------
Funds' Authorized Officer
Date: November 26, 1996
6
TRANSFER AGENCY AND SERVICE AGREEMENT
between
The Global Government Plus Fund, Inc.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent..................... 1
Article 2 Fees and Expenses............................................. 5
Article 3 Representations and Warranties of the Agent................... 5
Article 4 Representations of Warranties of the Fund..................... 6
Article 5 Duty of Care and Indemnification.............................. 7
Article 6 Documents and Covenants of the Fund and the Agent............. 10
Article 7 Termination of Agreement...................................... 12
Article 8 Assignment.................................................... 12
Article 9 Affiliations.................................................. 13
Article 10 Amendment..................................................... 14
Article 11 Applicable Law................................................ 14
Article 12 Miscellaneous................................................. 14
Article 13 Merger of Agreement........................................... 15
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 13th day of September, 1995 by and between THE
GLOBAL GOVERNMENT PLUS FUND, INC., a Maryland corporation, having its principal
office and place of business at One Seaport Plaza, New York 10292 (the Fund),
and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey corporation, having its
principal office and place of business at Raritan Plaza One, Edison, New Jersey
08837 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer agent, dividend
disbursing agent and shareholder servicing agent in connection with certain
other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of the common
stock of each series of the Fund, $.01 par value (Shares), dividend disbursing
agent and
<PAGE>
shareholder servicing agent in connection with any accumulation, open-account or
similar plans provided to the shareholders of the Fund or any series thereof
(Shareholders) and set out in the currently effective prospectus and statement
of additional information (prospectus) of the Fund, including without limitation
any periodic investment plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the Custodian
of the Fund authorized pursuant to the Articles of Incorporation of the Fund
(the Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay
2
<PAGE>
over or cause to be paid over in the appropriate manner such monies as
instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Fund as such charges may be reflected in the
prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant to
Rule 17Ad-10(e) under the Securities Exchange Act of 1934 (1934 Act) a record of
the total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. PMFS shall also provide
to the Fund on a regular basis the total number of Shares which are authorized,
issued and outstanding and shall notify the Fund in case any proposed issue of
Shares by the Fund would result in an overissue. In case any issue of Shares
would result in an overissue, PMFS shall refuse to issue such Shares and shall
not countersign and issue any certificates requested for such Shares. When
recording
3
<PAGE>
the issuance of Shares, PMFS shall have no obligation to take cognizance of any
Blue Sky laws relating to the issue or sale of such Shares, which functions
shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders and
providing Shareholder account information and (ii) provide a system
which will enable
4
<PAGE>
the Fund to monitor the total number of Shares sold in each State or other
jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of PMFS for the Fund's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is solely limited
to the initial establishment of transactions subject to Blue Sky compliance by
the Fund and the reporting of such transactions to the Fund as provided above
and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established from
time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee
5
<PAGE>
for each Shareholder account and certain transactional fees as set out in the
fee schedule attached hereto as Schedule A. Such fees and out-of-pocket
expenses and advances identified under Section 2.02 below may be changed from
time to time subject to mutual written agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the
Fund agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by
PMFS for the items set out in Schedule A attached hereto. In addition, any other
expenses incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of time following the mailing of the respective
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to PMFS by the Fund
upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry on its
business in New Jersey.
6
<PAGE>
3.02 It is and will remain registered with the U.S. Securities and
Exchange Commission (SEC) as a Transfer Agent pursuant to the requirements of
Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and
By-Laws to enter into and perform the Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All Corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter and perform
this Agreement.
4.04 It is an investment company registered with the SEC under the
Investment Company Act of 1940, as amended (the 1940
7
<PAGE>
Act).
4.05 A registration statement under the Securities Act of 1933 (the
1933 Act) is currently effective and will remain effective, and appropriate
state securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Fund shall indemnify
and hold PMFS harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to
8
<PAGE>
it by or on behalf of the Fund, and (ii) have been prepared and/or maintained by
the Fund or any other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under the
federal securities laws or regulations or the securities or Blue Sky laws of any
State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by PMFS as a result of PMFS' lack of good faith, negligence
or willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect
9
<PAGE>
to any matter arising in connection with the services to be performed by PMFS
under this Agreement, and PMFS and its agents or subcontractors shall not be
liable and shall be indemnified by the Fund for any action taken or omitted by
it in reliance upon such instructions or upon the opinion of such counsel. PMFS,
its agents and subcontractors shall be protected and indemnified in acting upon
any paper or document furnished by or on behalf of the Fund, reasonably believed
to be genuine and to have been signed by the proper person or persons, or upon
any instruction, information, data, records or documents provided to PMFS or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to have notice
of any change of authority of any person, until receipt of written notice
thereof from the Fund. PMFS, its agents and subcontractors shall also be
protected and indemnified in recognizing stock certificates which are reasonably
believed to bear the proper manual or facsimile signature of the officers of the
Fund, and the proper countersignature of any former transfer agent or registrar,
or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage
10
<PAGE>
reasonably beyond its control, or other causes reasonably beyond its control,
such party shall not be liable for damages to the other for any damages
resulting from such failure to perform or otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of
11
<PAGE>
Directors of the Fund authorizing the appointment of PMFS and the execution and
delivery of this Agreement;
(b) A certified copy of the Articles of Incorporation and By-Laws of the
Fund and all amendments thereto;
(c) The current registration statements and any amendments and supplements
thereto filed with the SEC pursuant to the requirements of the 1933 Act and the
1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Directors, with a certificate of the Secretary of the
Fund as to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems to
be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
12
<PAGE>
6.03 PMFS shall prepare and keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
13
<PAGE>
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential Securities Incorporated (Prudential Securities), a
registered
14
<PAGE>
broker-dealer, (ii) The Prudential Insurance Company of America (Prudential),
(iii) Pruco Securities Corporation, a registered broker-dealer, (iv) any
Prudential Securities or Prudential subsidiary or affiliate duly registered as a
broker-dealer and/or a transfer agent pursuant to the 1934 Act or (vi) any other
Prudential Securities or Prudential affiliate or subsidiary; provided, however,
that PMFS shall be as fully responsible to the Fund for the acts and omissions
of any agent or subcontractor as it is for its own acts and omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of or notice to
the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company registered with the SEC under the 1940 Act, including
without limitation any investment company whose adviser, administrator, sponsor
or principal underwriter is or may become affiliated with Prudential
Securities and/or Prudential or any of its or their direct or indirect
subsidiaries or affiliates.
9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be
15
<PAGE>
interested in the Agent as directors, officers, employees, agents, shareholders
or otherwise, and that the directors, officers, employees, agents or
shareholders of the Agent may be interested in the Fund as directors, officers,
employees, agents, Shareholders or otherwise, or in the investment adviser
and/or distributor as officers, directors, employees, agents, shareholders or
otherwise.
16
<PAGE>
Article 10 Amendment
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate, in
cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for
17
<PAGE>
payment of money on the account of any Shareholder or new investor is returned
unpaid for any reason, PMFS will (a) give prompt notification to the Fund's
distributor (Distributor) of such non-payment; and (b) take such other action,
including imposition of a reasonable processing or handling fee, as PMFS may, in
its sole discretion, deem appropriate or as the Fund and the Distributor may
instruct PMFS.
12.03 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or to PMFS shall be sufficiently
given if addressed to that party and received by it at its office set forth
below or at such other place as it may from time to time designate in writing.
To the Fund:
The Global Government Plus Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement
18
<PAGE>
between the parties hereto and supersedes any prior agreement with respect to
the subject matter hereof whether oral or written.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in their names and on their behalf under their seals by and
through their duly authorized officers, as of the day and year first above
written.
THE GLOBAL GOVERNMENT PLUS FUND, INC.
BY: /s/ Richard A. Redeker
----------------------------------
Richard A. Redeker
President
ATTEST:
MARGUERITE E.H. MORRISON
- ----------------------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Vincent Marra
----------------------------------
Vincent Marra
ATTEST:
MARGUERITE E.H. MORRISON
- ----------------------------------
19
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
THE GLOBAL GOVERNMENT PLUS FUND, INC.
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. In addition, there is a one time set-up
charge per account for manually established accounts and a monthly charge for
inactive zero balance accounts. The effective period of this fee schedule is
September 13, 1995 through December 31, 1995 and shall continue thereafter from
year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that the account opens or closes.
Annual Maintenance Per Account Fee $ 13.00
Other Charges
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Monthly Inactive Zero Balance Account Fee $ .20
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
<PAGE>
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
THE GLOBAL GOVERNMENT PRUDENTIAL MUTUAL FUND
PLUS FUND, INC. SERVICES, INC.
By: /s/ Richard A. Redecker By: /s/ Vincent Marra
------------------------- -------------------------
NAME: Richard A. Redecker NAME: Vincent Marra
TITLE: President TITLE: Chief Operating
Officer
DATE: September 13, 1995 DATE: September 13, 1995
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 3 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 26, 1997, relating to the financial statements and financial highlights
of The Global Government Plus Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
New York, New York
July 10, 1997
THE GLOBAL GOVERNMENT PLUS FUND, INC.
Distribution and Service Plan
(Class A Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by The Global Government Plus Fund, Inc. (the Fund)
and by Prudential Securities Incorporated, the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors of the Fund, including a majority of
those Directors who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have
<PAGE>
no direct or indirect financial interest in the operation of this Plan or any
agreements related to it (the Rule 12b-1 Directors), have determined by votes
cast in person at a meeting called for the purpose of voting on this Plan that
there is a reasonable likelihood that adoption of this Plan will benefit the
Fund and its shareholders. Expenditures under this Plan by the Fund for
Distribution Activities (defined below) are primarily intended to result in the
sale of Class A shares of the Fund within the meaning of paragraph (a) (2) of
Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
2
<PAGE>
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network, including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class A shares of the Fund are referred to
herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class A
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee
3
<PAGE>
(described in Section 2 hereof), of .30 of 1% per annum of the average daily net
assets of the Class A shares of the Fund for the performance of Distribution
Activities. The Fund shall calculate and accrue daily amounts payable by the
Class A shares of the Fund hereunder and shall pay such amounts monthly or at
such other intervals as the Board of Directors may determine. Amounts payable
under the Plan shall be subject to the limitations of Article III, Section 26 of
the NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
4
<PAGE>
(a) sales commissions and trailer commissions paid to, or on account of,
account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch
expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of
Class A shares of the Fund, including sales commissions, trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prusec) which have entered into selected dealer agreements with the
Distributor with respect to Class A shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
5
<PAGE>
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as the
Board shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting
6
<PAGE>
called for the purpose of voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the Rule
12b-l Directors, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class A shares of the Fund.
7. Amendments
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class A shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the Board
of Directors of the Fund and a majority of the Rule 12b-1 Directors by votes
cast in person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of the Directors
shall be committed to the discretion of the Rule 12b-1 Directors.
7
<PAGE>
9. Records
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: September 13, 1995
8
THE GLOBAL GOVERNMENT PLUS FUND, INC.
Distribution and Service Plan
(Class B Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by The Global Government Plus Fund, Inc. (the Fund)
and by Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Board of Directors of the Fund including a majority who
are not "interested persons" of the Fund (as defined in the Investment Company
Act) and who have no direct or indirect financial interest in the operation of
this Plan or any agreements
<PAGE>
related to it (the Rule 12b-1 Directors), have determined by votes cast in
person at a meeting called for the purpose of voting on this Plan that there is
a reasonable likelihood that adoption of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
B shares of the Fund within the meaning of paragraph (a) (2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of
2
<PAGE>
the facilities of the Prudential Securities distribution network including sales
personnel and branch office and central support systems, and also using such
other qualified broker-dealers and financial institutions as the Distributor may
select, including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class B shares of the Fund are referred to
herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class B
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund
3
<PAGE>
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be subject
to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of
Class B shares of the Fund, including sales commissions and trailer
commissions paid
4
<PAGE>
to, or on account of, agents and indirect and overhead costs
associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to Class B shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as
they shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to
5
<PAGE>
broker-dealers and other financial institutions which have selected dealer
agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class B shares of the Fund.
6
<PAGE>
7. Amendments
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class B shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the Board
of Directors of the Fund and a majority of the Rule 12b-1 Directors by votes
cast in person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Directors shall be committed to the discretion of the Rule 12b-l
Directors.
9. Records
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: September 13, 1995
7
THE GLOBAL GOVERNMENT PLUS FUND, INC.
Distribution and Service Plan
(Class C Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by The Global Government Plus Fund, Inc. (the Fund)
and by Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor) and will become effective upon the approval of the
Plan by the sole shareholder of the Class C shares.
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Directors of the Fund, including a majority who
are not "interested persons" of the Fund (as defined
<PAGE>
in the Investment Company Act) and who have no direct or indirect financial
interest in the operation of this Plan or any agreements related to it (the Rule
12b-1 Directors), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class C shares of the
Fund within the meaning of paragraph (a) (2) of Rule 12b-1 promulgated under the
Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class C
2
<PAGE>
shares of the Fund and to service shareholder accounts using all of the
facilities of the Prudential Securities distribution network including sales
personnel and branch office and central support systems, and also using such
other qualified broker-dealers and financial institutions as the Distributor may
select, including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class C shares of the Fund are referred to
herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund
3
<PAGE>
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be subject
to the review of the Board of Directors. Payments hereunder will be applied to
distribution expenses in the order in which they are incurred, unless otherwise
determined by the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
4
<PAGE>
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of
Class C shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to Class C shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-l. The Distributor will
provide to the Board of Directors of the Fund such additional information as
they shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund
5
<PAGE>
of the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class C shares of the Fund.
6
<PAGE>
7. Amendments
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Fund. All material amendments of the Plan shall be approved by a majority of
the Board of Directors of the Fund and a majority of the Rule 12b-1 Directors by
votes cast in person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Directors shall be committed to the discretion of the Rule 12b-1
Directors.
9. Records
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: September 13, 1995
7
