PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
Statement of Additional Information
dated March 1, 1996
Prudential Intermediate Global Income Fund, Inc. (the Fund) is an open-end,
non-diversified management investment company, or a mutual fund, whose
investment objective is to seek to maximize total return, the components of
which are current income and capital appreciation. The Fund will seek to achieve
this objective through investment in a portfolio consisting primarily of U.S.
Government securities and Foreign Government securities. The Fund may also
purchase and sell certain derivatives, including put and call options on U.S.
Government securities and Foreign Government securities and engage in
transactions involving futures contracts and options on such futures with
respect to U.S. Government securities and Foreign Government securities. There
can be no assurance that the Fund's investment objective will be achieved.
Investing in Foreign Government securities, options and futures contracts
involves considerations and possible risks which are different from those
ordinarily associated with investing in U.S. Government securities.
The Fund's 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 One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the Fund's Prospectus, dated March 1, 1996, a
copy of which may be obtained from the Fund at the address noted above.
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TABLE OF CONTENTS
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General Information ................................................................ B-2 26
Investment Objective and Policies .................................................. B-2 9
Additional Investment Policies ..................................................... B-4 15
Investment Restrictions ............................................................ B-14 20
Directors and Officers ............................................................. B-16 20
Manager ............................................................................ B-18 20
Distributor ........................................................................ B-20 21
Portfolio Transactions and Brokerage ............................................... B-22 23
Purchase and Redemption of Fund Shares ............................................. B-24 27
Shareholder Investment Account ..................................................... B-27 36
Net Asset Value .................................................................... B-30 23
Performance Information ............................................................ B-31 24
Taxes, Dividends and Distributions ................................................. B-32 24
Organization and Capitalization .................................................... B-35 --
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants ...... B-35 23
Financial Statements ............................................................... B-36 --
Report of Independent Accountants .................................................. B-48 --
Appendix A--Description of Securities Ratings ...................................... A-1 --
Appendix I--General Investment Information ......................................... I-1 --
Appendix II--Historical Performance Data ........................................... II-1 --
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MF 155 B
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GENERAL INFORMATION
The Fund was incorporated in Maryland on March 15, 1988 under the name "The
Prudential Intermediate Income Fund, Inc." as a closed-end, non-diversified
management investment company. The Fund operated as a closed-end fund prior to
October 7, 1991. On August 8, 1991, shareholders approved open-ending the Fund
and changing the Fund's name to "Prudential Intermediate Global Income Fund,
Inc." and since October 7, 1991, the Fund has operated as an open-end fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek to maximize total return, the
components of which are current income and capital appreciation. The Fund will
seek to achieve this objective through investment in a portfolio consisting
primarily of U.S. Government securities and Foreign Government securities. The
Fund may also purchase and sell put and call options on U.S. Government
securities and Foreign Government securities and engage in transactions
involving futures contracts and options on such futures with respect to U.S.
Government securities and Foreign Government securities. 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.
U.S. GOVERNMENT SECURITIES
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT INSTRUMENTALITIES.
Mortgages backing the securities purchased by the Fund include conventional
thirty year fixed rate mortgages, graduated payment mortgages, fifteen year
mortgages and adjustable rate mortgages. All of these mortgages can be used to
create pass-through securities. A pass-through security is formed when mortgages
are pooled together and undivided interests in the pool or pools are sold. The
cash flow from the mortgages is passed through to the holders of the securities
in the form of periodic payments of interest, principal and prepayments (net of
a service fee). Prepayments occur when the holder of an individual mortgage
prepays the remaining principal before the mortgage's scheduled maturity date.
As a result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. The remaining
expected average life of a pool of mortgage loans underlying a mortgage-backed
security is a prediction of when the mortgage loans will be repaid and is based
upon a variety of factors, such as the demographic and geographic
characteristics of the borrowers and the mortgaged properties, the length of
time that each of the mortgage loans has been outstanding, the interest rates
payable on the mortgage loans and the current interest rate environment.
During periods of declining interest rates, prepayments of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that time.
Therefore, the Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium generally will result in capital
losses.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage- backed securities, which evidence
an undivided interest in a pool or pools of mortgages. GNMA Certificates that
the Fund purchases are the "modified pass-through" type, which entitle the
holder to receive timely payment of all interest and principal payments due on
the mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of
whether or not the mortgagor actually makes the payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration (FHA) or the Farmers'
Home Administration (FMHA), or guaranteed by the Veterans Administration (VA).
The GNMA guarantee is backed by the full faith and credit of the United States.
The GNMA is also empowered to borrow without limitation from the U.S. Treasury
if necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) was
created in 1970 through enactment of Title III of the Emergency Home Finance Act
of 1970. Its purpose is to promote development of a nationwide secondary market
in conventional residential mortgages.
The 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
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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) was
established in 1938 to create a secondary market in mortgages insured by the
FHA.
FNMA issues guaranteed mortgage pass-through certificates (FNMA
Certificates). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
and principal on FNMA Certificates.
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, Adjustable Rate Mortgage
securities (ARMs) have a specified maturity date and amortize principal over
their life. In periods of declining interest rates, there is a reasonable
likelihood that ARMs will experience increased rates of prepayment of principal.
However, the major difference between ARMs and Fixed Rate Mortgage Securities
(FRMs) is that the interest rate and the rate of amortization of principal of
ARMs can and do change in accordance with movements in a particular,
pre-specified, published interest rate index. The amount of interest on an ARM
is calculated by adding a specified amount, the "margin," to the index, subject
to limitations on the maximum and minimum interest that is charged during the
life of the mortgage or to maximum and minimum changes to that interest rate
during a given period. Because the interest rate on ARMs generally moves in the
same direction as market interest rates, the market value of ARMs tends to be
more stable than that of long-term fixed-rate securities.
FIXED-RATE MORTGAGE SECURITIES. The Fund anticipates investing in
high-coupon fixed-rate mortgage securities. Such securities are collateralized
by fixed-rate mortgages and tend to have high prepayment rates when the level of
prevailing interest rates declines significantly below the interest rates on the
mortgages. Thus, under those circumstances, the securities are generally less
sensitive to interest rate movements than lower coupon FRMs.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The interest rates paid on
the ARMs in which the Fund invests generally are readjusted at intervals of one
year or less to an increment over some predetermined interest rate index. There
are two main categories of indices: those based on U.S. Treasury securities and
those derived from a calculated measure such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-month Treasury
Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the 11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury Note rate, closely
mirror changes in market interest rate levels. Others, such as the 11th District
Home Loan Bank Cost of Funds index (often related to ARMs issued by FNMA), tend
to lag changes in market rate levels and tend to be somewhat less volatile.
The underlying mortgages which collateralize the ARMs, collateralized
mortgage obligations and Real Estate Mortgage Investment Conduits in which the
Fund invests will frequently have caps and floors which limit the maximum amount
by which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization.
The market value of mortgage securities, like other U.S. Government
securities, will generally vary inversely with changes in market interest rates,
declining when interest rates rise and rising when interest rates decline.
However, mortgage securities, while having comparable risk of decline during
periods of rising rates, usually have less potential for capital appreciation
than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline. In addition, to
the extent such mortgage securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments generally will result in some
loss of the holders' principal to the extent of the premium paid. On the other
hand, if such mortgage securities are purchased at a discount, an unscheduled
prepayment of principal will increase current and total returns and will
accelerate the recognition of income which when distributed to shareholders will
be taxable as ordinary income.
FOREIGN SECURITIES
Foreign securities in which the Fund will invest will generally be
denominated in foreign currencies, will be traded on foreign markets, including
foreign stock exchanges, 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.
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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.
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 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, financial indices,
U.S. and foreign government debt securities and foreign currencies and forward
contracts on foreign currencies. The Fund's ability to engage in these practices
may be limited by tax considerations and certain other legal considerations. See
"Taxes, Dividends and Distributions."
OPTIONS ON SECURITIES
The Fund may purchase put and call options and write covered put and call
options on debt securities, aggregates of debt securities or indices of prices
thereof, other financial indices and U.S. and foreign government debt
securities. These may include options traded on U.S. or foreign exchanges and
options traded on U.S. or foreign over-the-counter markets (OTC Options).
When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. The Fund's principal objective in
writing options is to 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
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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 or other
liquid high-grade debt obligations 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 or other
liquid high-grade debt obligations having a value equal to or greater than the
exercise price of the option.
The Fund may also buy and write straddles (i.e., a combination of a call
and a put written on the same security at the same strike price). In such cases
the same segregated collateral is considered "cover" for both the put and the
call) and the Fund will also deposit in a segregated account with its Custodian
cash, U.S. Government securities or other liquid high-grade debt obligations
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 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 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.
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 contra-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
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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 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 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.
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 at 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
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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.
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 to 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, return enhancement and risk management purposes. The Fund may enter
into futures contracts for the purchase or sale of debt securities, aggregates
of debt securities or indices of prices thereof, other financial indices, U.S.
Government securities, corporate debt securities and certain Foreign Government
debt securities (collectively, interest rate futures contracts). It may also
enter into futures contracts for the purchase or sale of foreign currencies or
composite foreign currencies (such as the European Currency Unit) in which
securities held or to be acquired by the Fund are denominated, or the value of
which have a high degree of positive correlation to the value of such currencies
as to constitute an appropriate vehicle for hedging. The Fund may enter into
such futures contracts both on U.S. and foreign exchanges.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures contracts are settled on a net cash payment basis rather than by the
sale and delivery of the securities or currency underlying the futures contract.
U.S. futures contracts have been designed by exchanges that have been designated
as "contract markets" by the Commodity Futures Trading Commission (the CFTC), an
agency of the U.S. Government, and must be executed through a futures commission
merchant (i.e., a brokerage firm) which is a member of the relevant contract
market. Futures contracts trade on these contract markets and the exchange's
affiliated clearing organization guarantees 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.
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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 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, return enhancement and risk management purposes. 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 or other liquid high-grade debt obligations 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 or other liquid high-grade debt obligations 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
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Fund's holdings of debt securities. If the futures price when the option is
exercised is above the exercise price, however, the Fund will incur a loss,
which may be wholly or partially offset by the increase in the value of the
securities in the Fund's portfolio which were being hedged.
The Fund will purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the debt securities it
owns as a result of rising interest rates or fluctuating currency exchange
rates. The Fund will also purchase call options on futures contracts as a hedge
against an increase in the value of securities the Fund intends to acquire as a
result of declining interest rates or fluctuating currency exchange rates.
If the 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 or
other liquid high-grade debt obligations 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 writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of debt securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
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<PAGE>
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 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.
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.
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.
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<PAGE>
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 Fund's Custodian or
subcustodian will place cash or U.S. Government securities or other high-grade
debt obligations in a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of the given
forward contract. If the value of the securities placed in the segregated
account declines, additional cash or 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
commitment with respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between the
Fund's entering into a forward contract for the sale of a currency and the date
it enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
purchase is less than the price of the currency it has agreed to sell. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Closing out forward purchase contracts involves similar
offsetting transactions.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward transactions in 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.
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
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
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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.
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 if the initial margin and premiums 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
such contracts; provided, however, that in the case of an option that is in-
the-money at the time of the purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. The above restriction does not apply to the
purchase and sale of futures contracts and options thereon for bona fide hedging
purposes within the meaning of the CFTC regulations. In instances involving the
purchase of futures contracts or call options thereon or the writing of put
options thereon by the Fund, an amount of 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. 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 return enhancement and risk management strategies. There
are no limitations on the Fund's use of futures contracts and options on futures
contracts beyond the restrictions set forth above.
Although the Fund intends to purchase or sell futures and options on
futures only on exchanges where there appears to be an active market, there is
no guarantee that an active market will exist for any particular contract or at
any particular time. If there is not a liquid market at a particular time, it
may not be possible to close a futures position at such time, and, in the event
of adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, 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 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
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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). In addition, in order for 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.
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 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 prices. 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 Mutual Fund Management, Inc. (PMF) 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.
BORROWING
When the Fund borrows money for temporary, extraordinary or emergency
purposes or for the clearance of transactions, it will borrow no more than 20%
of its net assets and, in any event, the value of its total assets (i.e.,
including borrowings) less its liabilities (excluding borrowings) must at all
times be maintained at not less than 300% of all outstanding borrowings. If, for
any reason, including adverse market conditions, the Fund should fail to meet
this test, it will be required to reduce its borrowings within three days (not
including Sundays and holidays) to the extent necessary to meet the test. This
requirement may make it necessary for the Fund to sell a portion of its
portfolio securities at a time when it is disadvantageous to do so.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Fund may enter into reverse repurchase agreements and dollar rolls. The
proceeds from such transactions will be used for the clearance of transactions
or to take advantage of investment opportunities.
Reverse repurchase agreements involve sales by the Fund of securities
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.
Dollar rolls involve sales by the Fund of securities for delivery in the
current month and a simultaneous contract to repurchase substantially similar
(same type and coupon) securities on a specified future date from the same
party. During the roll
B-13
<PAGE>
period, the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash position
or a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction.
The Fund will establish a segregated account with its custodian in which it
will maintain cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities retained by the Fund
may decline below the price of the securities the Fund has sold but is obligated
to repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls, including covered dollar
rolls, are speculative techniques involving leverage and are considered
borrowings by the Fund for purposes of the percentage limitations applicable to
borrowings. See "Borrowings" above. The Fund does not presently intend to enter
into reverse repurchase agreements or dollar rolls.
INTEREST RATE SWAP TRANSACTIONS
The Fund may enter into interest rate swaps. Interest rate swaps involve
the exchange by the Fund with another party of their respective commitments to
pay or receive interest, for example, an exchange of floating rate payments for
fixed-rate payments. The Fund expects to enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment. The risk of loss
with respect to interest rate swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make and will not exceed 5%
of the Fund's net assets. The use of interest rate swaps may involve investment
techniques and risks different from those associated with ordinary portfolio
transactions. If the investment adviser is incorrect in its forecast of market
values, interest rates and other applicable factors, the investment performance
of the Fund would diminish compared to what it would have been if this
investment technique was never used. The Fund does not presently intend to enter
into interest rate swap transactions.
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 300%. 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 220%
and 554% for the fiscal years ended December 31, 1995 and 1994, respectively.
The Fund's portfolio turnover rate for the fiscal year ended December 31, 1994
was high as a result of the Subadviser's attempt to minimize 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. Invest 25% or more of its total assets in any one industry. For this
purpose "industry" does not include the U.S. Government and agencies and
instrumentalities of the U.S. Government.
2. Invest more than 5% of its total assets in securities of companies
having a record, together with predecessors, of less than three years of
continuous operation. This restriction shall not apply to obligations of the
U.S. Government and obligations issued by agencies of the U.S. Government or
instrumentalities established or sponsored by the U.S. Government.
3. 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.
4. Purchase securities of other investment companies, except in accordance
with applicable limits under the Investment Company Act.
B-14
<PAGE>
5. Make short sales of securities or maintain a short position, with the
exception of "short sales against the box," provided that not more than 10% of
the Fund's net assets (taken at market value) is held as collateral for such
sales at any one time.
6. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary or extraordinary or emergency purposes or for
the clearance of transactions. 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,
collateral arrangements with respect to interest rate swaps, reverse repurchase
agreements or dollar roll transactions, options, futures contracts and options
on futures contracts and collateral arrangements with respect to initial and
variation margins are not deemed to be a pledge of assets or the issuance of a
senior security; and neither such arrangements, the purchase or sale of interest
rate futures contracts or other financial futures contracts or the purchase or
sale of related options nor obligations of the Fund to the Directors pursuant to
deferred compensation arrangements are deemed to be the issuance of a senior
security.
7. Buy or sell commodities, commodity contracts, real estate or interests
in real estate (including mineral leases or rights), except that the Fund may
purchase and sell futures contracts, options on futures contracts and securities
secured by real estate or interests therein or issued by companies that invest
therein. Transactions in foreign currencies and forward contracts and options in
foreign currencies are not considered by the Fund to be transactions in
commodities or commodity contracts.
8. Make loans (except that purchases of debt securities in accordance with
the Fund's investment objective and policies and loans of portfolio securities
and repurchase agreements are not considered by the Fund to be "loans").
9. Make investments for the purpose of exercising control or management
over the issuers of any security.
10. 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).
In order to comply with certain state "blue sky" restrictions, the Fund
will not as a matter of operating policy:
1. Invest in oil, gas and mineral leases.
2. Invest in securities of any issuer if any officer or director of
the Fund or the Fund's Manager or Subadviser owns more than 1/2 of 1% of
the outstanding securities of such issuer, and such officers and directors
who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
3. Purchase warrants if as a result the Fund would then have more than
5% of its assets (determined at the time of investment) invested in
warrants. Warrants will be valued at the lower of cost or market and
investment in warrants which are not listed on the New York Stock Exchange
or American Stock Exchange or a major foreign exchange will be limited to
2% of the Fund's net assets (determined at the time of investment). For
purposes of this limitation, warrants acquired in units or attached to
securities are deemed to be without value.
4. Purchase any security if as a result the Fund would hold more than
10% of any class of securities of any issuer (taking all common stock
issues of an issuer as a single class, all preferred stock issues as a
single class and all debt issues as a single class) or more than 10% of the
outstanding voting securities of any issuer.
5. Invest more than 50% of its total assets in the securities of any
one issuer. This limitation will not apply to securities which are direct
obligations of the U.S. Government, its agencies or instrumentalities or to
obligations of the government of Canada.
6. Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of its total assets
(taken at current value) would be invested in such securities, or except as
part of a merger, consolidation or other acquisition.
7. Invest more than 15% of its assets in securities which the Fund
would be restricted from selling to the public without registration under
the Securities Act, but excluding restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act that are determined to be
liquid by the Board of Directors, securities of unseasoned issuers
including their predecessors, which have been in operation for less than
three years.
8. Purchase or sell real property (including limited partnership
interests), excluding readily available interests in real estate investment
trusts or readily marketable securities of companies which invest in real
estate.
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-15
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS
Principal Occupations and Position
Name, Address and Age Other Affiliations with Fund
- --------------------- ------------------------- ---------
<S> <C> <C>
Thomas A. Owens, Jr. (73) Consultant.
c/o Prudential Mutual Fund Director
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker (52) President, Chief Executive Officer and Director (since October
One Seaport Plaza 1993), PMF; Executive Vice President, Director and Member of the President
New York, NY Operating Committee (since October 1993), Prudential Securities; and Director
Director (since October 1993) of Prudential Securities Group,
Inc. (PSG); Executive Vice President, The Prudential Investment
Corporation (PIC) (since July 1994); Director (since January
1994) of Prudential Mutual Fund Distributors, Inc. (PMFD) and
Prudential Mutual Fund Services, Inc. (PMFS); formerly Senior
Executive Vice President and Director of Kemper Financial
Services, Inc. (September 1978-September 1993); Director of The
High Yield Income Fund, Inc.
Gerald A. Stahl (56) President, Rochester Lumber Company. Director
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
Stephen Stoneburn (52) President, Argus Integrated Media, Inc. (since June 1995); formerly Director
c/o Prudential Mutual Fund Senior Vice President and Managing Director, Cowles Business
Management, Inc. Media (January 1993-1995); Senior Vice President (January
One Seaport Plaza 1991-1992) and Publishing Vice President (May 1989-December 1990)
New York, NY of Gralla Publications a division of United Newspapers, U.K.;
formerly Senior Vice President of Fairchild Publications, Inc.
Robert H. Wellington (73) Retired (since January 1994); formerly Chairman and Chief Executive Director
c/o Prudential Mutual Fund Officer, AMSTED Industries, Incorporated (diversified manufacturer
Management, Inc. of railroad, construction and industrial products).
One Seaport Plaza
New York, NY
Robert F. Gunia (49) One Chief Administrative Officer (since July 1990), Director (since Vice President
Seaport Plaza January 1989) and Executive Vice President, Treasurer and Chief
New York, NY Financial Officer of PMF; Senior Vice President (since March 1987)
of Prudential Securities; Executive Vice President, Treasurer,
Comptroller and Director (since March 1991) of PMFD; Director
(since June 1987) of PMFS; Vice President and Director
of The Asia Pacific Fund, Inc. (since May 1989).
Grace Torres (36) First Vice President (since March 1994) Prudential Mutual Fund Treasurer and
One Seaport Plaza Management, Inc. First Vice President of Prudential Securities Chief Accounting
New York, NY (since March 1994); prior thereto, Vice President of Bankers Officer
Trust Corporation.
S. Jane Rose (50) Senior Vice President (since January 1991) and Senior Counsel and Secretary
One Seaport Plaza First Vice President (June 1987-December 1990) of PMF; Senior
New York, NY Vice President and Senior Counsel of Prudential Securities (since
July 1992) formerly Vice President and Associate General Counsel
of Prudential Securities.
</TABLE>
- ----------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential Securities or PMF.
B-16
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations and Position
Name, Address and Age Other Affiliations with Fund
- --------------------- ------------------------- ---------
<S> <C> <C>
Deborah A. Docs (38) Vice President and Associate General Counsel (since January 1993) of Assistant
One Seaport Plaza PMF; Vice President and Associate General Counsel (since January Secretary
New York, NY 1993), of Prudential Securities; previously Associate Vice
President (January 1990-December 1992) Assistant General Counsel
(November 1991-December 1992) and Assistant Vice President
(January 1989-December 1989) of PMF.
Stephen M. Ungerman (42) First Vice President of Prudential Mutual Fund Management, Inc. Assistant
One Seaport Plaza (since February 1993); prior thereto, Senior Tax Manager of Price Treasurer
New York, NY Waterhouse (1981-January 1993).
</TABLE>
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 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.
The Board of Directors has nominated a new slate of Directors for the Fund
which will be submitted to shareholders at a special meeting scheduled to be
held in or about October 1996.
The Fund pays each of its Directors who is not an affiliated person of the
investment adviser annual compensation of $7,500. 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 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, 1995 and the aggregate compensation paid to such Directors
for service on the Fund's board and that of all other funds managed by
Prudential Mutual Fund Management, Inc. (Fund Complex) for the calendar year
ended December 31, 1995.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement Estimated From Fund
Aggregate Benefits Accrued Annual And Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Directors
----------------- ------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Thomas A. Owens, Jr., Director ......................... $7,500 None N/A $87,000(12/13)*
Gerald A. Stahl, Director .............................. $7,500 None N/A $11,875(2/2)*
Stephen Stoneburn, Director ............................ $7,500 None N/A $44,875(7/7)*
Robert H. Wellington, Director ......................... $7,500 None N/A $19,000(3/3)*
</TABLE>
- ----------
* Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
As of February 9, 1996, the Directors and officers of the Fund as a group
owned less than 1% of the outstanding common stock of the Fund.
As of February 9, 1996, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of common stock were Robert
L. Mofenson Trustee for the benefit of Robert L. Mofenson, P.O. Box 1103, Great
Neck, NY 11023-0103 who held 1,484 Class C shares of the Fund (61.2%); and
Prudential Securities, Inc. FA Gidi G. Cohen, 28 Buckaneer St. #B, Marina Del
Ray, CA 90292-5103 who held 833 Class C shares of the Fund (34.4%).
As of February 9 ,1996, Prudential Securities was record holder of
11,751,807 Class A shares (or 55% of the outstanding Class A shares), 1,628,938
Class B shares (or 78% of the outstanding Class B shares) and 2,317 Class C
shares (or 96% of the outstanding Class C 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.
B-17
<PAGE>
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other investment companies that, together with the Fund, comprise
the "Prudential Mutual Funds." See "How the Fund is Managed" in the Prospectus.
As of January 31, 1996, PMF managed and/or administered open-end and closed-end
management investment companies with assets of approximately $52 billion.
According to the Investment Company Institute as of September 30, 1995, the
Prudential Mutual Funds were the 13th largest family of mutual funds in the
United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, 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, PMF is obligated to keep certain books and records of the Fund. PMF
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 Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), the Fund's transfer and dividend disbursing agent.
The management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .75 of 1% of the Fund's average daily net assets. 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 PMF, 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 PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended December 31, 1995. Currently, the
Fund believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of the Fund's average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1 1/2% of such assets in excess of
$100 million.
In connection with its management of the business affairs of the Fund, PMF
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 PMF or the Fund's investment adviser;
(b) all expenses incurred by PMF 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
(PIC) pursuant to the subadvisory agreement between PMF and PIC (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, registering the Fund and qualifying its shares 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.
B-18
<PAGE>
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act, on May 10, 1995 and by
shareholders of the Fund on February 25, 1988.
PMF earned management fees of $1,650,798, $2,210,372 and $2,934,112 for the
fiscal years ended December 31, 1995, 1994 and 1993, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of The Prudential. The Subadvisory Agreement provides
that PIC will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, PIC is obligated to keep
certain books and records of the Fund; PMF continues to have responsibility for
all investment advisory services pursuant to the Management Agreement and
supervises PIC's performance of such services. PIC is reimbursed by PMF for the
reasonable costs and expenses incurred by PIC in furnishing services to PMF.
Investment advisory services are provided to the Fund by a unit of the
Subadviser, known as Prudential Mutual Fund Investment Management, Inc.
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 10, 1995 and was approved by shareholders of the Fund on May
12, 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, PMF or PIC upon not more than 60 days' nor less than 30
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.
The Manager and Subadviser 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, 1994. 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 nearly
100,000 persons worldwide, and maintains a sales force of approximately 19,000
agents, 3,400 insurance brokers and 6,000 financial advisors. It insures or
provides other financial services to more than 50 million people worldwide.
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. For the year ended December 31, 1994,
Prudential through its subsidiaries provided financial services to more than 50
million people worldwide--more than one of every five people in the United
States. As of December 31, 1994, Prudential through its subsidiaries provided
automobile insurance for more than 1.8 million cars and insured more than 1.5
million homes. For the year ended December 31, 1994, The Prudential Bank, a
subsidiary of Prudential, served 940,000 customers in 50 states providing credit
card services and loans totaling more than $1.2 billion. Assets held by
Prudential Securities Incorporated (PSI) for its clients totaled approximately
$150 billion at December 31, 1994. During 1994, over 28,000 new customer
accounts were opened each month at PSI. The 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.
Based on data for the period from January 31, 1995 to September 30, 1995
for the Prudential Mutual Funds, on an average day, there are approximately $80
million in common stock transactions, over $150 million in bond transactions and
over $3.1 billion in money market transactions. 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. Based on complex-wide data for
the period from January 31, 1995 to September 30, 1995, on an average day, 7,000
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.
B-19
<PAGE>
The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and 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 tax-exempt and
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.
With respect to taxable fixed-income obligations, 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.
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.
DISTRIBUTOR
Prudential Securities, One Seaport Plaza, New York, New York 10292 acts as
the distributor of the shares of the Fund. Prior to January 2, 1996, Prudential
Mutual Fund Distributors, Inc. (PMFD) One Seaport Plaza, New York, New York
10292, acted as distributor of the Class A shares of the Fund.
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 (the Distributor) incurs the
expenses of distributing the Fund's Class A, Class B and Class C shares,
respectively. See "How the Fund is Managed--Distributor" in the Prospectus.
Prior to October 7, 1991, the Fund operated as a closed-end fund and
offered only one class of shares (the then existing Class A shares). On April
18, 1991, 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 Class A or Class B Plan or in any agreement
related to either Plan (the Rule 12b-1 Directors), at a meeting called for the
purpose of voting on the Class A Plan, adopted a plan of distribution for the
Class A shares of the Fund. The Class A Plan was approved by shareholders of the
Fund on August 8, 1991. On April 18, 1991, the Rule 12b-1 Directors, at a
meeting called for the purpose of voting on the Class B Plan, adopted a plan of
distribution for the Class B shares of the Fund. The Class B Plan was approved
by Class B shareholders on December 3, 1992.
On May 12, 1993, the Directors, including a majority of the Rule 12b-1
Directors, at a meeting called for the purpose of voting on each Plan, approved
the continuance of the Plans and Distribution Agreements and approved
modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with recent amendments to the National Association of
Securities Dealers, Inc. (NASD) maximum sales charge rule described below. As so
modified, 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 .25 of 1%) may not exceed .30 of
1%. As so modified, the Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares may be paid as a service fee and
(ii) up to .75 of 1% (including the service fee) may be used as reimbursement
for distribution-related expenses with respect to the Class B shares
(asset-based sales charge). On May 12, 1993, the Board of Directors, including a
majority of the Rule 12b-1 Directors, at a meeting called for the purpose of
voting on each Plan, adopted a plan of distribution for the Class C shares of
the Fund and approved further amendments to the plans of distribution for the
Fund's Class A and Class B shares changing them from reimbursement type plans to
compensation type plans. The Plans were last approved by the Board of Directors,
including a majority of the Rule 12b-1 Directors, on May 10, 1995. The Class A
Plan, as amended, was approved by Class A and Class B shareholders, and the
Class B Plan, as amended, was approved by Class B shareholders, on July 19,
1994. The Class C Plan was approved by the sole shareholder of Class C shares on
August 1, 1994.
B-20
<PAGE>
CLASS A PLAN. For the fiscal year ended December 31, 1995, PMFD received
payment of $301,139 under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares.
In addition, for the fiscal year ended December 31, 1995, PMFD received
approximately $8,900 in initial sales charges.
CLASS B PLAN. For the fiscal year ended December 31, 1995, the Distributor
received $145,025 from the Fund under the Class B Plan. It is estimated that the
Distributor spent approximately $51,300 on behalf of the Fund during such year.
It is estimated that of the latter amount approximately 11.1% ($5,700) was spent
on printing and mailing of prospectuses to other than current shareholders; 1.4%
($700) on compensation to Pruco Securities Corporation, an affiliated
broker-dealer (Prusec), for commissions to its representatives and other
expenses, including an allocation on account of overhead and other branch office
distribution-related expenses, incurred by it for its distribution of Fund
shares; and 87.5% ($44,900) on the aggregate of (i) payments of commissions to
financial advisers 51.6% ($26,500) and (ii) an allocation of overhead and other
branch office distribution related expenses 35.9% ($18,400). The term "overhead
and other branch office distribution-related expenses" represents (a) the
expenses of operating the Distributor'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 holders of Class B shares upon certain redemptions of
Class B shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended December
31, 1995, Prudential Securities received $59,900 in contingent deferred sales
charges.
CLASS C PLAN. For the fiscal year ended December 31, 1995, Prudential
Securities received $81 under the Class C Plan and spent approximately $300 in
distributing Class C shares. It is estimated that of the latter amount,
approximately 66.7% ($200) was spent on printing and mailing of prospectuses to
other than current shareholders; and 33.3% ($100) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers (13.3%
or $40) and (ii) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses (20% or $60).
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. For the fiscal year ended December 31, 1995, Prudential
Securities did not receive any contingent deferred sales charges attributable to
Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each 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 each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933. Each Distribution
Agreement was last approved by the Board of Directors, including a majority of
the Rule 12b-1 Directors, on May 10, 1995. On November 3, 1995, the Directors
approved the transfer of the Distribution Agreement for Class A shares with PMFD
to Prudential Securities.
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
B-21
<PAGE>
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.
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 will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months 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
B-22
<PAGE>
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 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 to Prudential Securities for the
fiscal year ended December 31, 1995, December 31, 1994, and December 31, 1993.
B-23
<PAGE>
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). See "Shareholder
Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the Securities and Exchange Commission in
connection with the offering of a conversion feature on Class B shares to submit
any amendment of the Class A distribution and service plan to both Class A and
Class B shareholders) and (iii) only Class B shares have a conversion feature.
See "Distributor." Each class also has separate exchange privileges. See
"Shareholder Investment Account--Exchange Privilege."
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
3.0% and Class B* and Class C* shares are sold at net asset value. Using the
Fund's net asset value at December 31, 1995, the maximum offering price of the
Fund's shares is as follows:
<TABLE>
<CAPTION>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share ........................... $8.30
-----
Maximum sales charge (3.0% of offering price) .................................... .26
-----
Offering price to public ......................................................... $8.56
=====
CLASS B
Net asset value, offering price and redemption price per Class B share* .......... $8.31
=====
CLASS C
Net asset value, offering price and redemption price per Class C share* .......... $8.31
=====
</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.
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);
B-24
<PAGE>
(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.
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. 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. 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 be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. 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 a Letter of Intent 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, except in
the case of retirement and group plans.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. 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.
B-25
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES.
The contingent deferred sales charge is waived under circumtances 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.
<TABLE>
<CAPTION>
<S> <C>
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 Administration award
considered disabled if he or she is letter or a letter from a physician on the physician's
unable to engage in any substantial letterhead stating that the shareholder (or, in the
gainful activity by reason of any case of a trust, the grantor) is permanently disabled.
medically determinable physical or The letter must also indicate the date of disability.
mental impairment which can be expected
to result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the custodial
Custodial Account 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.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994.
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
or Redemption Proceeds
Year Since Purchase ------------------------------------------
Payment Made $500,001 to $1 million Over $1 million
- ------------------- ---------------------- ---------------
<S> <C> <C>
First ................................... 3.0% 2.0%
Second .................................. 2.0% 1.0%
Third ................................... 1.0% 0%
Fourth and thereafter ................... 0% 0%
</TABLE>
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 the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-26
<PAGE>
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 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.
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., a money market fund. 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
B-27
<PAGE>
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 five year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares, respectively of other funds without
being subject to any CDSC.
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 beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public
university.(superior1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(superior2)
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."
- ----------
(superior1)Source information concerning the costs of education at public
and private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(superior2)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.
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<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at 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.
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<PAGE>
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(superior1)
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
- ----------
(superior1)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.
MUTUAL FUND PROGRAMS
From time to time, the Fund (or a portfolio of the Fund, if applicable) 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 promoted
collectively. Typically, these programs are created with an investment theme,
e.g., to seek greater diversification, protection from interest rate movements
or access to different management styles. In the event such a program is
instituted, there may be a minimum investment requirement for the program as a
whole. The Fund may waive or reduce the minimum initial investment requirements
in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor 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
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, the value of the investments
listed on a securities exchange and NASDAQ National Market System securities
(other than options on stock and stock indices) are valued at the last sale
price on the day of valuation or, if there was no sale on such day, the mean
between the last bid and asked prices on such day, as provided by a pricing
service or principal market maker. Corporate bonds (other than convertible debt
securities) and U.S. Government securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of the commodities exchange or board of trade. Quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the current rate obtained from a recognized bank or dealer and
forward currency exchange contracts are valued at the current cost of covering
or offsetting such contracts. Should an extraordinary event, which is likely to
affect the value of the security, occur after the close of an exchange on which
a portfolio security is traded, such security will be valued at fair value
considering factors determined in good faith by the investment adviser under
procedures established by and under the general supervision of the Fund's Board
of Directors.
B-30
<PAGE>
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board. Short-term debt securities are valued at cost, with interest accrued or
discount amortized to the date of maturity, if their original maturity was 60
days or less, unless this is determined by the Board not to represent fair
value. Short-term securities with remaining maturities of more than 60 days, for
which market quotations are readily available, are valued at their current
market quotations as supplied by an independent pricing agent or principal
market maker. The Fund will compute 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 on days
on which no orders to purchase, sell or redeem Fund shares have been received or
days on which changes in the value of the Fund's portfolio securities 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 the time between such closing and 4:15 P.M., New York time.
Net asset value is calculated separately for each class. The net asset
value of Class B and Class C shares will generally be lower than the net asset
value of Class A shares as a result of the larger distribution-related fee to
which Class B and Class C shares are subject. It is expected, however, that the
NAV of the three classes will tend to converge immediately after the recording
of dividends, which will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "How the Fund Calculates
Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)(superior n) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the one, five or ten year
periods (or fractional portion thereof) of a hypothetical $1,000
investment made at the beginning of the one, five or ten year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charge but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one, five and
since inception (May 26, 1988) periods ended December 31, 1995 was 20.29%, 7.51%
and 7.68%, respectively. The average annual total return for Class B shares for
the one year and one year and since inception (January 15, 1992) periods ended
December 31, 1995 was 20.25% and 7.78%, respectively. The average annual total
return for Class C shares for the one year and since inception (August 1, 1994)
periods ended December 31, 1995 was 22.25% and 13.96, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B and
Class C 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 or any applicable initial or
contingent deferred sales charges.
The Fund's aggregate total return for Class A shares for the one, five and
since inception periods ended December 31, 1995 was 24.01%, 48.02% and 80.79%,
respectively. The aggregate total return for Class B shares for the one year and
since inception periods ended on December 31, 1995 was 23.25% and 35.47%,
respectively. The aggregate total return for Class C shares for the one year and
since inception (August 1, 1994) periods ended December 31, 1995 was 23.25% and
20.24%, respectively.
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<PAGE>
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 and
Class C 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
YIELD = 2[(--------- +1)(superior6)-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 Fund's 30-day yields for the 30 days ended December 31, 1995, were
6.36%, 5.95% and 5.95% for 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. (Superior1)
A Look At Performance Over the Long-Term
(1926-1994)
[CHART]
(superior1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and
Inflation--1995 Yearbook" (annually updates the work of Roger G. Ibbotson and
Rex A. Sinquefield). Used with permission. All rights reserved. Common stock
returns are based on the Standard & Poor's 500 Stock Index, a market-weighted,
unmanaged index of 500 common stocks in a variety of industry sectors. It is a
commonly used indicator of broad stock price movements. This chart is for
illustrative purposes only, and is not intended to represent the performance of
any particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL. The Fund has 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 gross income (without offset for losses from the sale or other
disposition of securities or foreign currencies) from dividends, interest,
proceeds from loans of securities and gains from the sale or other disposition
of securities or foreign currencies or certain other income, including, but not
limited to, gains derived from options and futures on such securities or foreign
currencies derived with respect to its business of investing in securities and
currencies; (b) derive less than 30% of its gross income from gains (without
offset for losses) from the sale or other disposition of securities or options
thereon held less than three months; and (c) diversify its holdings so that, at
the end of each fiscal quarter, (i) 50% of the market 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 Fund's
assets and no more than 10% of the outstanding voting securities of any such
issuer, and (ii) not
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<PAGE>
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than U.S. Government securities). These requirements may limit
the Fund's ability to engage in, or close out, transactions involving options on
securities, futures contracts and options thereon.
The Fund declares dividends on a daily basis 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 monthly in additional shares
of the Fund unless otherwise requested by the shareholder. 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.
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,
1995 of approximately $83,764,100 of which $41,890,000 expires in 1997,
$23,240,000 expires in 1998 and $18,634,100 expires 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.
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."
As a regulated investment company, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, that it
distributes to its shareholders, provided that it distributes at least 90% of
its net investment income and short-term capital gains earned in each year.
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 long-term capital gains, if any, are
taxable as long-term capital gains regardless of how long the investor has held
his or her Fund shares. However, if a shareholder holds shares in the Fund for
not more than six months, then any loss recognized on the sale of such shares
will be treated as long-term capital loss to the extent of any distribution on
the shares which was treated as long-term capital gain. To the extent that, in a
given year, distributions to shareholders exceed recognized net investment
income and recognized short-term and long-term capital gains for the year,
shareholders will receive a return of capital in respect of such year and, in an
annual statement, will be notified of the amount of any return of capital for
such year. Shareholders will be notified annually by the Fund as to the federal
tax status of dividends and distributions made by the Fund.
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 disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss.
These gains, referred to under the Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to its shareholders as ordinary income, rather than
increasing or decreasing the amount of the Fund's net capital gain. If Section
988 losses exceed other investment company taxable income during a taxable year,
the Fund would not be able to make any taxable ordinary dividend distributions,
or distributions made before the losses were realized would be recharacterized
as a return of capital to shareholders, rather than as an ordinary dividend,
reducing each shareholder's basis in his or her 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.
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
B-33
<PAGE>
the Internal Revenue Code, if more than 50% of the value of the Fund's total
assets at the close of its taxable year consists of stock or securities of
foreign corporations, the Fund will be eligible and may file an election with
the Internal Revenue Service to "pass-through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. Pursuant to this election shareholders
will be required to: (i) include in gross income (in addition to taxable
dividends actually received) their pro rata share of the foreign taxes paid by
the Fund; (ii) treat their pro rata share of foreign taxes as paid by them; and
(iii) either deduct their pro rata share of foreign taxes in computing their
taxable income or, subject to certain limitations, use it as a foreign tax
credit against U.S. income taxes. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions. A shareholder that is a
nonresident alien individual or foreign corporation may be subject to U.S.
withholding tax on the income resulting from the election described in this
paragraph, but may not be able to claim a credit or deduction against such tax
for the foreign taxes treated as having been paid by such shareholder. A
tax-exempt shareholder will not ordinarily benefit from this election. The
amount of foreign taxes for which a shareholder may claim a credit in any year
will generally be subject to various limitations including a separate limitation
for "passive income," which includes, among other things, dividends, interest
and certain foreign currency gains.
The Fund may purchase debt securities (such as zero-coupon bonds) that
contain original issue discount. Original issue discount that accrues in a
taxable year is treated as income earned by the Fund and therefore is subject to
the distribution requirements of the Internal Revenue Code. Because the original
issue discount income earned by the Fund in a taxable year may not be
represented by cash income, the Fund may have to dispose of other securities and
use the proceeds to make distributions to satisfy the Internal Revenue Code's
distribution requirements.
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. 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.
FOREIGN SHAREHOLDERS. 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. Transfers by gift of
shares of the Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of the
shares of the Fund held by such a shareholder at his death will be includable in
his gross estate for U.S. federal estate tax purposes. 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.
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.
B-34
<PAGE>
ORGANIZATION AND CAPITALIZATION
The Fund was initially incorporated in Maryland on March 15, 1988. On
August 8, 1991, the Fund's shareholders voted to change the name of the Fund to
Prudential Intermediate Global Income Fund, Inc. and to change the Fund from a
closed-end company to an open-end company. On October 20, 1992, the Fund's Board
of Directors approved a change in the Fund's fiscal year end to December 31.
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, Inc. (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 PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, PMFS receives an annual fee per
shareholder account, a new account set-up fee for each manually-established
account and a monthly inactive zero balance account fee per shareholder account.
PMFS is also reimbursed for its out-of-pocket expenses, including but not
limited to postage, stationery, printing, allocable communications expenses and
other costs. For the fiscal year December 31, 1995, the Fund incurred fees of
approximately $387,500 for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
B-35
<PAGE>
Portfolio of Investments as of PRUDENTIAL INTERMEDIATE GLOBAL
December 31, 1995 INCOME FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal US$
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS(a)--90.4%
- ------------------------------------------------------------
Australia--2.2%
A$ 2,900 New South Wales Treasury
Corporation,
6.50%, 5/1/06 $ 1,867,647
4,000 Queensland Treasury
Corporation,
6.50%, 6/14/05 2,608,806
-------------
4,476,453
- ------------------------------------------------------------
Canada--6.2%
C$ 3,000 British Columbia Provincial
Bond,
7.75%, 6/16/03 2,277,159
Canadian Government Bonds,
9,500 9.00%, 12/1/04 7,844,707
2,700 9.00%, 6/1/25 2,305,747
-------------
12,427,613
- ------------------------------------------------------------
Czech Republic--0.3%
CZK 15,000 Skoda Finance,
11.625%, 2/9/98 569,090
- ------------------------------------------------------------
Denmark--7.7%
Danish Government Bonds,
DKr 30,400 8.00%, 5/15/03 5,836,656
35,000 7.00%, 12/15/04 6,270,499
16,500 8.00%, 3/15/06 3,135,791
-------------
15,242,946
- ------------------------------------------------------------
France--1.1%
FF 10,500 National Bank of Hungary,
8.00%, 11/12/99 2,089,280
- ------------------------------------------------------------
Germany--12.4%
DM 4,035 DSL Finance BV,
7.375%, 2/15/00 3,049,349
German Government Bonds,
DM 2,910 5.375%, 2/22/99 $ 2,094,534
2,500 5.75%, 8/22/00 1,812,659
6,630 6.75%, 4/22/03 4,897,054
10,000 7.375%, 1/3/05 7,627,059
8,000 6.25%, 1/4/24 5,205,250
-------------
24,685,905
- ------------------------------------------------------------
Ireland--3.3%
Irish Government Bonds,
IEP 2,700 9.25%, 7/11/03 4,799,147
1,100 8.00%, 8/18/06 1,817,132
-------------
6,616,279
- ------------------------------------------------------------
Italy--5.4%
Lira 1,500,000 Bayerische Landesanstalt Bank,
10.625%, 5/12/00 956,037
Italian Government Bonds,
12,750,000 8.50%, 8/1/99 7,629,323
3,500,000 10.00%, 8/1/03 2,148,851
-------------
10,734,211
- ------------------------------------------------------------
Netherlands--6.6%
Dutch Government Bonds,
NLG 5,000 7.50%, 6/15/99 3,398,316
3,100 9.00%, 7/1/00 2,236,525
8,500 7.00%, 6/15/05 5,671,085
2,600 7.50%, 1/15/23 1,777,667
-------------
13,083,593
- ------------------------------------------------------------
New Zealand--0.8%
NZ$ 2,500 New Zealand Government Bond,
10.00%, 7/15/97 1,678,165
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36
<PAGE>
Portfolio of Investments as of PRUDENTIAL INTERMEDIATE GLOBAL
December 31, 1995 INCOME FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal US$
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Spain--4.0%
Pts 300,000 Republic of Argentina,
12.80%, 12/9/97 $ 2,424,689
Spanish Government Bonds,
400,000 10.30%, 6/15/02 3,404,461
300,000 8.20%, 2/28/09 2,190,138
-------------
8,019,288
- ------------------------------------------------------------
United Kingdom--7.2%
United Kingdom Treasury Bonds,
BP 2,600 9.00%, 3/3/00 4,347,790
4,000 8.00%, 9/25/09 6,398,476
2,000 6.25%, 11/25/10 2,704,612
600 Guaranteed Export Finance
Corporation,
7.25%, 12/15/98 937,181
-------------
14,388,059
- ------------------------------------------------------------
United States--33.2%
Corporate Bonds--2.6%
US$ 750 Banco Nacional de Commercial
Exterior (Mexico),
7.50%, 7/1/00 647,813
1,250 Bancomer SA (Mexico),
8.00%, 7/7/98 1,156,250
1,850 Cemex SA (Mexico),
8.875%, 6/10/98 1,776,000
1,450 Financiera Energetica Nacional
(Columbia),
9.00%, 11/8/99 1,513,437
-------------
5,093,500
-------------
Sovereign Bonds--3.1%
Republic of Brazil,
1,140 6.6875%, 1/1/01, FRB/IDU 981,825
1,500 6.00%, 9/15/13 832,500
1,250 Republic of Colombia,
8.75%, 10/6/99 1,314,455
US$ 1,600 Republic of Ecuador
6.8125%, 2/28/25, FRB $ 808,000
3,100 Republic of Poland
6.875%, 10/27/24, FRB 2,340,500
-------------
6,277,280
-------------
Supranational Bond--0.6%
1,200 Corporacion Andina de Fomento,
7.375%, 7/21/00 1,203,000
-------------
U.S. Government Obligations--26.9%
4,500 United States Treasury Bond,
7.50%, 11/15/24 5,409,135
United States Treasury Notes,
15,000 6.75%, 6/30/99 15,684,300
6,500 6.125%, 9/30/00 6,695,000
16,500 5.75%, 8/15/03 16,698,495
7,800 7.875%, 11/15/04 9,028,500
-------------
53,515,430
-------------
66,089,210
-------------
Total long-term investments
(cost US$169,640,902) 180,100,092
-------------
SHORT-TERM INVESTMENTS--7.5%
- ------------------------------------------------------------
Australia--1.1%
A$ 2,900 Barclays Bank Time Deposit,
7.125%, 1/5/96 2,157,883
- ------------------------------------------------------------
Czech Republic--0.5%
CZK 25,000 Unilever, Euro Commercial Paper
10.25%, 2/19/96 (b) 925,880
- ------------------------------------------------------------
Italy--0.3%
Lira 900,000 Mellon Bank Time Deposit,
10.25%, 1/5/96 567,661
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
Portfolio of Investments as of December 31, 1995
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal US$
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
New Zealand--2.1%
NZ$ 5,000 New Zealand Government Bond,
9.00%, 11/15/96 $ 3,285,812
1,500 Mellon Bank Time Deposit,
8.25%, 1/5/96 979,950
-------------
4,265,762
- ------------------------------------------------------------
Spain--0.7%
Pts 180,000 Barclays Bank Time Deposit,
9.0625%, 1/5/96 1,484,504
- ------------------------------------------------------------
United Kingdom--0.7%
BP 850 Mellon Bank Time Deposit,
6.375%, 1/5/96 1,316,482
- ------------------------------------------------------------
United States--2.1%
US$ 4,263 Joint Repurchase Agreement
Account,
5.85%, 1/2/96, (Note 5) 4,263,000
-------------
Total short-term investments
(cost US$14,954,126) 14,981,172
-------------
- ------------------------------------------------------------
Total Investments--97.9%
(cost $184,595,028; Note 4) 195,081,264
Other assets in excess of
liabilities--2.1% 4,233,396
-------------
Net Assets--100% $ 199,314,660
-------------
-------------
</TABLE>
- ---------------
Portfolio securities are classified according to the securities currency
denomination.
(a) Principal amount segregated as collateral for forward currency contracts.
(b) Percentages quoted represent yield-to-maturity as of purchase date.
FRB-Floating Rate Bond.
IDU-Interest Due and Unpaid Bonds.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Statement of Assets and Liabilities INCOME FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets December 31, 1995
-----------------
Investments, at value (cost $184,595,028)............................................................... $ 195,081,264
Foreign currency (cost $286,047)........................................................................ 287,917
Interest receivable..................................................................................... 5,410,531
Receivable for investments sold......................................................................... 1,362,883
Forward currency contracts-net amount receivable from counterparties.................................... 53,310
Receivable for Fund shares sold......................................................................... 11,501
Other assets............................................................................................ 44,534
-----------------
Total assets......................................................................................... 202,251,940
-----------------
Liabilities
Bank overdraft.......................................................................................... 34,254
Payable for investments purchased....................................................................... 1,316,482
Payable for Fund shares reacquired...................................................................... 520,496
Forward currency contracts--net amount payable to counterparties........................................ 501,989
Accrued expenses........................................................................................ 299,275
Management fee payable.................................................................................. 129,214
Dividends payable....................................................................................... 99,913
Distribution fee payable................................................................................ 34,693
Withholding taxes payable............................................................................... 964
-----------------
Total liabilities.................................................................................... 2,937,280
-----------------
Net Assets.............................................................................................. $ 199,314,660
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 24,007
Paid-in capital in excess of par..................................................................... 271,494,889
-----------------
271,518,896
Undistributed net investment income.................................................................. 1,651,431
Accumulated net realized loss on investments......................................................... (83,880,683)
Net unrealized appreciation on investments and foreign currencies.................................... 10,025,016
-----------------
Net assets, December 31, 1995........................................................................... $ 199,314,660
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($181,984,629 / 21,921,450 shares of common stock issued and outstanding)......................... $8.30
Maximum sales charge (3.00% of offering price)....................................................... .26
-----
Maximum offering price to public..................................................................... $8.56
=====
Class B:
Net asset value, offering price and redemption price per share
($17,316,889 / 2,083,751 shares of common stock issued and outstanding)........................... $8.31
=====
Class C:
Net asset value, offering price and redemption price per share
($13,142 / 1,581 shares of common stock issued and outstanding)................................... $8.31
=====
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-39
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1995
-----------------
<S> <C>
Income
Interest and discount earned............. $16,491,112
Income from securities loaned............ 4,913
-----------------
16,496,025
-----------------
Expenses
Management fee........................... 1,650,798
Distribution fee--Class A................ 301,139
Distribution fee--Class B................ 145,025
Distribution fee--Class C................ 81
Transfer agent's fees and expenses....... 468,000
Custodian's fees and expenses............ 298,000
Reports to shareholders.................. 133,000
Audit fees and expenses.................. 72,000
Registration fees........................ 54,000
Legal fees and expenses.................. 34,000
Directors' fees and expenses............. 33,000
Insurance expense........................ 6,000
Miscellaneous............................ 12,361
-----------------
Total expenses........................ 3,207,404
-----------------
Net investment income....................... 13,288,621
-----------------
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign
Currency Transactions
Net realized gain (loss) on:
Investment transactions.................. 18,146,832
Foreign currency transactions............ 2,401,415
Written option transactions.............. (1,839,478)
-----------------
18,708,769
-----------------
Net change in net unrealized appreciation/depreciation of:
Investments.............................. 14,025,407
Foreign currencies....................... 1,627,689
Written options.......................... 84,821
-----------------
15,737,917
-----------------
Net gain on investments and foreign
currencies............................... 34,446,686
-----------------
Net Increase in Net Assets
Resulting from Operations................... $47,735,307
-----------------
-----------------
</TABLE>
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1995 1994
------------- -------------
<S> <C> <C>
Operations
Net investment income.......... $ 13,288,621 $ 17,615,129
Net realized gain (loss) on
investment and foreign
currency transactions....... 18,708,769 (33,774,304)
Net change in net unrealized
appreciation/depreciation on
investments and foreign
currencies.................. 15,737,917 (6,472,524)
------------- -------------
Net increase (decrease) in net
assets resulting from
operations.................. 47,735,307 (22,631,699)
------------- -------------
Net equalization debits........... (68,241) (298,272)
------------- -------------
Dividends and distributions (Note 1)
Dividends from net investment
income
Class A..................... (12,197,948) (9,720,977)
Class B..................... (1,089,996) (1,068,617)
Class C..................... (677) --
------------- -------------
(13,288,621) (10,789,594)
------------- -------------
Distributions in excess of net
investment income
Class A..................... (5,263,793) --
Class B..................... (470,367) --
Class C..................... (293) --
------------- -------------
(5,734,453) --
------------- -------------
Distributions from net realized
gains
Class A..................... -- (451,238)
Class B..................... -- (57,559)
------------- -------------
-- (508,797)
------------- -------------
Tax return of capital
distributions
Class A..................... -- (7,599,757)
Class B..................... -- (836,616)
------------- -------------
-- (8,436,373)
------------- -------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
sold........................ 16,586,187 12,598,805
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 5,341,402 4,734,600
Cost of shares reacquired...... (81,316,129) (104,455,068)
------------- -------------
Net decrease in net assets from
Fund share transactions..... (59,388,540) (87,121,663)
------------- -------------
Total decrease.................... (30,744,548) (129,786,398)
Net Assets
Beginning of year................. 230,059,208 359,845,606
------------- -------------
End of year....................... $ 199,314,660 $ 230,059,208
------------- -------------
------------- -------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-40
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- -------------------------------------------------------------------------------
Prudential Intermediate Global Income Fund, Inc., (the ``Fund'') was organized
in Maryland as a closed-end, non-diversified management investment company and
commenced investment operations on May 26, 1988. On October 4, 1991 the Fund
concluded operations as a closed-end investment company and effective October 7,
1991, commenced operations as an open-end, non-diversified investment company.
The Fund's investment objective is to maximize total return, the components of
which are current income and capital appreciation, by investing in a portfolio
consisting primarily of U.S. and foreign government securities. The Fund will
also engage in certain hedging strategies to meet its investment objective. The
ability of issuers of debt securities held by the Fund to meet their obligations
may be affected by economic and political developments in a specific country or
region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current currency rate. Portfolio securities (including options) are valued
at their current market value as determined by an independent pricing service,
principal market maker or by reference to the applicable exchange price. Forward
currency exchange contracts are valued at the current cost of covering or
offsetting the contract on the day of valuation. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the year, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at year end. Similarly, the Fund does not isolate
the effect of changes in foreign exchange rates from the fluctuations arising
from changes in the market prices of long-term debt securities sold during the
year. Accordingly, such realized foreign currency gains and losses are included
in the reported net realized gains/losses on investment transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains and losses from sales and maturities of short-term securities and
forward currency contracts, holding of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amounts of interest and foreign
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net currency gains and losses from valuing foreign
currency denominated assets (excluding investments) and liabilities at period
end exchange rates are reflected as a component of net unrealized
appreciation/depreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
- -------------------------------------------------------------------------------
B-41
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- -------------------------------------------------------------------------------
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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
Securities Lending: The Fund may lend its U.S. Government securities to
broker-dealers or government securities dealers. The loans are secured by
collateral at least equal at all times to the market value of the securities
loaned. The Fund may bear the risk of delay in recovery of, or even loss of
rights in, the securities loaned should the borrower of the securities fail
financially. The Fund receives compensation for lending its securities in the
form of fees or it retains a portion of interest on the investment of any cash
received as collateral. The Fund also continues to receive interest on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund. As of December 31, 1995, the Fund had no securities on loan.
Security Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized gains and losses from security and currency
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Net investment income (other than distribution fees), and unrealized gains or
losses are allocated daily to each class of shares based upon the relative
proportion of net assets of each class at the beginning of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Dividends and Distributions: The Fund declares daily and pays dividends of net
investment income monthly and makes distributions at least annually of any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with AICPA Statement of Position
93-2: Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this Statement of Position was to reclassify $12,161,312 of
foreign currency gains to undistributed net investment
- -------------------------------------------------------------------------------
B-42
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- -------------------------------------------------------------------------------
income from accumulated net realized loss on investments. Net investment income,
net realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``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, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly at an annual
rate of .75% of the Fund's average daily net assets.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Prudential Securities Incorporated (``PSI'') is
the distributor of the Class B and Class C shares of the Fund. The Fund
compensated PMFD and PSI for distributing and servicing the Fund's Class A,
Class B and Class C shares, pursuant to plans of distribution (the ``Class A, B
and C Plans''), regardless of expenses actually incurred by them. The
distribution fees are accrued daily and payable monthly. Effective January 2,
1996, PSI became the distributor of the Class A shares of the Fund and is
serving the Fund under the same terms and conditions as under the arrangement
with PMFD.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI, and PMFD for
the year ended December 31, 1995 with respect to Class A shares, for
distribution-related activities at an annual rate of up to .30 of 1%, .75 of 1%
and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .15% of 1%, .75% of 1% and .75
of 1% of the average daily net assets of the Class A, B and C shares,
respectively, for the fiscal year ended December 31, 1995.
PMFD has advised the Fund that it has received approximately $8,900 in front-end
sales charges resulting from sales of Class A shares during the fiscal year
ended December 31, 1995. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
PSI has advised the Fund that for the fiscal year ended December 31, 1995, it
received approximately $59,900 in contingent deferred sales charges imposed upon
certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the fiscal year ended
December 31, 1995, the Fund incurred fees of approximately $387,500 for the
services of PMFS. As of December 31, 1995, fees of approximately $28,500 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
and written options, for the fiscal year ended December 31, 1995, aggregated
$435,065,739 and $469,492,179, respectively.
- -------------------------------------------------------------------------------
B-43
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- -------------------------------------------------------------------------------
At December 31, 1995, the Fund had outstanding forward currency contracts to
sell foreign currencies as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current Appreciation
Sale Contracts Receivable Value (Depreciaton)
- ------------------------------- --------------- ----------- --------------
<S> <C> <C> <C>
British Pounds,
expiring 1/24/96.............. $ 7,869,987 $ 7,915,886 $ (45,899)
Deutschemarks,
expiring 1/24/96.............. 36,887,477 37,013,510 (126,033)
French Francs,
expiring 1/24-9/16/96......... 6,130,703 6,379,372 (248,669)
Irish Punts,
expiring 1/24/96.............. 1,604,483 1,611,271 (6,788)
Italian Lira,
expiring 1/5/96............... 614,233 617,045 (2,812)
Japanese Yen,
expiring 1/24/96.............. 3,111,496 3,058,186 53,310
New Zealand Dollars,
expiring 1/24/96.............. 13,752,542 13,798,276 (45,734)
Swiss Francs,
expiring 1/24/96.............. 8,401,149 8,427,203 (26,054)
--------------- ----------- --------------
$78,372,070 $78,820,749 $ (448,679)
--------------- ----------- --------------
--------------- ----------- --------------
</TABLE>
Transactions in options written during the fiscal year ended December 31, 1995,
were as follows:
<TABLE>
<CAPTION>
Number of
Units Premiums
(000) Received
---------- ---------
<S> <C> <C>
Options outstanding at
December 31, 1994.............................. 40,658 $ 466,627
Options written................................. 72,075 436,677
Options terminated in closing purchase
transactions................................... (96,258) (647,069)
Options exercised............................... (16,475) (256,235)
---------- ---------
Options outstanding at
December 31, 1995.............................. -- --
---------- ---------
---------- ---------
</TABLE>
The federal income tax basis of the Portfolio's investments at December 31, 1995
was $184,726,853 and, accordingly, net unrealized appreciation for federal
income tax purposes was $10,354,411 (gross unrealized appreciation--$10,475,201
gross unrealized depreciation--$120,790).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1995, of approximately $83,764,100 of which $41,890,000 expires in
1997, $23,240,000 expires in 1998 and $18,634,100 expires in 2002. Such
carryforward is after utilization of approximately $3,875,500 of net taxable
gains realized and recognized during the year ended December 31, 1995.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of the aggregate of
such amounts.
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of December 31, 1995, the
Fund has a 0.4% undivided interest in the joint account. The undivided interest
for the Fund represents $4,263,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:
Bear, Stearns & Co. Inc., 5.80%, in the principal amount of $262,000,000,
repurchase price $262,168,844, due 1/2/96. The value of the collateral including
accrued interest is $267,947,172.
BT Securities Corp., 5.75%, in the principal amount of $61,765,000, repurchase
price $61,804,461, due 1/2/96. The value of the collateral including accrued
interest is $63,059,883.
Goldman, Sachs & Co., 5.90%, in the principal amount of $365,000,000, repurchase
price $365,239,278, due 1/2/96. The value of the collateral including accrued
interest is $372,300,053.
Morgan Stanley & Co. Inc., 5.89%, in the principal amount of $103,000,000,
repurchase price $103,067,408, due 1/2/96. The value of the collateral including
accrued interest is $105,192,608.
Smith Barney, Inc., 5.83%, in the principal amount of $365,000,000, repurchase
price $365,236,439, due 1/2/96. The value of the collateral including accrued
interest is $372,300,416.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 3% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately five
years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value.
- -------------------------------------------------------------------------------
B-44
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- -------------------------------------------------------------------------------
There are 2 billion authorized shares of $.001 par value common stock divided
equally into Class A, B and C shares. Of the 24,006,782 shares of common stock
issued and outstanding at December 31, 1995, PMF owned 12,717 Class A shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- ------------
<S> <C> <C>
Year ended December 31, 1995:
Shares sold....................... 1,850,612 $15,008,482
Shares issued in reinvestment of
dividends....................... 550,526 4,466,762
Shares reacquired................. (8,945,391) (72,011,740)
----------- ------------
Net decrease in shares outstanding
before conversion............... (6,544,253) (52,536,496)
Shares issued upon conversion from
Class B......................... 169,839 1,290,841
----------- ------------
Net decrease in shares
outstanding..................... (6,374,414) $(51,245,655)
----------- ------------
----------- ------------
Year ended December 31, 1994:
Shares sold....................... 818,956 $ 6,611,489
Shares issued in reinvestment of
dividends and distributions..... 477,735 3,708,750
Shares reacquired................. (11,028,813) (85,609,639)
----------- ------------
Net decrease in shares
outstanding..................... (9,732,122) $(75,289,400)
----------- ------------
----------- ------------
Class B
- ----------------------------------
Year ended December 31, 1995:
Shares sold....................... 195,759 $ 1,567,104
Shares issued in reinvestment of
dividends....................... 107,743 873,686
Shares reacquired................. (1,173,472) (9,304,389)
----------- ------------
Net decrease in shares outstanding
before conversion............... (869,970) (6,863,599)
Shares reacquired upon conversion
into Class A.................... (169,615) (1,290,841)
----------- ------------
Net decrease in shares
outstanding..................... (1,039,585) $(8,154,440)
----------- ------------
----------- ------------
Year ended December 31, 1994:
Shares sold....................... 741,502 $ 5,987,116
Shares issued in reinvestment of
dividends and distributions..... 131,446 1,025,848
Shares reacquired................. (2,424,396) (18,845,429)
----------- ------------
Net decrease in shares
outstanding..................... (1,551,448) $(11,832,465)
----------- ------------
----------- ------------
Class C Shares Amount
- ---------------------------------- ----------- ------------
Year ended December 31, 1995:
Shares sold....................... 1,439 $ 10,601
Shares issued in reinvestment of
dividends....................... 116 954
----------- ------------
Increase in shares outstanding.... 1,555 $ 11,555
----------- ------------
----------- ------------
August 1, 1994* through December 31, 1994:
Shares sold....................... 26 $ 200
Shares issued in reinvestment of
dividends....................... -- 2
----------- ------------
Increase in shares outstanding.... 26 $ 202
----------- ------------
----------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- -------------------------------------------------------------------------------
B-45
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Financial Highlights INCOME FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A(e)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ten Months
Year Ended December 31, Ended Year Ended
---------------------------------- December 31, February 29,
1995 1994 1993 1992(b) 1992
-------- -------- -------- ------------ ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 7.32 $ 8.43 $ 7.77 $ 8.39 $ 8.79
-------- -------- -------- ------------ ------------
Income from investment operations
Net investment income......................... .52(d) .50 .59 .61 .71
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... 1.20(d) (1.09) .63 (.36) (.36)
-------- -------- -------- ------------ ------------
Total from investment operations........... 1.72 (.59) 1.22 .25 .35
-------- -------- -------- ------------ ------------
Less distributions
Dividends from net investment income.......... (.52)(d) (.29) (.48) (.59) (.71)
Distributions in excess of net investment
income..................................... (.22)(d) -- -- -- --
Distributions from capital gains.............. -- (.01) (.08) (.28) --
Tax return of capital distributions........... -- (.22) -- -- (.04)
-------- -------- -------- ------------ ------------
Total distributions........................ (.74) (.52) (.56) (.87) (.75)
-------- -------- -------- ------------ ------------
Net asset value, end of period................ $ 8.30 $ 7.32 $ 8.43 $ 7.77 $ 8.39
-------- -------- -------- ------------ ------------
-------- -------- -------- ------------ ------------
TOTAL RETURN(c):.............................. 24.01% (7.02)% 16.12% 3.09% 4.24%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $181,985 $207,153 $320,406 $378,865 $271,714
Average net assets (000)...................... $200,759 $262,882 $355,018 $331,339 $399,714
Ratios to average net assets:
Expenses, including distribution fees...... 1.40% 1.46% 1.41% 1.30%(a) 1.20%
Expenses, excluding distribution fees...... 1.25% 1.31% 1.26% 1.15%(a) 1.15%
Net investment income...................... 6.09% 6.04% 7.42% 9.08%(a) 8.43%
Portfolio turnover rate....................... 220% 554% 361% 201% 170%
Total debt outstanding at end of period
(000)...................................... -- -- -- -- --
Asset coverage(f)............................. -- -- -- -- --
<CAPTION>
Year Ended
February 28,
1991
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.56
------------
Income from investment operations
Net investment income......................... .74
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... .35
------------
Total from investment operations........... 1.09
------------
Less distributions
Dividends from net investment income.......... (.74)
Distributions in excess of net investment
income..................................... --
Distributions from capital gains.............. --
Tax return of capital distributions........... (.12)
------------
Total distributions........................ (.86)
------------
Net asset value, end of period................ $ 8.79
------------
------------
TOTAL RETURN(c):.............................. 13.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $449,178
Average net assets (000)...................... $437,752
Ratios to average net assets:
Expenses, including distribution fees...... 1.04%
Expenses, excluding distribution fees...... 1.04%
Net investment income...................... 8.61%
Portfolio turnover rate....................... 250%
Total debt outstanding at end of period
(000)...................................... $20,240
Asset coverage(f)............................. $23,193
</TABLE>
- ---------------
(a) Annualized.
(b) The Fund changed its fiscal year end to December 31.
(c) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Calculated based upon average shares outstanding during the fiscal year.
(e) Prior to October 7, 1991, the Fund was organized as a closed-end fund.
(f) Per $1,000 of debt outstanding.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Financial Highlights INCOME FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------------------------------- -----------
January 15,
Ten Months 1992(f)
Year Ended December 31, Ended Through Year Ended
------------------------------- December 31, February 29, December 31,
1995 1994 1993 1992(b) 1992 1995
------- ------- ------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 7.33 $ 8.44 $ 7.79 $ 8.40 $ 8.43 $ 7.33
------- ------- ------- ------------ ----- -----
Income from investment operations
Net investment income......................... .47(d) .45 .54 .57 .08 .47(d)
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... 1.20(d) (1.09) .63 (.35) (.03) 1.20(d)
------- ------- ------- ------------ ----- -----
Total from investment operations........... 1.67 (.64) 1.17 .22 .05 1.67
------- ------- ------- ------------ ----- -----
Less distributions
Dividends from net investment income.......... (.47)(d) (.26) (.44) (.55) (.08) (.47)(d)
Distributions in excess of net investment
income..................................... (.22)(d) -- -- -- -- (.22)(d)
Distributions from capital gains.............. -- (.01) (.08) (.28) -- --
Tax return of capital distributions........... -- (.20) -- -- -- --
------- ------- ------- ------------ ----- -----
Total distributions........................ (.69) (.47) (.52) (.83) (.08) (.69)
------- ------- ------- ------------ ----- -----
Net asset value, end of period................ $ 8.31 $ 7.33 $ 8.44 $ 7.79 $ 8.40 $ 8.31
------- ------- ------- ------------ ----- -----
------- ------- ------- ------------ ----- -----
TOTAL RETURN(c):.............................. 23.25% (7.69)% 15.29% 2.70% 0.58% 23.25%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $17,317 $22,906 $39,440 $33,500 $1,049 $13
Average net assets (000)...................... $19,336 $31,835 $36,197 $18,358 $ 456 $11
Ratios to average net assets:
Expenses, including distribution fees...... 2.00% 2.07% 2.01% 1.90%(a) 1.03%(a) 2.00%
Expenses, excluding distribution fees...... 1.25% 1.31% 1.26% 1.15%(a) .28%(a) 1.25%
Net investment income...................... 5.49% 5.44% 6.67% 8.54%(a) 9.43%(a) 5.49%
Portfolio turnover rate....................... 220% 554% 361% 201% 170% 220%
<CAPTION>
August 1,
1994(g)
Through
December 31,
1994
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 7.69
-----
Income from investment operations
Net investment income......................... .14
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... (.32)
-----
Total from investment operations........... (.18)
-----
Less distributions
Dividends from net investment income.......... (.10)
Distributions in excess of net investment
income..................................... --
Distributions from capital gains.............. --
Tax return of capital distributions........... (.08)
-----
Total distributions........................ (.18)
-----
Net asset value, end of period................ $ 7.33
-----
-----
TOTAL RETURN(c):.............................. (2.44)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $193(e)
Average net assets (000)...................... $197(e)
Ratios to average net assets:
Expenses, including distribution fees...... 1.05%(a)
Expenses, excluding distribution fees...... .30%(a)
Net investment income...................... 3.30%(a)
Portfolio turnover rate....................... 554%
</TABLE>
- ---------------
(a) Annualized.
(b) The Fund changed its fiscal year end to December 31.
(c) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Calculated based upon average shares outstanding during the fiscal year.
(e) Figures are actual and not rounded to the nearest thousand.
(f) Commencement of offering of Class B shares.
(g) Commencement of offering of Class C shares.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Report of Independent Accountants INCOME FUND, INC.
- -------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Prudential Intermediate Global Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Intermediate Global
Income Fund, Inc. (the "Fund") at December 31, 1995, 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 the
three years ended December 31, 1995, for the ten month period ended December 31,
1992 and for each of the two years in the period ended February 29, 1992 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, 1995 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 20, 1996
- -------------------------------------------------------------------------------
B-48
<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 edge." 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 Aaa 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.
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.
COMMERCIAL PAPER
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months.
P-1: The designation "Prime-1" or "P-1" indicates the highest quality
repayment capacity of the rated issue.
P-2: The designation "Prime-2" or "P-2" indicates a strong capacity for
repayment.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. 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 higher 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.
A-1
<PAGE>
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, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest 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 of major risk exposures to adverse
conditions.
COMMERCIAL PAPER
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt having an original maturity of no more than
270 days.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is very strong.
A-2: Capacity for timely payment on issues with the designation A-2 is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-2
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
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.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(VALUE OF $1 INVESTED ON 12/31/25)
[GRAPH]
- ----------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 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 represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. 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).
Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
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 to
September 1995. 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
YTD
'87 '88 '89 '90 '91 '92 '93 '94 9/95
---- ---- ---- ---- ---- ---- ---- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY BONDS(superior1) ......... 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 13.2%
---- ---- ---- ---- ---- ---- ---- --- ----
U.S. GOVERNMENT
MORTGAGE SECURITIES(superior2) .... 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 13.1%
---- ---- ---- ---- ---- ---- ---- --- ----
U.S. INVESTMENT GRADE
CORPORATE BONDS(superior3) ........ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 16.5%
---- ---- ---- ---- ---- ---- ---- --- ----
U.S. HIGH YIELD
CORPORATE BONDS(superior4) ........ 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 15.6%
---- ---- ---- ---- ---- ---- ---- --- ----
WORLD GOVERNMENT
BONDS(superior5) .................. 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 17.1%
==== ==== ==== ==== ==== ==== ==== === ====
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT .................... 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 4.0
</TABLE>
- ----------
(superior1) 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.
(superior2) 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).
(superior3) 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. AlI bonds in the
index have maturities of at least one year.
(superior4) 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.
(superior5) SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over
800 bonds issued by various foreign governments or agencies,
excluding those in the U.S., but including those in Japan, Germany,
France, the U.K., Canada, Italy, Australia, Belgium, Denmark, the
Netherlands, Spain, Sweden, and Austria. All bonds in the index
have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)
[CHART]
- ----------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. 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.
EFFICIENT FRONTIER OF US VS NON-US BONDS
This chart below is a graphical representation of the risk/return
possibilities of a portfolio consisting of US bonds and non-US bonds (Unhedged).
[CHART]
- ----------
Source
EFFICIENT FRONTIER OF US STOCKS VS NON-US BONDS
This chart below is a graphical representation of the risk/return
possibilities of a portfolio consisting of US Stocks and Non-US Bonds
(Unhedged).
[CHART]
- ----------
Source
EFFICIENT FRONTIER OF US STOCK/BOND MIX VS NON-US BONDS
This chart below is a graphical representation of the risk/return
possibilities of a portfolio consisting of a US Bond/Stock Mix and Non-US Bonds
(Unhedged).
[CHART]
- ----------
Source
II-3
<PAGE>
SALOMON BROTHERS INTERNATIONAL LTD
HISTORICAL RISK-RETURN FROM A USD PERSPECTIVE
Time Period: 31 Dec 1984 to 31 Jan 1996
All indices in USD terms unhedged
All annualized numbers
Risk is defined as the annualized standard deviation of monthly returns
Return Risk
------ ------
SB US Treasury Index (All Maturities) .................... 10.38% 5.15%
SB Non-US World Govt Bond Index (All Maturities) ......... 15.08% 11.50%
Correlation between monthly returns ................ 0.33
HISTORICAL RISK AND RETURN
US Tsy NS WGBI Return Risk
------ ------- ------ ------
100% 0% 10.38% 5.15%
90% 10% 10.85% 5.13%
80% 20% 11.32% 5.35%
70% 30% 11.79% 5.76%
60% 40% 12.26% 6.34%
50% 50% 12.73% 7.04%
40% 60% 13.20% 7.83%
30% 70% 13.67% 8.69%
20% 80% 14.14% 9.59%
10% 90% 14.61% 10.53%
0% 100% 15.08% 11.50%
Return Risk
------ ------
S&P 500 Return Index (Source: Datastream) ................ 16.45% 14.59%
SB Non-US World Govt Bond Index (All Maturities) ......... 15.08% 11.50%
Correlation between monthly returns ................ -0.03
HISTORICAL RISK AND RETURN
S&P 500 NS WGBI Return Risk
------- ------- ------ ------
100% 0% 16.45% 14.59%
90% 10% 16.32% 13.14%
80% 20% 16.18% 11.82%
70% 30% 16.04% 10.67%
60% 40% 15.90% 9.75%
50% 50% 15.77% 9.13%
40% 60% 15.63% 8.88%
30% 70% 15.49% 9.03%
20% 80% 15.36% 9.56%
10% 90% 15.22% 10.40%
0% 100% 15.08% 11.50%
Return Risk
------ ------
SB Non-US World Govt Bond Index (All Maturities) ......... 15.08% 11.50%
60% S&P 500/40% US Treasuries ............................ 14.26% 9.64%
Correlation between monthly returns ................ 0.04
HISTORICAL RISK AND RETURN
60%/4%
NS WGBI S&P/USTs Return Risk
------- -------- ------ ------
100% 0% 15.08% 11.50%
90% 10% 15.00% 10.43%
80% 20% 14.92% 9.48%
70% 30% 14.84% 8.66%
60% 40% 14.75% 8.04%
50% 50% 14.67% 7.65%
40% 60% 14.59% 7.53%
30% 70% 14.51% 7.70%
20% 80% 14.43% 8.14%
10% 90% 14.34% 8.80%
0% 100% 14.26% 9.64%
COMPARISON OF WORLD BOND MARKETS
This table represents a percentage of total world bond assets broken down by
country.
COMPARISON OF WORLD BOND MARKETS
Country Dec. '85 Dec. '94
------- -------- --------
United States ..................... 52% 42%
Japan ............................. 18% 20%
Germany ........................... 7% 11%
Italy ............................. 4% 5%
United Kingdom .................... 4% 3%
France ............................ 3% 5%
Canada ............................ 3% 2%
Scandanavia ....................... 3% 3%
Belgium ........................... 2% 2%
Switzerland ....................... 1% 1%
Holland ........................... 1% 2%
Other ............................. 2% 4%
---- ----
100% 100%
==== ====
II-4
SOURCE: Salomon Brothers
