As filed with the Securities and Exchange Commission on March 2, 1998
Securities Act File No. 33-42093
Investment Company Act File No. 811-5510
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 11 [x]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 15 [x]
(Check appropriate box or boxes)
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PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077
------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077
------------------------------------------------------------------------
(Name and Address of Agent for Service of Process)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on March 4, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
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Title of Securities Being Registered ................... Shares of Common Stock,
$.001 par value per share.
================================================================================
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
N-1A ITEM NO. LOCATION
- ------------- -------
PART A
Item 1. Cover Page ........................... Cover Page
Item 2. Synopsis ............................. Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information ...... Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Registrant .... Cover Page; Fund Highlights;
How the Fund Invests; General
Information
Item 5. Management of the Fund ............... How the Fund is Managed;
General Information;
Shareholder Guide
Item 5A. Management's Discussion of
Fund Performance ................... Financial Highlights
Item 6. Capital Stock and Other Securities ... Taxes, Dividends, and
Distributions; General
Information; Shareholder Guide
Item 7. Purchase of Securities Being Offered . Shareholder Guide; How the
Fund Values its Shares; How
the Fund is Managed
Item 8. Redemption or Repurchase ............. Shareholder Guide; How the
Fund Values its Shares;
General Information
Item 9. Pending Legal Proceedings ............ Not Applicable
PART B
Item 10. Cover Page ........................... Cover Page
Item 11. Table of Contents .................... Table of Contents
Item 12. General Information and History ...... Not Applicable
Item 13. Investment Objectives and Policies ... Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund ............... Directors and Officers;
Manager; Distributor
Item 15. Control Persons and Principal
Holders of Securities .............. Directors and Officers
Item 16. Investment Advisory and
Other Services ..................... Manager; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and
Other Practices .................... Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities ... Not Applicable
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered ........ Purchase and Redemption of
Fund Shares; Shareholder
Investment Account; Net Asset
Value
Item 20. Tax Status ........................... Taxes, Dividends and
Distributions
Item 21. Underwriters ......................... Distributor
Item 22. Calculation of Performance Data ...... Performance Information
Item 23. Financial Statements ................. Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Post-Effective
Amendment to the Registration Statement.
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
- --------------------------------------------------------------------------------
Prospectus dated March 4, 1998
- --------------------------------------------------------------------------------
Prudential Intermediate Global Income Fund, Inc. (the Fund) is an open-end,
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 seeks to achieve its 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 securities and foreign currencies and engage
in transactions involving futures contracts and options on such futures to hedge
its portfolio and to attempt to enhance return. See "How the Fund
Invests--Investment Objective and Policies." THE FUND IS NON-DIVERSIFIED AND MAY
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ONE OR MORE
ISSUERS. INVESTMENT IN A NON-DIVERSIFIED PORTFOLIO INVOLVES GREATER RISK THAN
INVESTMENT IN A DIVERSIFIED PORTFOLIO. IN ADDITION, THE FUND MAY INVEST UP TO
10% OF ITS TOTAL ASSETS IN NON-INVESTMENT GRADE SECURITIES, WHICH MAY ENTAIL
ADDITIONAL RISKS. There can be no assurance that the Fund's investment objective
will be achieved. Investing in Foreign Government securities, options and
futures contracts involves considerations and possible risks which are different
from those ordinarily associated with investing in U.S. Government securities.
See "How the Fund Invests--Investment Objective and Policies."
THE FUND MAY ENGAGE IN SHORT-TERM TRADING AND ENTER INTO BANK BORROWINGS. THESE
TECHNIQUES MAY BE CONSIDERED SPECULATIVE AND MAY RESULT IN HIGHER RISKS AND
COSTS TO THE FUND. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of The Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated March 4, 1998, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to the Fund at the address or telephone number noted above.
The Commission maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference and
other information regarding the Fund.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND
RETAIN IT FOR FUTURE REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
================================================================================
FUND HIGHLIGHTS
================================================================================
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
- --------------------------------------------------------------------------------
WHAT IS PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.?
Prudential Intermediate Global Income Fund, Inc. is a mutual fund. A mutual
fund pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
non-diversified, management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek to maximize total return, the
components of which are current income and capital appreciation. It seeks to
achieve this objective by investing primarily in a portfolio consisting of U.S.
Government securities and Foreign Government securities. There can be no
assurance that the Fund's objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 10.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
Investing in securities issued by foreign governments involves
considerations and risks not typically associated with investing in obligations
issued by the U.S. Government and domestic corporations. See "How the Fund
Invests--Risk Factors--Risk Factors on Foreign Investments" at page 14. The Fund
may also engage in various hedging and return enhancement strategies, including
using derivatives, which may be considered speculative and may result in higher
risks and costs to the Fund. See "How the Fund Invests--Hedging and Return
Enhancement Strategies--Risks of Hedging and Return Enhancement Strategies" at
page 20. In addition, the Fund may invest up to 10% of its total assets in
securities rated below investment grade, but with a minimum rating of B, as
determined by Moody's Investors Service, Inc. (Moody's), Standard & Poor's
Ratings Group (S&P) or by another nationally recognized statistical rating
organization (NRSRO), or if unrated, deemed to be of equivalent quality by the
investment adviser. Lower-rated securities are subject to a greater risk of loss
of principal and interest. See "How the Fund Invests--Risk Factors--Medium and
Lower-Rated Securities" at page 15. The amount of income available for
distribution to shareholders will be affected by any foreign currency gains or
losses generated by the Fund upon the disposition of debt securities denominated
in a foreign currency and by certain hedging activities of the Fund. Gains and
losses on security and currency transactions cannot be predicted. This fact
coupled with the different tax and accounting treatment of certain currency
gains and losses increases the likelihood of distributions in whole or in part
constituting a return of capital to shareholders. See "Taxes, Dividends and
Distributions" at page 25. As with an investment in any mutual fund, an
investment in this Fund can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of .75
of 1% of the Fund's average daily net assets. As of January 31, 1998, PIFM
served as manager or administrator to 64 investment companies, including 42
mutual funds, with aggregate assets of approximately $63 billion. PIFM has
entered into a Subadvisory Agreement with The Prudential Investment Corporation,
doing business as Prudential Investments (PI); PI through PRICOA Asset
Management Ltd. (PRICOA and collectively with PI, the Subadviser or the
investment adviser), furnishes investment advisory services in connection with
the management of the Fund. See "How the Fund is Managed--Manager" at page 21.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares. The Distributor is paid an annual distribution and service fee
which is currently being charged at a rate of .15 of 1% of the average daily net
assets of the Class A shares, an annual distribution and service fee at the rate
of .75 of 1% of the average daily net assets of the Class B shares and an annual
distribution and service fee which is currently being charged at the rate of .75
of 1% of the average daily net assets of the Class C shares. The Distributor
incurs the expense of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which is reimbursed or paid for by
the Fund. See "How the Fund is Managed--Distributor" at page 22.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
investment requirements. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How to
Buy Shares of the Fund" at page 28 and "Shareholder Guide--Shareholder Services"
at page 39.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at NAV without any sales charge. See "How the Fund
Values its Shares" at page 24 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 28.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
o Class A Shares: Sold with an initial sales charge of up to 3% of the
offering price.
o Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 3%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within four years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B
shares will automatically convert to Class A shares (which
are subject to lower ongoing distribution-related expenses)
approximately five years after purchase.
o Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
o Class Z Shares: Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not subject
to any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 29.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
HOW DO I SELL MY SHARES?
You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 33.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about selling their
Class Z shares.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net
investment income and make distributions of any net capital gains at least
annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. The amount of income available for
distribution to shareholders will be affected by any foreign currency gains or
losses generated by the Fund upon the disposition of debt securities denominated
in a foreign currency and by certain hedging activities of the Fund. See "Taxes,
Dividends and Distributions" at page 25.
- --------------------------------------------------------------------------------
4
<PAGE>
<TABLE>
=====================================================================================================================
FUND EXPENSES
=====================================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) ...................... 3% None None None
Maximum Sales Load Imposed on
Reinvested Dividends ................. None None None None
Maximum Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower) .................. None 3% during the first year, 1% on None
decreasing by 1% annually redemptions
to 1% in the third made within one
and fourth years and year of purchase
0% in the fifth year*
Redemption Fees ....................... None None None None
Exchange Fee .......................... None None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees ....................... .75% .75% .75% .75%
12b-1 Fees (After Reduction) .......... .15%++ .75% .75%++ None
Other Expenses ........................ .51% .51% .51% .51%
---- ---- ---- ----
Total Fund Operating Expenses
(After Reduction) .................... 1.41% 2.01% 2.01% 1.26%
==== ==== ==== ====
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class A ............................................. $44 $73 $105 $194
Class B ............................................. $50 $73 $108 $198
Class C ............................................. $30 $63 $108 $234
Class Z ............................................. $13 $40 $ 69 $152
You would pay the following expenses on the same
investment, assuming no redemption:
Class A ............................................. $44 $73 $105 $194
Class B ............................................. $20 $63 $108 $213
Class C ............................................. $20 $63 $108 $234
Class Z ............................................. $13 $40 $ 69 $152
The above example is based on data for the Fund's fiscal year ended December 31, 1997. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor in
the Fund will bear, whether directly or indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" include operating expenses of the Fund, such as Directors' and
professional fees, registration fees, reports to shareholders and transfer agency and custodian (domestic and
foreign) fees.
- --------------
* Class B shares will automatically convert to Class A shares approximately five years after purchase. See
"Shareholder Guide--Conversion Feature--Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc., the aggregate initial sales charges,
deferred sales charges and asset-based sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on each class of the Fund rather than on a
per shareholder basis. Therefore, long-term shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that the Fund may pay up to .30 of 1% and
1% per annum of average daily net assets of the Class A and Class C shares, respectively, the Distributor has
agreed to limit its distribution fee with respect to Class A and Class C shares of the Fund to .15 of 1% and .75
of 1% of the average daily net assets of the Class A and Class C shares, respectively, for the fiscal year ending
December 31, 1998. Total Fund Operating Expenses without such limitation would be 1.56% for Class A shares and
2.26% for Class C shares. See "How the Fund is Managed--Distributor."
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
====================================================================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
====================================================================================================================================
The following financial highlights with respect to each of the five years in the period ended December 31, 1997, have been audited
by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the Statement of Additional Information. The financial
highlights contain selected data for a Class A share of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. Further performance information is contained in the annual report, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TEN MONTHS MAY 26,
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED FEBRUARY 28/29, 1988(B) TO
------------------------------------------------DECEMBER 31,----------------------------FEBRUARY 28,
1997(d) 1996 1995(d) 1994 1993 1992(e) 1992(f) 1991(f) 1990(f) 1989(f)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period ................ $ 8.34 $ 8.30 $ 7.32 $ 8.43 $ 7.77 $ 8.39 $ 8.79 $ 8.56 $ 8.93 $ 9.30
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ...... .54 .56 .52 .50 .59 .61 .71 .74 .73 .59
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions ............. (.18) .33 1.20 (1.09) .63 (.36) (.36) .35 (.10) (.26)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations ............. .36 .89 1.72 (.59) 1.22 .25 .35 1.09 .63 .33
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income ........ (.54) (.56) (.52) (.29) (.48) (.59) (.71) (.74) (.73) (.59)
Distributions in excess of
net investment income .... (.25) (.29) (.22) -- -- -- -- -- -- --
Distributions from
capital gains ............ -- -- -- (.01) (.08) (.28) -- -- -- --
Tax return of capital
distributions ............ -- -- -- (.22) -- -- (.04) (.12) (.27) (.09)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions ...... (.79) (.85) (.74) (.52) (.56) (.87) (.75) (.86) (1.00) (.68)
Capital charge resulting
from the issuance of
Fund shares .............. -- -- -- -- -- -- -- -- -- (.02)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end
of period ................ $ 7.91 $ 8.34 $ 8.30 $ 7.32 $ 8.43 $ 7.77 $ 8.39 $ 8.79 $ 8.56 $ 8.93
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(c): ........... 4.42% 11.13% 24.01% (7.02)% 16.12% 3.09% 4.24% 13.49% 7.20% 3.41%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000) ............. $137,799 $165,829 $181,985 $207,153 $320,406 $378,865 $271,714 $449,178 $437,558 $456,224
Average net assets (000) ... $153,168 $169,219 $200,759 $262,882 $355,018 $331,339 $399,714 $437,752 $455,386 $463,039
Ratios to average
net assets:
Expenses, including
distribution fees ...... 1.41% 1.40% 1.40% 1.46% 1.41% 1.30%(a) 1.20% 1.04% 1.07% .97%(a)
Expenses, excluding
distribution fees ...... 1.26% 1.25% 1.25% 1.31% 1.26% 1.15%(a) 1.15% 1.04% 1.07% .97%(a)
Net investment income .... 6.62% 6.55% 6.09% 6.04% 7.42% 9.08%(a) 8.43% 8.61% 8.16% 8.54%(a)
Portfolio turnover rate .... 40% 45% 220% 554% 361% 201% 170% 250% 231% 358%
Total debt outstanding at
end of period (000) ...... -- -- -- -- -- -- -- $ 20,240 $ 27,600 $ 34,960
Asset coverage(g) .......... -- -- -- -- -- -- -- $ 23,193 $ 16,854 $ 14,050
- ----------------
(a) Annualized.
(b) Commencement of investment operations.
(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) The Fund changed its fiscal year end to December 31.
(f) During these periods, the Fund operated as a closed-end investment company. Effective October 7, 1991, the Fund commenced
operations as an open-end investment company. Accordingly, historical expenses and ratios of expenses to average net assets
are not necessarily indicative of future expenses and related ratios.
(g) Per $1,000 of debt outstanding.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
====================================================================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
====================================================================================================================================
The following financial highlights with respect to each of the five years in the period ended December 31, 1997, have been
audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the Statement of Additional Information. The financial
highlights contain selected data for a Class B share of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. Further performance information is contained in the annual report, which may
be obtained without charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
JANUARY 15,
TEN MONTHS 1992(b)
YEAR ENDED DECEMBER 31, ENDED THROUGH
---------------------------------------------------------- DECEMBER 31, FEBRUARY 29,
1997(d) 1996 1995(d) 1994 1993 1992(e) 1992
------- ------- ------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period .......................... $ 8.34 $ 8.31 $ 7.33 $ 8.44 $ 7.79 $ 8.40 $ 8.43
------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ................ .50 .53 .47 .45 .54 .57 .08
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions .............. (.18) .30 1.20 (1.09) .63 (.35) (.03)
------- ------- ------- ------- ------- ------- ------
Total from investment operations .... .32 .83 1.67 (.64) 1.17 .22 .05
------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (.50) (.53) (.47) (.26) (.44) (.55) (.08)
Distributions in excess of net
investment income .................. (.24) (.27) (.22) -- -- -- --
Distributions from capital gains ..... -- -- -- (.01) (.08) (.28) --
Tax return of capital distributions .. -- -- -- (.20) -- -- --
------- ------- ------- ------- ------- ------- ------
Total distributions ................ (.74) (.80) (.69) (.47) (.52) (.83) (.08)
------- ------- ------- ------- ------- ------- ------
Net asset value, end of period ....... $ 7.92 $ 8.34 $ 8.31 $ 7.33 $ 8.44 $ 7.79 $ 8.40
======= ======= ======= ======= ======= ======= ======
TOTAL RETURN(c): ..................... 3.80% 10.36% 23.25% (7.69)% 15.29% 2.70% 0.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ...... $ 8,896 $12,987 $17,317 $22,906 $39,440 $33,500 $1,049
Average net assets (000) ............. $11,377 $15,491 $19,336 $31,835 $36,197 $18,358 $ 456
Ratios to average net assets:
Expenses, including
distribution fees................. 2.01% 2.00% 2.00% 2.07% 2.01% 1.90%(a) 1.03%(a)
Expenses, excluding
distribution fees................. 1.26% 1.25% 1.25% 1.31% 1.26% 1.15%(a) .28%(a)
Net investment income .............. 6.04% 5.94% 5.49% 5.44% 6.67% 8.54%(a) 9.43%(a)
Portfolio turnover rate............... 40% 45% 220% 554% 361% 201% 170%
- ----------------
(a) Annualized.
(b) The Fund commenced a public offering of Class B shares on January 15, 1992. Accordingly, historical expenses and ratios to
average net assets of Class B shares are not necessarily indicative of future expenses and related ratios of Class B shares.
See "How the Fund is Managed--Distributor."
(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) The Fund changed its fiscal year end to December 31.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
======================================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)
======================================================================================================
The following financial highlights have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This information should be read in conjunction with
the financial statements and notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class C share of common stock outstanding, total
return, ratios to average net assets and other supplemental data for the periods indicated. Further
performance information is contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<CAPTION>
- ------------------------------------------------------------------------------------------------------
AUGUST 1,
1994(b)
YEAR ENDED DECEMBER 31, THROUGH
--------------------------- DECEMBER 31,
1997(d) 1996 1995(d) 1994
----- ----- ----- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................ $8.34 $8.31 $7.33 $7.69
----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income ....................................... .50 .53 .47 .14
Net realized and unrealized gain (loss) on
investment and foreign currency transactions ............ (.18) .30 1.20 (.32)
----- ----- ----- -----
Total from investment operations .......................... .32 .83 1.67 (.18)
----- ----- ----- -----
LESS DISTRIBUTIONS
Dividends from net investment income ........................ (.50) (.53) (.47) (.10)
Distributions in excess of net investment income ............ (.24) (.27) (.22) --
Tax return of capital distributions ......................... -- -- -- (.08)
----- ----- ----- -----
Total distributions ....................................... (.74) (.80) (.69) (.18)
----- ----- ----- -----
Net asset value, end of period .............................. $7.92 $8.34 $8.31 $7.33
===== ===== ===== =====
TOTAL RETURN(C): ............................................ 3.80% 10.36% 23.25% (2.44)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ............................. $ 198 $ 190 $ 13 $ 193(e)
Average net assets (000) .................................... $ 213 $ 110 $ 11 $ 197(e)
Ratios to average net assets:
Expenses, including distribution fees ..................... 2.01% 2.00% 2.00% 1.05%(a)
Expenses, excluding distribution fees ..................... 1.26% 1.25% 1.25% .30%(a)
Net investment income ..................................... 6.25% 6.02% 5.49% 3.30%(a)
Portfolio turnover rate ..................................... 40% 45% 220% 554%
- ------------
(a) Annualized.
(b) Commencement of offering of Class C shares.
(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.
- ------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
=====================================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
=====================================================================================================
The following financial highlights have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This information should be read in conjunction with
the financial statements and notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class Z share of common stock outstanding, total
return, ratios to average net assets and other supplemental data for the periods indicated. Further
performance information is contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<CAPTION>
- -----------------------------------------------------------------------------------------------------
SEPTEMBER 13,
YEAR ENDED 1996(a)
DECEMBER 31, THROUGH
1997 DECEMBER 31, 1996
------------ -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................ $ 8.34 $8.39
------ -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income ....................................... .55 .32
Net realized and unrealized gain (loss) on
investment and foreign currency transactions .............. (.18) .12
------ -----
Total from investment operations ........................ .37 .44
------ -----
LESS DISTRIBUTIONS
Dividends from net investment income ........................ (.55) (.32)
Distributions in excess of net investment income ............ (.25) (.17)
------ -----
Total distributions ..................................... (.80) (.49)
------ -----
Net asset value, end of period .............................. $ 7.91 $8.34
====== =====
TOTAL RETURN(c): ............................................ 4.57% 5.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ............................. $2,518 $ 341
Average net assets (000) .................................... $1,668 $ 142
Ratios to average net assets:
Expenses, including distribution fees ..................... 1.26% 1.11%(b)
Expenses, excluding distribution fees ..................... 1.26% 1.11%(b)
Net investment income ..................................... 6.76% 6.94%(b)
Portfolio turnover rate ..................................... 40% 45%
- ------------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) Total return does not consider the effect of sales loads. Total return is calculated assuming a
purchase of shares on the first day and a sale on the last day of each period reported and
includes reinvestment of dividends and distributions. Total returns for periods of less than a
full year are not annualized.
- -----------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
================================================================================
HOW THE FUND INVESTS
================================================================================
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
ATTEMPT TO ACHIEVE ITS OBJECTIVE BY INVESTING PRIMARILY IN OBLIGATIONS ISSUED OR
GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES, AUTHORITIES OR
INSTRUMENTALITIES (U.S. GOVERNMENT SECURITIES) AND IN OBLIGATIONS ISSUED OR
GUARANTEED BY CERTAIN FOREIGN GOVERNMENTS, QUASI-GOVERNMENTAL ENTITIES,
GOVERNMENTAL AGENCIES, SUPRANATIONAL ENTITIES OR ANY OF THEIR POLITICAL
SUBDIVISIONS OR INSTRUMENTALITIES (FOREIGN GOVERNMENT SECURITIES). THE FUND WILL
INVEST PRIMARILY IN INVESTMENT GRADE SECURITIES (I.E., THOSE RATED IN ONE OF THE
FOUR HIGHEST RATING CATEGORIES BY MOODY'S, S&P OR ANOTHER NRSRO), OR IN
NON-RATED SECURITIES DETERMINED BY THE FUND'S INVESTMENT ADVISER TO BE OF
EQUIVALENT QUALITY. THE FUND MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN DEBT
SECURITIES RATED BELOW INVESTMENT GRADE, WITH A MINIMUM RATING OF B, BY EITHER
S&P OR MOODY'S OR COMPARABLY RATED BY ANOTHER NRSRO, OR, IF UNRATED, DEEMED TO
BE OF EQUIVALENT QUALITY BY THE INVESTMENT ADVISER. SEE "RISK FACTORS--MEDIUM
AND LOWER-RATED SECURITIES." UNDER NORMAL CIRCUMSTANCES, THE FUND INTENDS TO
MAINTAIN INVESTMENTS IN AT LEAST THREE COUNTRIES (INCLUDING THE UNITED STATES).
THE FUND WILL MAINTAIN AN AVERAGE MATURITY OF NOT MORE THAN TEN YEARS AND, IN
GENERAL, WILL NOT INVEST IN SECURITIES WITH REMAINING MATURITIES GREATER THAN
TEN YEARS. SEE "INVESTMENT OBJECTIVE AND POLICIES" IN THE STATEMENT OF
ADDITIONAL INFORMATION. FOR TEMPORARY DEFENSIVE PURPOSES, THE FUND MAY INVEST
WITHOUT LIMIT IN HIGH-QUALITY MONEY MARKET INSTRUMENTS, INCLUDING COMMERCIAL
PAPER OF DOMESTIC AND FOREIGN CORPORATIONS, CERTIFICATES OF DEPOSIT, BANKERS'
ACCEPTANCES AND OTHER OBLIGATIONS OF DOMESTIC AND FOREIGN BANKS AND SHORT-TERM
OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS INSTRUMENTALITIES
OR AGENCIES. SEE "OTHER INVESTMENTS AND INVESTMENT TECHNIQUES." THERE IS NO
ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AS WITH AN
INVESTMENT IN ANY MUTUAL FUND, AN INVESTMENT IN THIS FUND CAN DECREASE IN VALUE
AND YOU CAN LOSE MONEY.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY OF THE FUND.
FUNDAMENTAL POLICIES MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A
MAJORITY OF THE FUND'S OUTSTANDING VOTING SECURITIES AS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND
POLICIES THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
The average maturity of the Fund's portfolio will be actively managed in
light of market conditions and trends. Generally, when the investment adviser
expects interest rates to rise, the average maturity of the Fund's portfolio
will be shortened. Conversely, when the investment adviser expects interest
rates to fall, the average maturity of the Fund's portfolio will be lengthened.
The investment adviser believes that this strategy will enable the Fund to
preserve capital while seeking to provide high current income. Intermediate-term
U.S. and Foreign Government securities generally are more stable and less
susceptible to principal loss than longer-term securities. While
intermediate-term securities in most cases offer lower yields than securities
with longer maturities, the Fund intends to enhance return by writing options on
U.S. and Foreign Government securities. Option writing can result in the loss of
principal under certain market conditions. See "Other Investments and Investment
Techniques--Hedging and Return Enhancement Strategies." The Fund will, to a
limited extent, also be permitted to acquire other debt securities of U.S.
corporate issuers, securities issued in private placements, convertible
securities, preferred stock, collateralized mortgage obligations and warrants
accompanied by debt securities.
THE FUND IS A "NON-DIVERSIFIED" INVESTMENT COMPANY AND MAY INVEST MORE THAN
5% OF ITS TOTAL ASSETS IN THE SECURITIES OF ONE OR MORE ISSUERS. INVESTMENT IN A
NON-DIVERSIFIED INVESTMENT COMPANY INVOLVES GREATER RISK THAN INVESTMENT IN A
DIVERSIFIED INVESTMENT COMPANY BECAUSE A LOSS RESULTING FROM THE DEFAULT OF A
SINGLE ISSUER MAY REPRESENT A GREATER PORTION OF THE TOTAL ASSETS OF A
NON-DIVERSIFIED PORTFOLIO.
10
<PAGE>
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund will invest in U.S. Treasury securities,
including Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. Government and,
as such, are backed by the "full faith and credit" of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund will invest in securities issued by agencies of the
U.S. Government or instrumentalities of the U.S. Government. These obligations,
including those which are guaranteed by Federal agencies or instrumentalities,
may or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association (GNMA), the Farmers
Home Administration and the Small Business Administration are backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest which are not backed by the full faith and credit of the United States
include obligations such as those issued by the Federal Home Loan Banks, the
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association, the Student Loan Marketing Association, Resolution Funding
Corporation and the Tennessee Valley Authority, each of which has the right to
borrow from the U.S. Treasury to meet its obligations, and obligations of the
Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency. FHLMC investments may include
collateralized mortgage obligations. See "Other Investments and Investment
Techniques" below.
Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by the Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are commonly
referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities, including
those which represent undivided ownership interests in pools of mortgages. The
U.S. Government or the issuing agency or instrumentality guarantees the payment
of interest on and principal of these securities. However, the guarantees do not
extend to the yield or value of the securities nor do the guarantees extend to
the yield or value of the Fund's shares. These securities are in most cases
"pass-through" instruments, through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees. Because the prepayment characteristics of the underlying
mortgages vary, it is not possible to predict accurately the average life of a
particular issue of pass-through certificates. Mortgage-backed securities are
often subject to more rapid repayment than their stated maturity date would
indicate as a result of the pass-through of prepayments of principal on the
underlying mortgage obligations. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected to
accelerate. 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 could result in capital losses.
The Fund may also invest in mortgage pass-through securities where all
interest payments go to one class of holders (Interest Only Securities or IOs)
and all principal payments go to a second class of holders (Principal Only
Securities or POs). These securities are commonly referred to as mortgage-backed
securities strips or MBS strips. The yields to maturity on IOs are very
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may not fully recoup its initial investment in these securities. Conversely, if
the underlying mortgage assets experience less than
11
<PAGE>
anticipated prepayments of principal, the yield on POs could be materially
adversely affected. The Fund will only invest in MBS strips rated Aaa by Moody's
or AAA by S&P. See "Investment Objective and Policies--U.S. Government
Securities--Mortgage-Related Securities Issued by U.S. Government
Instrumentalities" in the Statement of Additional Information.
The Fund will invest in both adjustable rate mortgage securities (ARMs),
which are pass-through mortgage securities collateralized by adjustable rate
mortgages, and fixed-rate mortgage securities (FRMs), which are collateralized
by fixed-rate mortgages. See "Investment Objective and Policies" in the
Statement of Additional Information.
The values of U.S. Government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. Under adverse
market or economic conditions, the secondary market for these securities may not
be as liquid as the market for other mortgage-related securities and it may be
difficult for the investment adviser to sell these securities or the investment
adviser might have to sell these securities at a loss. During periods of falling
U.S. interest rates, the values of U.S. Government securities generally rise
and, conversely, during periods of rising interest rates, the values of such
securities generally decline. The magnitude of these fluctuations will generally
be greater for securities with longer-term maturities.
ZERO COUPON BONDS. The Fund may invest up to 5% of its total assets in zero
coupon securities. Zero coupon bonds are purchased at a discount from the face
amount because the buyer receives only the right to receive a fixed payment on a
certain date in the future and does not receive any periodic interest payments.
The effect of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but also, in
effect, on all discount accretion during the life of the obligations. This
implicit investment of earnings at the same rate eliminates the risk of being
unable to reinvest distributions at a rate as high as the implicit yield on the
zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are comparable securities which pay interest
currently, which fluctuation increases the longer the period to maturity.
Although zero coupon securities pay no interest to holders prior to maturity,
interest on these securities is reported as income to the Fund and distributed
to its shareholders. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities. The
Fund will not be able to purchase additional income-producing securities with
cash used to make such distributions and consequently its current income may be
reduced.
FOREIGN GOVERNMENT SECURITIES. Foreign Government securities include debt
securities issued or guaranteed, as to payment of principal and interest, by
governments, quasi-governmental entities, governmental agencies, supranational
entities and other governmental entities (collectively, Government Entities).
The Fund may invest in the Foreign Government securities of developed countries
and developing or emerging market countries that the investment adviser believes
to be stable. Foreign Government securities may be denominated in U.S. dollars
or in foreign currencies. The Fund's investments may include Foreign Government
securities of the countries named below, among others:
<TABLE>
<CAPTION>
AMERICAS ASIA AND PACIFIC EUROPE
- --------- ------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C>
Argentina Australia New Zealand Austria Hungary Portugal
Canada China Pakistan Belgium Ireland Spain
Chile Hong Kong Philippines Czech Republic Israel Sweden
Colombia India Singapore Denmark Italy Switzerland
Mexico Indonesia South Korea Finland The Netherlands Turkey
Peru Japan Taiwan France Luxembourg United Kingdom
Uruguay Korea Thailand Germany Norway
Venezuela Malaysia Greece Poland
</TABLE>
12
<PAGE>
A supranational entity is an entity constituted by the national governments
of several countries to promote economic development. Examples of such
supranational entities include, among others, the World Bank (International Bank
for Reconstruction and Development), the European Investment Bank and the Asian
Development Bank. Debt securities of quasi-governmental entities are issued by
entities owned by a national, state, or equivalent government or are obligations
of a political unit that are not backed by the national government's "full faith
and credit" and general taxing powers. Examples of quasi-government issuers
include, among others, the Province of Ontario and the City of Stockholm.
Foreign Government securities also include debt securities of Government
Entities denominated in European Currency Units. A European Currency Unit
represents specified amounts of the currencies of certain of the twelve member
states of the European Community. Foreign Government securities also include
mortgage-backed securities issued by Government Entities including
quasi-governmental entities and the remaining maturities of such securities
shall be treated by the Fund in the same manner as mortgage-backed U.S.
Government securities.
The Fund may invest in component parts of debt securities of foreign
governments or semi-governmental entities, namely either the corpus (principal)
of such obligations or one or more of the interest payments scheduled to be paid
on such obligations. These securities may take the form of (i) obligations from
which the interest coupons have been stripped (principal only); (ii) the
interest coupons that are stripped (interest only); (iii) book-entries at a bank
representing ownership of obligation components; or (iv) receipts evidencing the
component parts (corpus or coupons) of obligations that have not actually been
stripped. Such receipts evidence ownership of component parts of obligations
(corpus or coupons) purchased by a third party (typically an investment banking
firm) and held on behalf of the third party in physical or book-entry form by a
major commercial bank or trust company pursuant to a custody agreement with the
third party. The Fund may also invest in custodial receipts held by a third
party. Stripped securities are, in general, more sensitive to interest rate
changes than securities that have not been stripped. Combined with investments
in similar U.S. Government securities, the Fund will not invest more than 10% of
its total assets in such securities.
RETURNS AVAILABLE FROM FOREIGN CURRENCY DENOMINATED DEBT INSTRUMENTS CAN BE
ADVERSELY AFFECTED BY CHANGES IN EXCHANGE RATES. The Fund's investment adviser
believes that the use of foreign currency hedging techniques, including
"cross-currency hedges," may assist, under certain conditions, in helping to
protect against declines in the U.S. dollar value of income available for
distribution to shareholders and declines in the net asset value of the Fund's
shares resulting from adverse changes in currency exchange rates. For example,
the return available from securities denominated in a particular foreign
currency would diminish in the event the value of the U.S. dollar increased
against such currency. Such a decline could be partially or completely offset by
an increase in value of a cross-currency hedge involving a forward exchange
contract to sell a different foreign currency, where such contract is available
on terms more advantageous to the Fund than a contract to sell the currency in
which the position being hedged is denominated. Cross-currency hedges can,
therefore, under certain conditions, provide protection of net asset value in
the event of a general rise in the U.S. dollar against foreign currencies.
However, there can be no assurance that the Fund will be able to engage in
cross-currency hedging or that foreign exchange rate relationships will be
sufficiently predictable to enable the investment adviser to employ
cross-currency hedging techniques successfully. A cross-currency hedge cannot
protect against exchange rate risks perfectly, and if the investment adviser is
incorrect in its judgment of future exchange rate relationships, the Fund could
be in a less advantageous position than if such a hedge had not been
established.
The Fund may invest without limitation in commercial paper and other
instruments which are indexed to certain specific foreign currency exchange
rates. The terms of such instruments provide that the principal amount is
adjusted upwards or downwards (but not below zero) at maturity to reflect
changes in the exchange rate between two currencies while the obligation is
outstanding. The Fund will purchase such an instrument with the currency in
which it is denominated and, at maturity, will receive interest and principal
payments thereon in that currency, but the amount of principal payable by the
issuer at maturity will change in proportion to the change (if any) in the
exchange rate between the two specified currencies between the date the
instrument is issued and the date the instrument matures. While such
13
<PAGE>
instruments entail the risk of loss of principal, the potential for realizing
gains as a result of changes in foreign currency exchange rates enables the Fund
to hedge (or cross-hedge) against a decline in the U.S. dollar value of
investments denominated in foreign currencies while providing an attractive
money market rate of return.
The Fund will not normally invest in securities denominated in a particular
foreign currency if, immediately thereafter, securities denominated in such
currency would exceed 30% of the total assets of the Fund unless, in the
judgment of the investment adviser, the particular currency appears likely to
appreciate significantly relative to the U.S. dollar. However, the Fund may
invest up to 50% of its total assets in securities denominated in Canadian,
Japanese, British or German currencies. The Fund will not invest more than 25%
of its total assets in securities issued or guaranteed by Government Entities
associated with any single foreign country, which shall be deemed to be
"industries." The Government Entities of national and local governments will be
considered separate industries. See "Investment Restrictions" in the Statement
of Additional Information.
RISK FACTORS
RISK FACTORS ON FOREIGN INVESTMENTS
INVESTING IN SECURITIES ISSUED BY FOREIGN GOVERNMENTS INVOLVES
CONSIDERATIONS AND POSSIBLE RISKS NOT TYPICALLY ASSOCIATED WITH INVESTING IN
OBLIGATIONS ISSUED BY THE U.S. GOVERNMENT AND DOMESTIC CORPORATIONS. The values
of foreign investments are affected by changes in currency rates or exchange
control regulations, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic or monetary policy (in
this country or abroad) or changed circumstances in dealings between nations.
Costs are incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions are generally higher than in the United
States, and foreign securities markets may be less liquid, more volatile and
less subject to governmental supervision than in the United States. Investments
in foreign countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.
The Fund will invest in Foreign Government securities denominated in
foreign currencies. A change in the value of any such currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of the
Fund's assets denominated in that currency. These changes will also affect the
Fund's yield, income and distributions to shareholders. In addition, although
the Fund will receive income in such currencies, the Fund will be required to
compute and distribute its income in U.S. dollars. Therefore, if the exchange
rate for any such currency decreases after the Fund's income has been accrued
and translated into U.S. dollars, the Fund could be required to liquidate
portfolio securities to make such distributions. Similarly, if an exchange rate
for any such currency decreases between the time the Fund incurs expenses in
U.S. dollars and the time such expenses are paid, the amount of such currency
required to be converted into U.S. dollars in order to pay such expenses in U.S.
dollars will be greater than the equivalent amount of such currency at the time
such expenses were incurred. Under the Internal Revenue Code of 1986, as amended
(the Internal Revenue Code), changes in an exchange rate which occur between the
time the Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities will result in foreign
exchange gains or losses that increase or decrease distributable net investment
income. Similarly, dispositions of certain debt securities (by sale, at maturity
or otherwise) at a U.S. dollar amount that is higher or lower than the Fund's
original U.S. dollar cost may result in foreign exchange gains or losses, which
will increase or decrease distributable net investment income. The Fund will
invest only in foreign currency denominated Foreign Government securities that
are freely convertible into U.S. dollars without legal restriction at the time
of investment. Gains and losses on security and currency transactions cannot be
predicted. This fact coupled with the different tax and accounting treatment of
certain currency gains and losses increases the likelihood of distributions in
whole or in part constituting a return of capital to shareholders.
The Fund's interest income from Foreign Government securities issued in
local markets may, in some cases, be subject to applicable withholding taxes
imposed by governments in such markets. The Fund may sell a foreign security it
owns prior to maturity in order to avoid foreign withholding taxes on dividend
and interest income and buy back the
14
<PAGE>
same security for a future settlement date. See "How the Fund Invests--Other
Investments and Investment Techniques--When-Issued and Delayed Delivery
Securities." Interest on Foreign Government securities is not generally subject
to foreign withholding taxes. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
Shareholders should be aware that investing in the fixed-income markets of
emerging market countries involves exposure to economies that are generally less
diverse and mature, and to political systems which can be expected to have less
stability than those of developed countries. Historical experience indicates
that the markets of developing countries have been more volatile than the
markets of developed countries. The risks associated with investments in foreign
securities, described above, may be greater with respect to investments in
developing countries.
MEDIUM AND LOWER-RATED SECURITIES
The Fund may invest in medium-grade securities (i.e., rated Baa by Moody's
or BBB by S&P or comparably rated by another NRSRO, or if unrated, deemed to be
of equivalent quality by the investment adviser) and up to 10% of its total
assets in lower-rated securities (i.e., rated lower than Baa by Moody's or lower
than BBB by S&P or comparably rated by another NRSRO, or if unrated, deemed to
be of equivalent quality by the investment adviser). However, the Fund will not
purchase a security rated lower than B by Moody's or S&P or comparably rated by
another NRSRO, or if unrated, deemed to be of equivalent quality by the
investment adviser. Securities rated Baa by Moody's, although considered
investment grade, possess speculative characteristics, and changes in economic
or other conditions are more likely to impair the ability of issuers of these
securities to make interest and principal payments than is the case with respect
to issuers of higher-grade bonds.
Generally, lower-rated securities and unrated securities of comparable
quality, commonly referred to as "junk" bonds (i.e., securities rated lower than
Baa by Moody's or BBB or S&P), offer a higher current yield than is offered by
higher-rated securities, but also (i) will likely have some quality and
protective characteristics that, in the judgment of the rating organizations,
are outweighed by large uncertainties or major risk exposures to adverse
conditions and (ii) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation. The market values of certain of these securities also tend to be
more sensitive to individual issuer developments and changes in economic
conditions than higher-quality bonds. In addition, medium and lower-rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower-rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. The investment
adviser, under the supervision of the Manager and the Board of Directors, in
evaluating the creditworthiness of an issuer, whether rated or unrated, takes
various factors into consideration, which may include, as applicable, the
issuer's financial resources, its sensitivity to economic conditions and trends
and regulatory matters.
In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for the Fund to purchase and may also have the effect
of limiting the ability of the Fund to sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by the Fund may decline proportionately
more than a portfolio consisting of higher-rated securities. If the Fund
experiences unexpected net redemptions, it may be forced to sell its
higher-rated
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bonds, resulting in a decline in the overall credit quality of the
securities held by the Fund and increasing the exposure of the Fund to the risks
of lower-rated securities. Investments in zero coupon bonds may be more
speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of these securities by the Fund, but
the investment adviser will consider this event in its determination of whether
the Fund should continue to hold the securities.
During the year ended December 31, 1997, the monthly dollar weighted
average ratings of the debt obligations held by the Fund expressed as a
percentage of the Fund's total investments were as follows:
PERCENTAGE OF
TOTAL
RATING INVESTMENTS
------ -------------
AAA/Aaa = 66.38%
AA/Aa = 8.02
A/A = 4.90
BBB/Baa = 11.39
BB/Ba = 7.15
B/B = 1.04
Unrated = 1.11
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
In addition to U.S. Government securities and Foreign Government
securities, the Fund is permitted to make the investments described below. Under
normal circumstances, these investments will represent no more than 35% of the
total assets of the Fund.
The Fund is permitted to invest (i) up to 20% of its total assets in any
combination of debt securities of U.S. corporate issuers that are rated Baa or
better by Moody's or BBB or better by S&P, (ii) up to 10% of its total assets in
convertible securities and (iii) up to 10% of its total assets in common shares
and warrants to purchase common shares when such shares or warrants are
accompanied by debt securities. See "Risk Factors--Medium and Lower-Rated
Securities" above. Bonds 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. 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 weakened capacity to pay
interest and repay principal for debt in this category than for debt in higher
rated categories.
The Fund may invest in obligations of foreign banks and foreign branches of
U.S. banks only if, after giving effect to such investment, all such investments
would constitute less than 20% of the Fund's total assets. This limitation shall
not be construed to apply to any forward commitments or options on foreign
currencies purchased by the Fund from any such banks for hedging purposes as
described below under "Hedging and Return Enhancement Strategies." These
investments may be subject to certain risks, including future political and
economic developments, the possible imposition of withholding taxes on interest
income, the seizure or nationalization of foreign deposits and foreign exchange
controls or other restrictions. In addition, there may be less publicly
available information about a foreign bank or foreign branch of a U.S. bank than
about a domestic bank and such entities may not be subject to the same
accounting, auditing and financial recordkeeping standards and requirements as
domestic banks.
The Fund may also purchase collateralized mortgage obligations (CMOs) if,
after giving effect to such investment, all such investments would constitute
less than 10% of the Fund's total assets. CMOs are debt obligations
collateralized by
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mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by GNMA, FNMA or FHLMC Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as Mortgage Assets). Multi-class
pass-through securities are equity interests in a trust composed of Mortgage
Assets. Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multi-class pass-through securities. CMOs
may be issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special-purpose subsidiaries
of the foregoing. The issuer of a series of CMOs may elect to be treated as a
Real Estate Mortgage Investment Conduit (REMIC). All future references to CMOs
include REMICs and multi-class pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on mortgage-backed securities. CMOs and REMICs
issued by an agency or instrumentality of the U.S. Government are considered
U.S. Government securities for purposes of this Prospectus.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at least
100% of the market value of the securities loaned which are maintained in a
segregated account pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower. As a matter of fundamental policy,
the Fund cannot lend more than 30% of the value of its total assets. The Fund
may pay reasonable administration and custodial fees in connection with a loan.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund's Custodian will maintain, in a segregated account of the Fund, cash or
other liquid assets having a value equal to or greater than the Fund's purchase
commitments. The securities so purchased are subject to market fluctuation and
no interest accrues to the purchaser during the period between purchase and
settlement. At the time of delivery of the securities, the value may be more or
less than the purchase price and an increase in the percentage of the Fund's
assets committed to the purchase of securities on a when-issued or delayed
delivery basis may increase the volatility of the Fund's net asset value.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original
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<PAGE>
purchase, 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 repurchase agreement.
The Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of instruments declines, the Fund will
require additional collateral. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may incur a
loss. The Fund participates in a joint repurchase account with other investment
companies managed by PIFM pursuant to an order of the Commission.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (computed at
the time the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions. During periods when the Fund has
borrowed for temporary, extraordinary or emergency purposes or for the clearance
of transactions, the Fund may pursue its investment objective by purchasing
additional securities which can result in increased volatility of the Fund's net
asset value. The Fund will not borrow to take advantage of investment
opportunities. See "Additional Investment Policies--Borrowing" in the Statement
of Additional Information. The Fund may pledge up to 20% of its total assets to
secure these borrowings.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. The Fund's investment in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. Repurchase agreements subject to demand are
deemed to have a maturity equal to the applicable notice period.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies currently include the use
of options, forward currency exchange contracts and futures contracts and
options thereon. The Fund's ability to use these strategies may be limited by
market conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Additional Investment
Policies" and "Taxes, Dividends and Distributions" in the Statement of
Additional Information. New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON NATIONAL SECURITIES EXCHANGES OR IN
THE OVER-THE-COUNTER MARKET TO ATTEMPT TO ENHANCE RETURN OR TO HEDGE ITS
PORTFOLIO INVESTMENTS. THESE OPTIONS WILL BE ON DEBT SECURITIES, FINANCIAL
INDICES (E.G., S&P 500), U.S. GOVERNMENT SECURITIES (LISTED ON AN EXCHANGE AND
OVER-THE-COUNTER, I.E., PURCHASED OR SOLD THROUGH U.S. GOVERNMENT SECURITIES
DEALERS), FOREIGN GOVERNMENT SECURITIES AND FOREIGN CURRENCIES. The Fund may
write covered put and call options to
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<PAGE>
attempt to generate additional income through the receipt of premiums, purchase
put options in an effort to protect the value of a security that it owns against
a decline in market value and purchase call options in an effort to protect
against an increase in price of securities (or currencies) it intends to
purchase. The Fund may also purchase put and call options to offset previously
written put and call options of the same type. See "Additional Investment
Policies--Options on Securities" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY
SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE).
The writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, it gives up the potential for gain on the underlying securities or
currency in excess of the exercise price of the option during the period that
the option is open. There is no limitation on the amount of call options the
Fund may write.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A WRITTEN option is covered if,
as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or currency or (ii) maintains in a
segregated account cash or other liquid assets in an amount equal to or greater
than its obligation under the option. Under this first circumstance, the Fund's
losses are limited because it owns the underlying security; under the second
circumstance, in the case of a written call option, the Fund's losses are
potentially unlimited. See "Additional Investment Policies--Additional Risks of
Options, Futures Contracts and Options on Futures Contracts" in the Statement of
Additional Information. There is no limitation on the amount of covered call
options the Fund may write.
FORWARD CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. The Fund may enter into such contracts on a spot, i.e.,
cash, basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract. See "Additional Investment Policies--Forward Currency Exchange
Contracts" in the Statement of Additional Information.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in or convertible into that currency or in a different currency (cross
hedge). Although there are no limits on the number of forward contracts which
the Fund may enter into, the Fund may not position hedge (including cross
hedges) with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of foreign
currency) of the securities being hedged. See "Additional Investment
Policies--Forward Currency Exchange Contracts" in the Statement of Additional
Information.
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<PAGE>
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING AND RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN
ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC).
THESE FUTURES CONTRACTS AND RELATED OPTIONS WILL BE ON DEBT SECURITIES,
FINANCIAL INDICES, U.S. GOVERNMENT SECURITIES, FOREIGN GOVERNMENT SECURITIES AND
FOREIGN CURRENCIES. THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. A financial futures contract is an
agreement to purchase or sell an agreed amount of securities or currencies at a
set price for delivery in the future.
THE FUND MAY NOT PURCHASE OR SELL FUTURES CONTRACTS AND RELATED OPTIONS TO
ATTEMPT TO ENHANCE RETURN IF IMMEDIATELY THEREAFTER THE SUM OF THE AMOUNT OF
INITIAL MARGIN DEPOSITS ON THE FUND'S EXISTING FUTURES AND OPTIONS ON FUTURES
AND PREMIUMS PAID FOR SUCH RELATED OPTIONS WOULD EXCEED 5% OF THE LIQUIDATION
VALUE OF THE FUND'S TOTAL ASSETS. THE FUND MAY PURCHASE AND SELL FUTURES
CONTRACTS AND RELATED OPTIONS WITHOUT LIMITATION, FOR BONA FIDE HEDGING PURPOSES
IN ACCORDANCE WITH REGULATIONS OF THE CFTC (I.E., TO REDUCE CERTAIN RISKS OF ITS
INVESTMENTS). THE TOTAL CONTRACT VALUE OF ALL FUTURES CONTRACTS SOLD WILL NOT
EXCEED THE TOTAL MARKET VALUE OF THE FUND'S INVESTMENTS.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than a specified futures contract,
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of a futures contract
or related options may vary, either up or down, from the previous day's
settlement price. These daily limits may restrict the Fund's ability to purchase
or sell certain futures contracts or related options on any particular day.
THE FUND'S ABILITY TO ENTER INTO OR CLOSE OUT FUTURES CONTRACTS AND OPTIONS
THEREON IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. See "Additional Investment
Policies--Options on Futures Contracts" and "Taxes, Dividends and Distributions"
in the Statement of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS ITS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. If
the investment adviser's prediction of movements in the direction of the
securities, foreign currency or interest rate markets is inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of options, foreign currency
and futures contracts and options on futures contracts and foreign currencies
include (1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; and (6) the possible inability of the Fund to purchase
or sell a security at a time that otherwise would be favorable for it to do so,
or the possible need for the Fund to sell a security at a disadvantageous time,
due to the need for the Fund to maintain "cover" or to segregate securities in
connection with hedging techniques. See "Taxes, Dividends and Distributions" in
the Statement of Additional Information.
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SHORT SALES AGAINST-THE-BOX
The Fund may make short sales against-the-box in which the Fund owns an
equal amount of the securities sold short or owns securities convertible into or
exchangeable, without payment of any further consideration, for securities of
the same issue as, and equal in amount to, the securities sold short.
PORTFOLIO TURNOVER AND BROKERAGE
The Fund has no fixed policy with respect to portfolio turnover; however it
is anticipated that the Fund's annual portfolio turnover rate will not 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
investment securities, excluding securities having a maturity at the date of
purchase of one year or less. While the Fund will pay commissions in connection
with its options and futures transactions, most of the securities purchased by
the Fund are generally traded on a "net" basis with dealers acting as principal
for their own accounts without a stated commission. Nevertheless, high portfolio
turnover (over 100%) may involve correspondingly greater brokerage commissions
and other transaction costs which will be borne directly by the Fund. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
================================================================================
HOW THE FUND IS MANAGED
================================================================================
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the fiscal year ended December 31, 1997, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B, Class C and
Class Z shares were 1.41%, 2.01%, 2.01% and 1.26%, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .75 OF 1%
OF THE FUND'S AVERAGE DAILY NET ASSETS. PIFM is organized in New York as a
limited liability company. For the fiscal year ended December 31, 1997, the Fund
paid management fees to PIFM of .75% of the Fund's average net assets. See
"Manager" in the Statement of Additional Information.
As of January 31, 1998, PIFM served as the manager of 42 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies, with aggregate
assets of approximately $63 billion.
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UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI), PI THROUGH A
SUBADVISORY AGREEMENT WITH PRICOA ASSET MANAGEMENT LTD. (PRICOA AND COLLECTIVELY
WITH PI, THE SUBADVISER OR THE INVESTMENT ADVISER) FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND. PI reimburses PRICOA,
and PIFM reimburses PI, for its reasonable costs and expenses incurred in
providing such services. PIFM continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and supervises
the Subadviser's performance of such services.
The portfolio is managed by J. Gabriel Irwin and Simon Wells, who head a
Global Fixed Income Group of PI. As a team, they have responsibility for the
day-to-day management of the Fund's portfolio. Messrs. Irwin and Wells have been
officers of PRICOA since August 1997 and have been employed by PI and
Prudential-Bache Securities (U.K.) Inc. since April 1995. Messrs. Irwin and
Wells were previously employed by Smith Barney Global Capital Management Inc.,
where they worked together as Directors and senior members of the Investment
Policy Committee and managed approximately $1.5 billion in institutional and
mutual fund assets. Messrs. Irwin and Wells also serve as the portfolio managers
of Prudential Global Limited Maturity Fund, Inc., Prudential International Bond
Fund, Inc. and The Global Total Return Fund, Inc.
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company. PIC's address is Prudential Plaza, Newark, New Jersey
07102-3777. PRICOA, a subsidiary of Prudential, is a private limited company
organized under the laws of England and regulated by IMRO in the conduct of its
investment business. Its address is 115 Houndsditch, London EC3A 7BU.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND. IT IS AN
INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which is reimbursed by or paid for by the Fund. These
expenses include commissions and account servicing fees paid to, or on account
of, financial advisers of Prudential Securities and representatives of Pruco
Securities Corporation (Prusec), an affiliated broker-dealer, commissions and
account servicing fees paid to, or on account of, other broker-dealers or
financial institutions which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS A SHARES.
The
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Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of up to .25 of 1%) may not exceed .30 of 1% of
the average daily net assets of the Class A shares. The Distributor has agreed
to limit its distribution related fees payable under the Class A Plan to .15 of
1% of the average daily net assets of the Class A shares for the fiscal year
ending December 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY THE DISTRIBUTOR FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO .75 OF 1% AND UP TO 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to the Distributor of (i) an asset-based sales charge
of up to .75 of 1% of the average daily net assets of the Class B shares, and
(ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.75 of 1%. The Class C Plan provides for the payment to the Distributor of (i)
an asset-based sales charge of up to .75 of 1% of the average daily net assets
of the Class C shares, and (ii) a service fee of up to .25 of 1% of the average
daily net assets of the Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholder accounts. The Distributor
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending December 31, 1998. The Distributor also receives contingent
deferred sales charges from certain redeeming shareholders. See "Shareholder
Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended December 31, 1997, the Fund paid distribution
expenses of .15%, .75% and .75% of the average daily net assets of the Class A,
Class B and Class C shares, respectively. The Fund records all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund will be allocated to each such class based upon the
ratio of sales of each such class to the sales of Class A, Class B and Class C
shares of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year,
provided that a majority of the Directors of the Fund, including a majority of
the Directors who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Directors), vote annually to continue the Plan. Each Plan may be terminated at
any time by vote of a majority of the Rule 12b-1 Directors or of a majority of
the outstanding shares of the applicable class of the Fund. The Fund will not be
obligated to pay distribution and service fees incurred under any Plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons which distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS
Prudential Securities has agreed to limit its distribution fee for Class
A and Class C shares as described above under "Distributor." Fee waivers will
increase the Fund's yield and total return. See "Performance Information" in the
Statement of Additional Information and "Fund Expenses" above.
23
<PAGE>
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
================================================================================
HOW THE FUND VALUES ITS SHARES
================================================================================
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. FOR
VALUATION PURPOSES, QUOTATIONS OF FOREIGN SECURITIES IN FOREIGN CURRENCIES ARE
CONVERTED TO U.S. DOLLAR EQUIVALENTS. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. As long as the Fund declares dividends daily, the NAV of
Class A, Class B, Class C and Class Z shares will generally be the same. It is
expected, however, that the dividends will differ by approximately the amount of
the distribution and/or service fee expense accrual differential among the
classes.
24
<PAGE>
================================================================================
HOW THE FUND CALCULATES PERFORMANCE
===============================================================================
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS YIELD, AVERAGE ANNUAL TOTAL
RETURN AND AGGREGATE TOTAL RETURN IN ADVERTISEMENTS OR SALES LITERATURE. YIELD
AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. These figures are based on historical earnings and are not
intended to indicate future performance. The yield refers to the income
generated by an investment in the Fund over a one-month or 30-day period. This
income is then "annualized;" that is, the amount of income generated by the
investment during that 30-day period is assumed to be generated each 30-day
period for twelve periods and is shown as a percentage of the investment. The
income earned on the investment is also assumed to be reinvested at the end of
the sixth 30-day period. The total return shows how much an investment in the
Fund would have increased (decreased) over a specified period of time (i.e.,
one, five or ten years or since inception of the Fund) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. The aggregate total return
reflects actual performance over a stated period of time. Average annual total
return is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. Average annual total return smooths out variations in
performance and takes into account any applicable initial or contingent deferred
sales charges. Neither average annual total return nor aggregate total return
takes into account any federal or state income taxes which may be payable upon
redemption. The Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc., Morningstar Publications,
Inc., other industry publications, business periodicals and market indices. See
"Performance Information" in the Statement of Additional Information. Further
performance information is contained in the Fund's annual and semi-annual
reports to shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
================================================================================
TAXES, DIVIDENDS AND DISTRIBUTIONS
================================================================================
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition also are
treated as ordinary gain or loss. These gains or losses increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency losses exceed
other investment company taxable income during a taxable year, distributions
made by the Fund during the year would be a return of capital to you, reducing
your basis in your Fund shares.
The Fund may incur foreign income taxes in connection with some of its
foreign investments. Certain of these taxes may be credited to shareholders. The
Fund may be permitted to "pass through" to shareholders the right to take
credits against federal income taxes or deductions in respect of foreign taxes
paid by the Fund. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked to
25
<PAGE>
market" for federal income tax purposes; that is, treated as having been sold at
market value. Sixty percent of any gain or loss recognized on these "deemed
sales" and on actual dispositions may be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss. See
"Taxes, Dividends and Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS. Any dividends out of net taxable investment
income, together with distributions of net short-term gains (i.e., the excess of
net short-term capital gains over net long-term capital losses) distributed to
shareholders, will be taxable as ordinary income to the shareholder whether or
not reinvested. Certain gains or losses from fluctuations in exchange rates
(Section 988 gains or losses) will affect the amount of ordinary income the Fund
will be able to pay as dividends. See "Taxes, Dividends and Distributions" in
the Statement of Additional Information. Any net capital gains (i.e., the excess
of net long-term capital gains over net short-term capital losses) distributed
to shareholders will be taxable as long-term capital gains to the shareholders,
whether or not reinvested and regardless of the length of time a shareholder has
owned his or her shares. The maximum long-term capital gains rate for individual
shareholders for securities held between 12 and 18 months currently is 28% and
for securities held more than 18 months is 20%. The maximum tax rate for
ordinary income is 39.6%. The maximum long-term capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary income.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or in additional
shares. In addition, certain dividends declared by the Fund will be treated as
received by shareholders on December 31 of the year the dividends are declared.
This rule applies to dividends declared by the Fund in October, November or
December of a calendar year, payable to shareholders of record on a date in any
such month, if such dividends are paid during January of the following calendar
year.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to interest income, capital and currency gain, gain or
loss from Section 1256 contracts, dividend income from foreign corporations and
income from some other sources are not eligible for the corporate
dividends-received deduction. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information. Corporate shareholders should consult their
tax advisers regarding other requirements applicable to the dividends-received
deduction.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held six months or less, however, will be treated as a long-term
capital loss to the extent of any capital gain distributions received by the
shareholder. Gain or loss on shares held more than 18 months will be considered
in determining a holder's adjusted net capital gain subject to a maximum tax
rate of 20%.
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
any class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
WITHHOLDING TAXES. Under the Internal Revenue Code, the Fund is required to
withhold and remit to the U.S. Treasury 31% of taxable dividends, capital gain
income and redemption proceeds payable to certain individuals and non-corporate
shareholders who fail to furnish their correct tax identification numbers on IRS
Form W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Withholding at this rate is also required from dividends and
capital gains distributions (but not redemption proceeds) payable to
shareholders who are otherwise subject to backup withholding. Dividends of net
investment income and short-term capital gains paid to a foreign shareholder
will generally be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate).
26
<PAGE>
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends paid by the Fund with respect to each class of shares, to the
extent any dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
other than Class Z will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A shares
and Class Z shares and lower dividends for Class A shares in relation to Class Z
shares. Distributions of capital gains will be in the same amount per share for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED
ON THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. To the
extent that, in a given year, distributions to shareholders exceed recognized
net investment income and recognized short-term and long-term capital gains,
shareholders will receive a return of capital in respect of such year and, in an
annual statement, will be notified of the amount of any return of capital for
such year.
As of December 31, 1997, the Fund had a capital loss carryforward for
federal income tax purposes of approximately $79,251,100.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF THE FUND.
================================================================================
GENERAL INFORMATION
================================================================================
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON 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. THE FUND IS AUTHORIZED TO ISSUE 2 BILLION SHARES
OF COMMON STOCK, $.001 PAR VALUE PER SHARE, DIVIDED INTO FOUR CLASSES,
DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z COMMON STOCK. EACH OF THE CLASS
A, CLASS B, CLASS C AND CLASS Z COMMON STOCK CONSISTS OF 500 MILLION AUTHORIZED
SHARES. Each class of common stock represents an interest in the same assets of
the Fund and is identical in all respects except that (i) each class is subject
to different sales charges and distribution and/or service fees (except for
Class Z shares, which are not subject to any sales charges or distribution
and/or service fees), which may affect performance, (ii) each class has
27
<PAGE>
exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Fund's Articles of Incorporation, the Board of Directors may authorize the
creation of additional series of common stock and classes within such series,
with such preferences, privileges, limitations and voting and dividend rights as
the Board of Directors may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class (with the
exception of Class Z shares, which are not subject to any distribution or
service fees) bears the expenses related to the distribution of its shares.
Except for the conversion feature applicable to the Class B shares, there are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of the Fund is entitled to its portion of all of the
Fund's assets after all debt and expenses of the Fund have been paid. Since
Class B and Class C shares generally bear higher distribution expenses than
Class A shares, the liquidation proceeds to shareholders of those classes are
likely to be lower than to Class A shareholders and to Class Z shareholders,
whose shares are not subject to any distribution and/or service fees. The Fund's
shares do not have cumulative voting rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS FOR EXAMPLE THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE DIRECTORS OF THE FUND OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the Commission
under the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the Commission or may be examined, without
charge, at the office of the Commission in Washington, D.C.
================================================================================
SHAREHOLDER GUIDE
================================================================================
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in proper form by the
Transfer Agent or the Distributor plus a sales charge which, at your option, may
be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net
28
<PAGE>
asset value without any sales charge. Payments may be made by cash, wire, check
or through your brokerage account. See "Alternative Purchase Plan" and "How the
Fund Values its Shares."
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. There is no minimum initial investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no such minimum. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name, address,
tax identification number, dividend distribution election, amount being wired
and wiring bank. Instructions should then be given by you to your bank to
transfer funds by wire to State Street Bank and Trust Company (State Street),
Boston, Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Intermediate Global Income Fund, Inc., specifying on the wire the
account number assigned by PMFS and your name and identifying the class in which
you are eligible to invest (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Intermediate
Global Income Fund, Inc., Class A, Class B, Class C or Class Z shares and your
name and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
29
<PAGE>
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF
AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ----------------- -----------------
<S> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently Initial sales charge waived or
of the public offering price being charged at a rate reduced for certain purchases
of .15 of 1%)
CLASS B Maximum CDSC of 3% of the lesser .75% Shares convert to Class A shares
of the amount invested or the approximately five years after
redemption proceeds; declines to purchase
zero after four years
CLASS C Maximum CDSC of 1% of the lesser 1% (currently being Shares do not convert to
of the amount invested or the charged at a rate of another class
redemption proceeds on .75 of 1%)
redemptions made within one
year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How to Exchange Your Shares" below. The income
attributable to each class and the dividends payable on the shares of each class
will be reduced by the amount of the distribution fee (if any) of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately five years after purchase (see
"Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 3% which declines to zero over a 4 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 5 years after purchase and because all
of your
30
<PAGE>
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 5
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fees on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in NAV, the effect of the return on the
investment over the period of time or redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV per share plus a sales
charge (expressed as a percentage of the offering price and of the amount
invested) as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------ -------------- --------------- --------------
<S> <C> <C> <C>
Less than $100,000 ....................... 3.0% 3.09% 2.75%
$100,000 but less than $499,000 .......... 2.5 2.56 2.25
$500,000 but less than $999,000 .......... 2.0 2.04 1.75
$1,000,000 and above ..................... None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined under
the federal securities laws.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the NAV of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
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<PAGE>
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account record keeping (Direct Account Benefit Plans) and
Benefit Plans sponsored by Prudential Securities or its subsidiaries (Prudential
Securities or Subsidiary Prototype Benefit Plans), Class A shares may be
purchased at NAV by participants who are repaying loans made from such plans to
the participant.
Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans of
a company for which Prudential serves as plan administrator or recordkeeper are
aggregated in meeting the $1 million threshold. The term "existing assets" as
used herein includes stock issued by a plan sponsor, shares of Prudential Mutual
Funds and shares of certain unaffiliated mutual funds that participate in the
PruArray or SmartPath Programs (Participating Funds). "Existing assets" also
include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided (i)
the purchase is made with the proceeds of a redemption from either GIA or SVF
and (ii) Class A shares are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are members
of a common trade, professional or membership association (Association) that
participate in the PruArray Program provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified plan(s) or non-qualified
plans so long as the employers in the Association (i) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (ii) maintain their accounts with the Transfer Agent.
PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (i) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (ii)
spouses of employees who open an IRA account with the Transfer Agent. The
Program is offered to companies that have at least 250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b)employees of
Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of the
Prudential Mutual Funds provided that purchases at NAV are permitted by such
person's employer, (d) Prudential, employees and special agents of Prudential
and its subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries, (e) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer, (f) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 180 days
of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the
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<PAGE>
purchase is made with proceeds of a redemption of shares of any open-end,
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchase, and (g) investors in Individual Retirement Accounts, provided
the purchase is made with the proceeds of a tax-free rollover of assets from a
Benefit Plan for which Prudential Investments serves as the recordkeeper or
administrator.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales alternatives is the NAV next determined following receipt
of an order by the Transfer Agent or Prudential Securities. Although there is no
sales charge imposed at the time of purchase, redemptions of Class B and Class C
shares may be subject to a CDSC. See "How to Sell Your Shares--Contingent
Deferred Sales Charges." The Distributor will pay, from its own resources, sales
commissions of up to 3% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of
sale. This facilitates the ability of the Fund to sell the Class B shares
without an initial sales charge being deducted at the time of purchase. The
Distributor anticipates that it will recoup its advancement of sales commissions
from the combination of the CDSC and the distribution fee. See "How the Fund is
Managed--Distributor." In connection with the sale of Class C shares, the
Distributor will pay, from its own resources, dealers, financial advisers and
other persons which distribute Class C shares a sales commission of up to 1% of
the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares are currently available for purchase by (i) pension,
profit-sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code, deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code, and non-qualified plans
for which the Fund is an available option (collectively, Benefit Plans),
provided such Benefit Plans (in combination with other plans sponsored by the
same employer or group of related employers) have at least $50 million in
defined contribution assets; (ii) participants in any fee-based program or trust
program sponsored by Prudential Securities, The Prudential Savings Bank, F.S.B.
or any affiliate which includes mutual funds as investment options and for which
the Fund is an available option; (iii) certain participants in the MEDLEY
Program (group variable annuity contracts) sponsored by Prudential for whom
Class Z shares of the Prudential Mutual Funds are an available investment
option; (iv) Benefit Plans for which Prudential Retirement Services serves as
recordkeeper and as of September 20, 1996, (a) were Class Z shareholders of the
Prudential Mutual Funds, or (b) executed a letter of intent to purchase Class Z
shares of the Prudential Mutual Funds; (v) current and former Directors/Trustees
of the Prudential Mutual Funds (including the Fund); and (vi) employees of
Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan. After a Benefit Plan qualifies to
purchase Class Z shares, all subsequent purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. See "How the Fund Values its Shares." In
33
<PAGE>
certain cases, however, redemption proceeds will be reduced by the amount of any
applicable contingent deferred sales charge, as described below. See "Contingent
Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves this right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices. In the
case of redemptions from a PruArray or SmartPath Plan, if the proceeds of the
redemption are invested in another investment option of the plan, in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the Commission,
by order, so permits; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions prescribed in (b), (c)
or(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable (i.e., U.S. Government
securities or securities listed on a national exchange) and will be valued in
the same manner as in a regular redemption. See "How the Fund Values its
Shares." If your shares are redeemed in kind, you would incur transaction costs
in converting the assets into cash. The Fund, however, has elected to be
governed by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the NAV of the Fund during any 90-day period for any one shareholder.
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<PAGE>
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Board of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a pro rata basis.) You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
federal tax treatment of any gain or loss realized upon redemption. However, if
the redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the amount
reinvested, may not be allowed for federal income tax purposes. For more
information on the rule which disallows a loss on the sale or exchange of shares
of the Fund which are replaced, see "Taxes, Dividends and Distributions" above
and in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 3% to zero over a four-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your shares to an amount which is lower than the amount of all payments
by you for shares during the preceding four years, in the case of Class B
shares, and one year, in the case of Class C shares. A CDSC will be applied on
the lesser of the original purchase price or the current value of the shares
being redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor. See "How the Fund
is Managed--Distributor" and "Waiver of Contingent Deferred Sales Charges--Class
B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
- ------------------ -----------------------------------
First ................................... 3.0%
Second .................................. 2.0%
Third ................................... 1.0%
Fourth .................................. 1.0%
Fifth ................................... None
35
<PAGE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of Fund shares made during the preceding four years;
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 2% (the applicable rate in the second year
after purchase) for a total CDSC of $4.80.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i)in the case of a tax-deferred
retirement plan, a lump-sum or other distribution after retirement; (ii)in the
case of an IRA or Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 59 1/2; and (iii)a tax-free return of an excess
contribution or plan distributions following the death or disability of the
shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and Prudential Securities or Subsidiary Prototype Benefit Plans,
the CDSC will be waived on redemptions which represent borrowings from such
plans. Shares purchased with amounts used to repay a loan from such plans on
which a CDSC was not previously deducted will thereafter be subject to a CDSC
without regard to the time such amounts were previously invested. In the case of
a 401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting
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<PAGE>
documentation as it may deem appropriate. The waiver will be granted subject to
confirmation of your entitlement. See "Purchase and Redemption of Fund
Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the
Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PruArray or SmartPath Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately five years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least five
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately five years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately five years from the initial purchase (i.e., $1,000 divided
by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The Manager
reserves the right to modify the formula for determining the number of Eligible
Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be same, you may receive fewer Class A shares than Class B
shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately six years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
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<PAGE>
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares will continue to be subject, possibly indefinitely, to their higher
annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS
C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE
NAV. No sales charge will be imposed at the time of the exchange. Any applicable
CDSC payable upon the redemption of shares exchanged will be that imposed by the
Fund in which shares were initially purchased and will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund, Inc. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after the
request is received in good order.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
38
<PAGE>
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
by any person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing strategy
or were otherwise engaging in excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges.
o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities you should contact your financial adviser.
o AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.
o TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are
39
<PAGE>
available through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction of
accounts by participants, or a pooled account arrangement. Information regarding
the establishment of these plans, the administration, custodial fees and other
details is available from Prudential Securities or the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal or
tax adviser with respect to the establishment and maintenance of such a plan.
o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
o REPORTS TO SHAREHOLDERS. The Fund will send to you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
40
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt 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 the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's short-term ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
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.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC and CC is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the 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 or major exposures to adverse conditions.
COMMERCIAL PAPER
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category designation indicates that the degree of safety
regarding timely payment is very strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-2
<PAGE>
<TABLE>
=======================================================================================================
THE PRUDENTIAL MUTUAL FUND FAMILY
=======================================================================================================
Prudential offers a broad range of mutual funds designed to meet your individual needs. We welcome you
to review the investment options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential Securities financial
adviser or Prusec representative or telephone the Fund at (800) 225-1852 for a free prospectus. Read
the prospectus carefully before you invest or send money.
<CAPTION>
- -------------------------------------------------------------------------------------------------------
========================== ==========================
TAXABLE BOND FUNDS EQUITY FUNDS
========================== ==========================
<S> <C>
Prudential Diversified Bond Fund, Inc. Prudential Balanced Fund
Prudential Government Income Fund, Inc. Prudential Distressed Securities Fund, Inc.
Prudential Government Securities Trust Prudential Emerging Growth Fund, Inc.
Short-Intermediate Term Series Prudential Equity Fund, Inc.
Prudential High Yield Fund, Inc. Prudential Equity Income Fund
Prudential Mortgage Income Fund, Inc. Prudential Index Series Fund
Prudential Structured Maturity Fund, Inc. Prudential Bond Market Index Fund
Income Portfolio Prudential Europe Index Fund
Prudential Pacific Index Fund
========================== Prudential Small-Cap Index Fund
TAX-EXEMPT BOND FUNDS Prudential Stock Index Fund
========================== Prudential Jennison Series Fund, Inc.
Prudential Jennison Active Balanced Fund
Prudential California Municipal Fund Prudential Jennison Growth Fund
California Series Prudential Jennison Growth & Income Fund
California Income Series Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund Prudential Small-Cap Quantum Fund, Inc.
High Yield Series Prudential Small Company Value Fund, Inc.
Insured Series Prudential Utility Fund, Inc.
Intermediate Series Nicholas-Applegate Fund, Inc.
Prudential Municipal Series Fund Nicholas-Applegate Growth Equity Fund
Florida Series
Maryland Series ==========================
Massachusetts Series MONEY MARKET FUNDS
Michigan Series ==========================
New Jersey Series
New York Series o Taxable Money Market Funds
North Carolina Series Cash Accumulation Trust
Ohio Series Liquid Assets Fund
Pennsylvania Series National Money Market Fund
Prudential National Municipals Fund, Inc. Prudential Government Securities Trust
Money Market Series
========================== U.S. Treasury Money Market Series
GLOBAL FUNDS Prudential Special Money Market Fund, Inc.
========================== Money Market Series
Prudential MoneyMart Assets, Inc.
Prudential Europe Growth Fund, Inc. o Tax-Free Money Market Funds
Prudential Global Genesis Fund, Inc. Prudential Tax-Free Money Fund, Inc.
Prudential Global Limited Maturity Fund, Inc. Prudential California Municipal Fund
Limited Maturity Portfolio California Money Market Series
Prudential Intermediate Global Income Fund, Inc. Prudential Municipal Series Fund
Prudential International Bond Fund, Inc. Connecticut Money Market Series
Prudential Natural Resources Fund, Inc. Massachusetts Money Market Series
Prudential Pacific Growth Fund, Inc. New Jersey Money Market Series
Prudential World Fund, Inc. New York Money Market Series
Global Series o Command Funds
International Stock Series Command Money Fund
The Global Total Return Fund, Inc. Command Government Fund
Global Utility Fund, Inc. Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
- -------------------------------------------------------------------------------------------------------
</TABLE>
B-1
<PAGE>
No dealer, sales representative or any other person
has been authorized to give any information or to
make any representations, other than those contained
in this Prospectus, in connection with the offer
contained herein, and, if given or made, such other
information or representations must not be relied
upon as having been authorized by the Fund or the
Distributor. This Prospectus does not constitute an
offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the
securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer in
such jurisdiction.
=====================================================
TABLE OF CONTENTS
PRUDENTIAL
PAGE
---- INTERMEDIATE
FUND HIGHLIGHTS ................................ 2
What are the Fund's Risk Factors and GLOBAL
Special Characteristics? ................... 2
FUND EXPENSES .................................. 5 INCOME
FINANCIAL HIGHLIGHTS ........................... 6
HOW THE FUND INVESTS ........................... 10 FUND, INC.
Investment Objective and Policies ............ 10
Risk Factors ................................. 14
Other Investments and Investment Techniques .. 16
Hedging and Return Enhancement Strategies .... 18
Portfolio Turnover and Brokerage ............. 21
Investment Restrictions ...................... 21
HOW THE FUND IS MANAGED ........................ 21
Manager ...................................... 21
Distributor .................................. 22
Fee Waivers .................................. 23
Portfolio Transactions ....................... 24
Custodian and Transfer and
Dividend Disbursing Agent .................. 24
Year 2000 .................................. 24
HOW THE FUND VALUES ITS SHARES ................. 24
HOW THE FUND CALCULATES PERFORMANCE ............ 25 ===================
TAXES, DIVIDENDS AND DISTRIBUTIONS ............. 25
GENERAL INFORMATION ............................ 27 P R O S P E C T U S
Description of Common Stock .................. 27
Additional Information ....................... 28 MARCH 4, 1998
SHAREHOLDER GUIDE .............................. 28
How to Buy Shares of the Fund ................ 28
Alternative Purchase Plan .................... 29
How to Sell Your Shares ...................... 33
Conversion Feature--Class B Shares ........... 37 WWW.PRUDENTIAL.COM
How to Exchange Your Shares .................. 38
Shareholder Services ......................... 39 ===================
DESCRIPTION OF SECURITY RATINGS ................ A-1
THE PRUDENTIAL MUTUAL FUND FAMILY .............. B-1
===================================================== PRUDENTIAL
[LOGO]
MF155A INVESTMENTS
- -----------------------------------------------------
| CUSIP Nos.: Class A: 74435G-20-3 |
| Class B: 74435G-30-2 |
| Class C: 74435G-40-1 |
| Class Z: 74435G-50-0 |
- -----------------------------------------------------
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
Statement of Additional Information
dated March 4, 1998
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 address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the Fund's Prospectus, dated March 4, 1998,
a copy of which may be obtained from the Fund at the address noted above.
TABLE OF CONTENTS
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
Investment Objective and Policies ..................... B-2 10
Additional Investment Policies ........................ B-4 16
Investment Restrictions ............................... B-14 21
Directors and Officers ................................ B-15 21
Manager ............................................... B-19 21
Distributor ........................................... B-20 22
Portfolio Transactions and Brokerage .................. B-22 24
Purchase and Redemption of Fund Shares ................ B-23 28
Shareholder Investment Account ........................ B-26 39
Net Asset Value ....................................... B-30 24
Performance Information ............................... B-31 25
Taxes, Dividends and Distributions .................... B-32 25
Organization and Capitalization ....................... B-35 27
Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants ......................... B-35 24
Financial Statements .................................. B-36 --
Report of Independent Accountants ..................... B-49 --
Appendix I--General Investment Information ............ I-1 --
Appendix II--Historical Performance Data .............. II-1 --
Appendix III--Information Relating to Prudential ...... III-1 --
================================================================================
MF155B
<PAGE>
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. During periods of rising interest rates, the rate of prepayment of
mortgages underlying mortgage-backed securities can be expected to decline,
extending the projected average maturity of the mortgage-backed securities. This
maturity extension risk may effectively change a security which was considered
short- or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to changes in
interest rates than short- or intermediate-term securities.
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 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.
B-2
<PAGE>
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FNMA SECURITIES. The Federal National Mortgage Association (FNMA) was
established in 1938 to create a secondary market in mortgages insured by the
FHA.
FNMA issues guaranteed mortgage pass-through certificates (FNMA
Certificates). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
and principal on FNMA Certificates.
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, Adjustable Rate Mortgage
securities (ARMs) have a specified maturity date and amortize principal over
their life. In periods of declining interest rates, there is a reasonable
likelihood that ARMs will experience increased rates of prepayment of principal.
However, the major difference between ARMs and Fixed Rate Mortgage Securities
(FRMs) is that the interest rate and the rate of amortization of principal of
ARMs can and do change in accordance with movements in a particular,
pre-specified, published interest rate index. The amount of interest on an ARM
is calculated by adding a specified amount, the "margin," to the index, subject
to limitations on the maximum and minimum interest that is charged during the
life of the mortgage or to maximum and minimum changes to that interest rate
during a given period. Because the interest rate on ARMs generally moves in the
same direction as market interest rates, the market value of ARMs tends to be
more stable than that of long-term fixed-rate securities.
FIXED-RATE MORTGAGE SECURITIES. The Fund anticipates investing in
high-coupon fixed-rate mortgage securities. Such securities are collateralized
by fixed-rate mortgages and tend to have high prepayment rates when the level of
prevailing interest rates declines significantly below the interest rates on the
mortgages. Thus, under those circumstances, the securities are generally less
sensitive to interest rate movements than lower coupon FRMs.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The interest rates paid on
the ARMs in which the Fund invests generally are readjusted at intervals of one
year or less to an increment over some predetermined interest rate index. There
are two main categories of indices: those based on U.S. Treasury securities and
those derived from a calculated measure such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-month Treasury
Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the 11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury Note rate, closely
mirror changes in market interest rate levels. Others, such as the 11th District
Home Loan Bank Cost of Funds index (often related to ARMs issued by FNMA), tend
to lag changes in market rate levels and tend to be somewhat less volatile.
The underlying mortgages which collateralize the ARMs, collateralized
mortgage obligations and Real Estate Mortgage Investment Conduits in which the
Fund invests will frequently have caps and floors which limit the maximum amount
by which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization.
The market value of mortgage securities, like other U.S. Government
securities, will generally vary inversely with changes in market interest rates,
declining when interest rates rise and rising when interest rates decline.
However, mortgage securities, while having comparable risk of decline during
periods of rising rates, usually have less potential for capital appreciation
than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline. In addition, to
the extent such mortgage securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments generally will result in some
loss of the holders' principal to the extent of the premium paid. On the other
hand, if such mortgage securities are purchased at a discount, an unscheduled
prepayment of principal will increase current and total returns and will
accelerate the recognition of income which when distributed to shareholders will
be taxable as ordinary income.
FOREIGN SECURITIES
Foreign securities in which the Fund will invest will generally be
denominated in foreign currencies, will be traded on foreign markets, 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. 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
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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 exercise price equal to or less than the exercise price of
the "covered" option, or will establish and maintain with its Custodian for the
term of the option a segregated account consisting of cash or other liquid
assets having a value at least equal to the fluctuating market value of the
optioned securities. A put option written by the Fund will be considered
"covered" if, so long as the Fund is
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obligated as the writer of the option, it owns an option to sell the underlying
securities subject to the option having an exercise price equal to or greater
than the exercise price of the "covered" option, or it deposits and maintains
with its Custodian in a segregated account cash or other liquid assets having a
value equal to or greater than the exercise price of the option.
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 or other liquid assets equivalent to the amount, if any, by which the put
is "in-the-money," i.e., the amount by which the exercise price of the put
exceeds the current market value of the underlying security. It is contemplated
that the Fund's use of straddles will be limited to 5% of the Fund's net assets
(meaning that the securities used for cover or segregated as described above
will not exceed 5% of the Fund's net assets at the time the straddle is
written).
The 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 counter-party with no
clearing organization guarantee. Thus, when the Fund purchases an OTC Option, it
relies on the dealer from which it has purchased the OTC Option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. The investment adviser pursuant to
procedures approved by the Board of Directors will evaluate the creditworthiness
of any dealer from which the Fund proposes to purchase OTC Options.
Exchange-traded options generally have a continuous liquid market while OTC
Options may not. Consequently, the Fund will generally be able to realize the
value of an OTC Option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when the Fund writes an OTC Option, it
generally will be able to close out the OTC Option prior to its expiration only
by entering into a closing purchase transaction with the dealer which originally
purchased the OTC Option. While the Fund will enter into OTC Options only with
dealers which agree to, and which are expected to be capable of, entering into
closing transactions
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with the Fund, there can be no assurance that the Fund will be able to liquidate
an OTC Option at a favorable price at any time prior to expiration. Until the
Fund is able to effect a closing purchase transaction in a covered OTC call
option the Fund has written, it will not be able to liquidate securities used as
cover until the option expires or is exercised or different cover is
substituted. In the event of insolvency of the counterparty, the Fund may be
unable to liquidate an OTC Option. With respect to options written by the Fund,
the inability to enter into a closing purchase transaction could result in
material losses to the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. The exercise price of the call the Fund determines to
write will depend upon the expected price movement of the underlying security.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying 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 the purchase of put options on other carefully selected
securities, which the investment adviser believes may move in the same direction
as those portfolio securities. If the investment adviser's judgment is correct,
changes in the value of the put options should generally offset changes in the
value of the portfolio securities being hedged. If the investment adviser's
judgment is not correct, the value of the securities underlying the put option
may decrease less than the value of the Fund's portfolio securities and
therefore the put option may not provide complete protection against a decline
in the value of the Fund's portfolio securities below the level sought to be
protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire through the purchase of call
options on other carefully selected debt securities, which the investment
adviser believes may move in the same direction as those portfolio securities.
In such circumstances the Fund will be subject to risks analogous to those
summarized above in the event that the correlation between the value of a call
option so purchased and the value of the securities intended to be acquired by
the Fund is not as close as anticipated and the value of the securities
underlying the call option increases less than the value of the securities to be
acquired by the Fund.
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SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds and
Notes tends to center on the most recently auctioned issues, the Exchanges will
not indefinitely continue to introduce new series of options with expirations to
replace expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular issue will be
allowed to run their course, with the possible addition of a limited number of
new expirations as the original ones expire. Options trading on each series of
Bonds or Notes will thus be phased out as new options are listed on the more
recent issues, and a full range of expiration dates will not ordinarily be
available for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable Treasury Bill changes from week
to week, writers of Treasury Bill call options cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
Bills with a principal amount corresponding to the option contract size, the
Fund may be hedged from a risk standpoint. In addition, the Fund will maintain
in a segregated account with its Custodian Treasury Bills maturing no later than
those which would be deliverable in the event of an assignment of an exercise
notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. The Fund may purchase and write options on GNMA
Certificates in the over-the-counter market and, to the extent available, on any
Exchange.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call option holding GNMA Certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA Certificates no longer have sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered or substitute cover.
A GNMA Certificate held by the Fund to cover a call option the Fund has
written in any but the nearest expiration month may cease to represent cover for
the option in the event of a decline in the GNMA coupon rate at which new pools
are originated under the FHA/VA loan ceiling in effect at any given time. Should
this occur, the Fund will no longer be covered, and the Fund will either enter
into a closing purchase transaction or replace the Certificate with a
Certificate which represents cover. When the Fund closes its option position or
replaces the Certificate, it may realize an unanticipated loss and incur
transaction costs.
FUTURES CONTRACTS
The Fund will enter into futures contracts only for certain bona fide
hedging, 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 payment of margin as between the
clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must allocate
cash or other liquid assets as a deposit payment (initial margin). It is
expected that the initial margin on U.S. exchanges will vary from one-half of 1%
to 4% of the total value of the contract. Under certain circumstances, however,
such as during periods of high volatility, the Fund may be required by an
exchange to increase the level of its initial margin payment. Thereafter, the
futures contract is valued daily and the payment in cash of "variation margin"
may be required, a process known as "mark-to-market." Each day the Fund is
required to provide or is entitled to receive variation margin in an amount
equal to any change in the value of the contract since the preceding day.
Although futures contracts by their terms may call for the actual delivery
or acquisition of underlying assets, in most cases the contractual obligation is
extinguished by offset before the expiration of the contract. The offsetting of
a contractual obligation
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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 write (i.e., sell) put and call options on futures contracts
only if they are covered. The Fund will be considered "covered" with respect to
a call option it writes on a futures contract if the Fund owns the securities or
currency which is deliverable under the futures contract or an option to
purchase that futures contract having a strike price equal to or less than the
strike price of the "covered" option and having an expiration date not earlier
than the expiration date of the "covered" option, or if it segregates and
maintains with its Custodian for the term of the option cash or other liquid
assets equal to the fluctuating value of the optioned futures. The Fund will be
considered "covered" with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the "covered" option and
having an expiration date not earlier than the expiration date of the "covered"
option, or if it segregates and maintains with its Custodian for the term of the
option cash or other liquid assets at all times equal in value to the exercise
price of the put (less any initial margin deposited by the Fund with its
Custodian with respect to such put option). There is no limitation on the amount
of the Fund's assets which can be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of debt securities the Fund intends to acquire.
If the futures price at expiration of the option is above the exercise price,
the Fund will retain the full amount of the option premium which provides a
partial hedge against any increase that may have occurred in the price of the
debt securities the Fund intends to acquire. If the market price of the
underlying futures contract is below the exercise price when the option is
exercised, the Fund will incur a loss, which may be wholly or partially offset
by the decrease in the value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written call
option is below the exercise price, the Fund will retain the full amount of the
option premium, thereby partially hedging against any decline that may have
occurred in the Fund's holdings of debt securities. If the futures price when
the option is exercised is above the exercise price, however, the Fund
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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 or other liquid assets 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.
B-9
<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 investment adviser did
not anticipate, however, the Fund will have incurred the expense of the option
without obtaining the expected benefit; any such movement in exchange rates may
also thereby reduce rather than enhance the Fund's profits on its underlying
securities transactions.
OPTIONS ON CURRENCIES
Instead of purchasing or selling futures or forward currency exchange
contracts, the Fund may attempt to accomplish similar objectives by purchasing
put or call options on currencies or by writing put options or covered call
options on currencies either on exchanges or in over-the-counter markets. A put
option gives the Fund the right to sell a currency at the exercise price until
the option expires. A call option gives the Fund the right to purchase a
currency at the exercise price until the option expires. Both options serve to
insure against adverse currency price movements in the underlying portfolio
assets designated in a given currency. The Fund's use of options on currencies
will be subject to the same limitations as its use of options on securities,
described above. Currency options may be subject to position limits which may
limit the ability of the Fund to fully hedge its positions by purchasing the
options.
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.
B-10
<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 transaction will be
"covered" by the position being hedged or the Fund's Custodian or subcustodian
will place cash or other liquid assets in a segregated account of the Fund (less
the value of the "covering" positions, if any) in an amount equal to the value
of the Fund's total assets committed to the consummation of the given forward
contract. If the value of the securities placed in the segregated account
declines, additional cash or other liquid assets will be placed in the account
so that the value of the account will, at all times, equal the amount of the
Fund's net commitment with respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between the
Fund's entering into a forward contract for the sale of a currency and the date
it enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
purchase is less than the price of the currency it has agreed to sell. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Closing out forward purchase contracts involves similar
offsetting transactions.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward transactions in currencies
are usually conducted on a principal basis, no fees or commissions are involved.
The use of foreign currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, although forward currency
contracts limit the risk of loss due to a decline in the value of the hedged
currency, they also limit any potential gain that might result if the value of
the currency increases. The Fund's ability to enter into forward foreign
currency exchange contracts may be limited by certain requirements for
qualification as a regulated investment company under the Internal Revenue Code.
See "Taxes, Dividends and Distributions."
If a decline in any currency is generally anticipated by the investment
adviser, the Fund may not be able to contract to sell the currency at a price
above the level to which the currency is anticipated to decline.
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS AND
OPTIONS ON FUTURES CONTRACTS
Options, futures contracts and options thereon may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as similar
transactions in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities. The value of such positions
also 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
B-11
<PAGE>
adviser's expectations are not met, the Fund would be in a worse position than
if a hedging strategy had not been pursued. For example, if the Fund has hedged
against the possibility of an increase in interest rates which would adversely
affect the price of securities in its portfolio and the price of such securities
increases instead, the Fund will lose part or all of the benefit of the
increased value of its securities because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash to meet daily variation margin requirements, it may have to sell securities
to meet the requirements. These sales may, but will not necessarily, be at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it is disadvantageous to do so.
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 cash or other liquid
assets equal to the market value of the futures contracts and options thereon
(less any related margin deposits), will be deposited in a segregated account
with the Fund's Custodian 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.
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, if a futures contract has been used
to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of securities, if any, may partially or completely offset losses on the
futures contract. However, there is no guarantee that the price movements of the
securities will, in fact, correlate with the price movements in the futures
contracts and thus provide an offset to losses on a futures contract.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible
B-12
<PAGE>
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.
The staff of the Securities and Exchange Commission (SEC) has taken the
position that purchased over-the-counter options and the assets used as "cover"
for written over-the-counter options are illiquid securities unless the Fund and
the counterparty have provided for the Fund, at the Fund's election, to unwind
the over-the-counter option. The exercise of such an option ordinarily would
involve the payment by the Fund of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the Fund
to treat the assets used as "cover" as "liquid."
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 Investments Fund Management LLC (PIFM or the
Manager) pursuant to an order of the SEC. 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.
B-13
<PAGE>
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 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 or other liquid assets 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.
SEGREGATED ACCOUNTS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or other liquid assets in a
segregated account with the Fund's Custodian. "Liquid assets" mean cash, U.S.
Government securities, equity securities (including foreign securities), debt
obligations or other liquid, unencumbered assets, marked-to-market daily.
PORTFOLIO TURNOVER
The Fund has no fixed policy with respect to portfolio turnover; however,
as a result of the Fund's investment policies, its annual portfolio turnover
rate may exceed 100% although the rate is not expected to exceed 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 (over 100%) may involve
correspondingly greater brokerage commissions and other transaction costs which
will be borne directly by the Fund. The Fund's portfolio turnover rate was 40%
and 45% for the fiscal years ended December 31, 1997 and 1996, respectively.
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.
B-14
<PAGE>
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. 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.
3. Purchase securities of other investment companies, except in accordance
with applicable limits under the Investment Company Act.
4. 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.
5. 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.
6. 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.
7. 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").
8. Make investments for the purpose of exercising control or management
over the issuers of any security.
9. 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).
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.
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) WITH FUND DURING PAST 5 YEARS
- ------------------------ --------- ---------------------
<S> <C> <C>
Edward D. Beach (73) Director President and Director of BMC Fund, Inc., a closed-end investment
company; formerly Vice Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary and Treasurer of
Broyhill Family Foundation, Inc.; Member of the Board of Trustees of
Mars Hill College; Director of The High Yield Income Fund, Inc.
Delayne Dedrick Gold (59) Director Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (51) Vice President Vice President, Prudential Investments (since September 1997);
and Director Executive Vice President and Treasurer (since December 1996),
Prudential Investments Fund Management LLC (PIFM); Senior Vice
President (since March 1987) of Prudential Securities Incorporated
(Prudential Securities); formerly Chief Administrative Officer (July
1990-September 1996), Director (January 1989-September 1996) and
Executive Vice President, Treasurer and Chief Financial Officer
(June 1987-September 1996) of Prudential Mutual Fund Management,
Inc.; Vice President and Director of The Asia Pacific Fund, Inc.
(since May 1989); Director of The High Yield Income Fund, Inc.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) WITH FUND DURING PAST 5 YEARS
- ------------------------ --------- ---------------------
<S> <C> <C>
Douglas H. McCorkindale (58) Director Vice Chairman (since March 1984) and President (since September
1997) of Gannett Co. Inc. (publishing and media); Director
of Gannett Co. Inc., Frontier Corporation and Continental
Airlines, Inc.
*Mendel A. Melzer, CFA (37) Director Chief Investment Officer (since October 1996) of Prudential Mutual
751 Broad St. Funds; formerly Chief Financial Officer (November 1995-September
Newark, NJ 07102 1996) of Prudential Investments, Senior Vice President and Chief
Financial Officer (April 1993-November 1995) of Prudential
Preferred Financial Services, Managing Director (April 1991-April
1993) of Prudential Investment Advisors and Senior Vice President
(July 1989-April 1991) of Prudential Capital Corporation; Chairman
and Director of Prudential Series Fund, Inc.; Director of The High
Yield Income Fund, Inc.
Thomas T. Mooney (56) Director President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of Rochester, Monroe County
Water Authority, Rochester Jobs, Inc., Executive Service Corps of
Rochester, Monroe County Industrial Development Corporation,
Northeast Midwest Institute, The Business Council of New York State
and The High Yield Income Fund, Inc.; President, Director and
Treasurer of First Financial Fund, Inc. and The High Yield Plus
Fund, Inc.
Stephen P. Munn (55) Director Chairman (since January 1994), Director and President (since 1988)
and Chief Executive Officer (1988-December 1993) of Carlisle
Companies Incorporated (manufacturer of industrial products).
*Richard A. Redeker (54) President and Employee of Prudential Investments; formerly President, Chief
751 Broad St. Director Executive Officer and Director (October 1993-September 1996),
Newark, NJ 07102 Prudential Mutual Fund Management, Inc., Executive Vice President,
Director and Member of the Operating Committee (October
1993-September 1996), Prudential Securities, Director (October
1993-September 1996) of Prudential Securities Group, Inc., Executive
Vice President, The Prudential Investment Corporation (PIC) (January
1994-September 1996), Director (January 1994-September 1996) of
Prudential Mutual Fund Distributors, Inc. and Prudential Mutual Fund
Services, Inc. and Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September 1978-September 1993);
President and Director of The High Yield Income Fund, Inc.
Robin B. Smith (58) Director Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; formerly President and Chief Executive
Officer (January 1989-August 1996) and President and Chief Operating
Officer (September 1981-December 1988) of Publishers Clearing House;
Director of BellSouth Corporation, Texaco Inc., Springs Industries
Inc. and Kmart Corporation.
Louis A. Weil, III (56) Director Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996), Publisher and Chief
Executive Officer (August 1991-December 1995) of Phoenix Newspapers,
Inc.; formerly Publisher of Time Magazine (May 1989-March 1991),
President, Publisher & CEO of The Detroit News (February 1986-August
1989) and member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The High Yield Income Fund, Inc.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) WITH FUND DURING PAST 5 YEARS
- ------------------------ --------- ---------------------
<S> <C> <C>
Clay T. Whitehead (59) Director President of National Exchange Inc. (new business development firm)
(since May 1983).
S. Jane Rose (52) Secretary Senior Vice President (since December 1996), PIFM; Senior Vice
President and Senior Counsel of Prudential Securities (since July
1992); formerly Senior Vice President (January 1991-September 1996)
and Senior Counsel (June 1987-September 1996) of Prudential Mutual
Fund Management, Inc.
Grace C. Torres (38) Treasurer First Vice President (since December 1996) of PIFM; First Vice
and Principal President of Prudential Securities (since March 1994); formerly First
Financial Vice President (March 1994-September 1996) Prudential Mutual Fund
and Accounting Management, Inc. and Vice President (July 1989-March 1994) of Bankers
Officer Trust Corporation.
Marguerite E.H. Morrison (41) Assistant Vice President (since December 1996) of PIFM; Vice President and
Secretary Associate General Counsel of Prudential Securities; formerly Vice
President and Associate General Counsel (June 1991-September 1996)
of Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996) of Prudential Investments and
Treasurer the Private Asset Group of The Prudential Insurance Company
of America (Prudential); formerly First Vice President of Prudential
Mutual Fund Management, Inc. (February 1993-September 1996); prior
thereto, Senior Tax Manager of Price Waterhouse (1981-January 1993).
</TABLE>
- ---------------
(1) Unless otherwise stated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential Securities, Prudential or PIFM.
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. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Directors who is not an affiliated person of PIFM or
the Subadviser annual compensation of $3,000 in addition to certain
out-of-pocket expenses. The amount of annual compensation paid to each Director
may change as a result of the introduction of additional funds on the Boards of
which the Director will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Directors' fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Director. The
Fund's obligation to make payments of deferred Directors' fees, together with
interest thereon, is a general obligation of the Fund.
B-17
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1997 and the aggregate compensation paid to such Directors
for service on the Fund's Board and the Boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1997.
TOTAL 1997
COMPENSATION
FROM FUND
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME AND POSITION FROM FUND TO DIRECTORS
----------------- --------- ---------------
Edward D. Beach--Director ..................... $ 3,000 $135,000(38/63)*
Delayne D. Gold--Director ..................... $ 3,000 $135,000(38/63)*
Robert F. Gunia--Director+ .................... -- --
Donald D. Lennox--Former Director ............. $ 3,000 $ 90,000(26/50)*
Douglas H. McCorkindale--Director** ........... $ 3,000 $ 70,000(20/35)*
Mendel A. Melzer--Director+ ................... -- --
Thomas T. Mooney--Director .................... $ 3,000 $115,000(31/64)*
Stephen P. Munn--Director ..................... 3,000 $ 45,000(15/21)*
Richard A. Redeker--Director+ ................. -- --
Robin B. Smith--Director** .................... $ 3,000 $ 90,000(27/34)*
Louis A. Weil, III--Director .................. $ 3,000 $ 90,000(26/50)*
Clay T. Whitehead--Director ................... $ 3,000 $ 45,000(15/21)*
- ----------
* Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1997, includes amounts deferred at the
election of Directors under the Funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,640,
$143,909 and $139,097 for Douglas H. McCorkindale, Thomas T. Mooney and
Robin B. Smith, respectively.
+ Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are
interested Directors, do not receive compensation from the Fund or any
other fund in the Fund Complex.
As of February 6, 1998, the Directors and officers of the Fund as a group
owned less than 1% of the outstanding common stock of the Fund.
As of February 6, 1998, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of common stock were Brook
Gutman, 2705 Moss St., Portland, OR 97219 who held 1,350 Class C shares (5.3%);
Robert L. Mofenson, TTEE Robert L. Mofenson MPP/PS Plan DTD 01/01/74, FBO Robert
L. Mofenson, P.O. Box 1103, Great Neck, NY 11023-0103 who held 2,267 Class C
shares (9%); Mrs. Pamela B. Thayer, TTEE Pamela B. Thayer Trust UA DTD 01/13/97,
2938 Cherry Lane, Northbrook, IL 60062-4312 who held 5,507 Class C shares
(21.9%); Prudential Securities, C/F Mr. Willard G. Smothers IRA DTD 09/09/97,
1013 Devonshire Lane, Saint Charles, MO 63301-0611 which held 1,765 Class C
shares (7%); Prudential Securities, C/F Mr. James A. Wojczynski IRA Rollover DTD
08/27/97, 7642 Candlewood Dr. SE, Ada, MI 49301-9348 which held 2,912 Class C
shares (11.6%); David G. Black, 10556 Barrywood Dr., Dallas, TX 75230-4243 who
held 3,171 Class C shares (12.6%) and Arlene Okinszyc, 5181 Peterson Rd. SE,
Port Orchard, WA 98367-7907 who held 2,049 Class C shares (8.1%).
As of February 6 ,1998, Prudential Securities was record holder of
8,262,593 Class A shares (or 48.2% of the outstanding Class A shares), 797,683
Class B shares (or 73.3% of the outstanding Class B shares), 15,109 Class C
shares (or 60.2% of the outstanding Class C shares) and 332,187 Class Z shares
(or 99.9% of the outstanding Class Z 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-18
<PAGE>
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager) (formerly, Prudential Mutual Fund Management LLC), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. PIFM serves as
manager to all of the other investment companies that, together with the Fund,
comprise the "Prudential Mutual Funds." See "How the Fund is Managed--Manager"
in the Prospectus. As of January 31, 1998, PIFM managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $63 billion. According to the Investment Company Institute, as of
October 31, 1997, the Prudential Mutual Funds were the 17th largest family of
mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary
of PIFM, serves as the transfer agent for the Prudential Mutual Funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM also administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's custodian, and PMFS, the Fund's
transfer and dividend disbursing agent. The management services of PIFM for the
Fund are not exclusive under the terms of the Management Agreement and PIFM is
free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a
fee at an annual rate of .75 of 1% of the Fund's average daily net assets. The
fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. No jurisdiction currently limits the
Fund's expenses.
In connection with its management of the business affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of members of the Board of Directors who are not
affiliated persons of PIFM or the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
doing business as Prudential Investments (PI, the subadviser or the investment
adviser), pursuant to the subadvisory agreement between PIFM and PI (the
Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Fund and of pricing the Fund's shares, (d) the charges and expenses of legal
counsel and independent accountants for the Fund, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Fund in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade associations of which the Fund
may be a member, (h) the cost of stock certificates representing shares of the
Fund, (i) the cost of fidelity and liability insurance, (j) certain organization
expenses of the Fund and the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the SEC and the
states, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Board of Directors' meetings and of preparing, printing and mailing reports,
proxy statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful
B-19
<PAGE>
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act, on May 21, 1997 and by
shareholders of the Fund on February 25, 1988.
PIFM earned management fees of $1,248,195, $1,386,451 and $1,650,798 for
the fiscal years ended December 31, 1997, 1996 and 1995, respectively.
PIFM has entered into a Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that PI will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PI is obligated to keep certain books and records
of the Fund. PI has entered into an agreement with PRICOA Asset Management Ltd.
(PRICOA and, collectively with PI, the investment adviser or Subadviser) under
which PRICOA provides investment advisory services to the Fund. PIFM continues
to have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises the Subadviser's performance of such
services. PI is reimbursed by PIFM for the reasonable costs and expenses
incurred by PI in furnishing these services. PRICOA is reimbursed by PI for its
reasonable costs and expenses incurred in furnishing advisory services. Between
October 1 and December 31, 1997, PRICOA was paid by PI a fee at an annual rate
of .30 of 1% of the Fund's average net assets for furnishing these services.
The PI Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 21, 1997 and was approved by shareholders of the Fund on May 12, 1988.
The PI Subadvisory Agreement provides that it will terminate in the event
of its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The PI Subadvisory Agreement may be
terminated by the Fund, PIFM or PI upon not more than 60 days' nor
less than 30 days' written notice. The PI Subadvisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act. The PRICOA
Subadvisory Agreement provides that PRICOA can terminate it on 60 days' written
notice and that PI can terminate it at any time and the termination would take
effect immediately. The PRICOA Subadvisory Agreement also provides that it will
terminate automatically in the event of its assignment (as defined in the
Investment Company Act).
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or the
Distributor), One Seaport Plaza, New York, New York 10292 acts as the
distributor of the 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), the Distributor incurs the expenses of distributing the Fund's Class
A, Class B and Class C shares, respectively. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under a Distribution
Agreement, none of which are reimbursed by or paid for by the Fund. See "How the
Fund is Managed--Distributor" in the Prospectus.
Prior to 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 were
not interested persons of the Fund and who had 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
B-20
<PAGE>
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% 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 21, 1997. 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.
CLASS A PLAN. For the fiscal year ended December 31, 1997, the Distributor
received payments of $229,752 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, 1997, the Distributor received approximately $28,800 in initial sales
charges.
CLASS B PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $85,326 from the Fund under the Class B Plan. It is estimated that the
Distributor spent approximately $63,400 on behalf of the Class B shares of the
Fund during such year. It is estimated that of the latter amount, approximately
7.26% ($4,600) was spent on printing and mailing of prospectuses to other than
current shareholders; 9.31% ($5,900) 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 83.43% ($52,900) on the aggregate of
(i) payments of commissions to financial advisers (37.06% or $23,500) and (ii)
an allocation of overhead and other branch office distribution related expenses
(46.37% or $29,400). 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.
The Distributor 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, 1997,
the Distributor received approximately $13,300 in contingent deferred sales
charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $1,600 under the Class C Plan and spent approximately $1,500 in
distributing Class C shares. It is estimated that of the latter amount,
approximately 6.67% ($100) was spent on printing and mailing of prospectuses to
other than current shareholders; and 93.33% ($1,400) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers (40.47%
or $660) and (ii) an allocation of overhead and other branch office
distribution-related expenses (52.86% or $740). The Distributor also receives
the proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. For the fiscal
year ended December 31, 1997, the Distributor received approximately $500 in
contingent deferred sales charges attributable to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. A Plan may be terminated at any time, without penalty, by the vote
of a majority of the Rule 12b-1 Directors or by the vote of the holders of a
majority of the outstanding shares of the applicable class of the Fund on not
more than 30 days' written notice to any other party to the Plan. The Plans may
not be amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report will include an
itemization of the distribution
B-21
<PAGE>
expenses and the purposes of such expenditures. In addition, as long as the
Plans remain in effect, the selection and nomination of Rule 12b-1 Directors
shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws. The restated Distribution Agreement
was last approved by the Board of Directors, including a majority of the Rule
12b-1 Directors, on May 21, 1997.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund, the
selection of brokers, dealers and futures commission merchants to effect the
transactions and the negotiation of brokerage commissions, if any. (For purposes
of this section, the term "Manager" includes the Subadviser.) On a national
securities exchange, broker-dealers may receive negotiated brokerage commissions
on Fund portfolio transactions, including options, futures, and options on
futures transactions and the purchase and sale of underlying securities upon the
exercise of options. On a foreign securities exchange, commissions may be fixed.
Orders may be directed to any broker or futures commission merchant including,
to the extent and in the manner permitted by applicable law, Prudential
Securities and its affiliates.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments and agency securities may be purchased directly from the
issuer, in which case no commissions or discounts are paid. The Fund will not
deal with Prudential Securities or any affiliate in any transaction in which
Prudential Securities or any affiliate acts as principal. Thus, it will not deal
in the over-the-counter market with Prudential Securities acting as market
maker, and it will not execute a negotiated trade with Prudential Securities if
execution involves Prudential Securities' acting as principal with respect to
any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Manager will consider the research and
investment services provided by brokers, dealers or futures commission merchants
who effect or are parties to portfolio transactions of the Fund, the Manager or
the Manager's other clients. Such research and investment services are those
which brokerage houses customarily provide to institutional investors and
include statistical and economic data and research reports on particular
companies and industries. Such services are used by the Manager in connection
with all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Fund may be used in
managing other investment accounts. Conversely, brokers, dealers or futures
commission merchants furnishing such services may be selected for the execution
of transactions of such other accounts, whose aggregate assets are far larger
than the Fund's, and the services furnished by such brokers, dealers or futures
commission merchants may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker, dealer or
futures commission merchant in the light of generally prevailing rates. The
Manager's policy is to pay higher commissions to brokers and futures commission
merchants, other than Prudential Securities, for particular transactions than
might be charged if a different broker had been selected, on occasions when, in
the Manager's opinion, this policy furthers the objective of obtaining best
price and execution. In addition, the Manager is authorized to pay higher
commissions on brokerage transactions for the Fund to brokers and futures
commission merchants other than Prudential Securities in order to secure
research and investment services described above, subject to review by the
Fund's Board of Directors from time to time as to the extent and continuation of
this
B-22
<PAGE>
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 SEC. 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, including none to Prudential
Securities or any affiliate, for the fiscal years ended December 31, 1997, 1996,
and 1995.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares of the
Fund are offered to a limited group of investors at NAV without any sales
charges. 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
(except for Class Z shares, which are not subject to any sales charges and
distribution and/or service fees), (ii) each class has exclusive voting rights
on any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interest of one class differ from the interest of any other class, (iii)
each class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "Distributor" and "Shareholder Investment
Account--Exchange Privilege."
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to: (i) reorganizations,(ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
B-23
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
3.0% and Class B*, Class C* and Class Z shares are sold at NAV. Using the Fund's
NAV at December 31, 1997, the maximum offering price of the Fund's shares is as
follows:
CLASS A
Net asset value and redemption price per Class A share ........... $7.91
Maximum sales charge (3.0% of offering price) .................... .24
-----
Offering price to public ......................................... $8.15
=====
CLASS B
Net asset value, offering price and redemption price
per Class B share* ............................................. $7.92
=====
CLASS C
Net asset value, offering price and redemption price
per Class C share* ............................................. $7.92
=====
CLASS Z
Net asset value, offering price and redemption price
per Class Z share .............................................. $7.91
=====
- ----------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds
B-24
<PAGE>
(excluding money market funds other than those acquired pursuant to the exchange
privilege) to determine the reduced sales charge. However, the value of shares
held directly with the Transfer Agent and through Prudential Securities will not
be aggregated to determine the reduced sales charge. All shares must be held
either directly with the Transfer Agent or through Prudential Securities. The
value of existing holdings for purposes of determining the reduced sales charge
is calculated using the maximum offering price (NAV plus maximum sales charge)
as of the previous business day. See "Net Asset Value" in the Prospectus. The
Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Rights of accumulation are
not available to individual participants in any retirement or group plans.
LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at NAV by entering into a Letter of Intent
whereby they agree to enroll, within a thirteen-month period, a specified number
of eligible employees or participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. If the goal
is exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
B-25
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge (CDSC) is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
Death A copy of the shareholder's death
certificate or, in the case of a
trust, a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a
unable to engage in any substantial letter from a physician on the
gainful activity by reason of any physician's letterhead stating that
medically determinable physical or the shareholder (or, in the case of a
mental impairment which can be trust, the grantor) is permanently
expected to result in death or to be disabled. The letter must also
of long-continued and indefinite indicate the date of disability.
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from
Custodial Account. the custodial firm indicating (i) the
date of birth of the shareholder and
(ii) that the shareholder is over age
59 1/2 and is taking a normal
distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee
on company letterhead indicating the
amount of the excess and whether or
not taxes have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
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:
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
------------------ ---------------------- ---------------
First ......................... 3.0% 2.0%
Second ........................ 2.0% 1.0%
Third ......................... 1.0% 0%
Fourth and thereafter ......... 0% 0%
You must notify the 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.
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
B-26
<PAGE>
transaction. Certificates are issued only for full shares and may be redeposited
in the Account at any time. There is no charge to the investor for issuance of a
certificate. The Fund makes available to the shareholders the following
privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value on the record date. An investor may direct the Transfer Agent in writing
not less than five (5) full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
In the case of recently purchased shares for which registration instructions
have not been received on the record date, cash payment will be made directly to
the dealer. Any shareholder who receives a cash payment representing a dividend
or distribution may reinvest such distribution at NAV by returning the check or
the proceeds to the Transfer Agent within 30 days after the payment date. Such
investment will be made at the NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Such shareholder will receive
credit for any CDSC paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. For retirement and group plans having a limited menu of Prudential
Mutual Funds, the exchange privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund will be able to exchange their Class A
shares for Class A shares of certain other Prudential Mutual Funds, shares of
Prudential Government Securities Trust (Short-Intermediate Term Series) and
shares of the money market funds specified below. No fee or sales load will be
imposed upon the exchange. Shareholders of money market funds who acquired such
shares upon exchange of Class A shares may use the exchange privilege only to
acquire Class A shares, of the Prudential Mutual Funds participating in the
Class A exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, Inc., 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 were initially purchased and the purchase date will be
deemed to be the first day of the month after the initial purchase, rather
than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the
B-27
<PAGE>
money market fund will be exchanged on the basis of their remaining holding
periods, with the longest remaining holding periods being transferred first. In
measuring the time period shares are held in a money market fund and "tolled"
for purposes of calculating the CDSC holding period, exchanges are deemed to
have been made on the last day of the month. Thus, if shares are exchanged into
the Fund from a money market fund during the month (and are held in the Fund at
the end of the month), the entire month will be included in the CDSC holding
period. Conversely, if shares are exchanged into a money market fund prior to
the last day of the month (and are held in the money market fund on the last day
of the month), the entire month will be excluded from the CDSC holding period.
For purposes of calculating the five year holding period applicable to the Class
B conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares, respectively, of other funds without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the exchange privilege and prospectuses for each
of Prudential Mutual Funds are available from the Transfer Agent, Prudential
Securities or Prusec. The exchange privilege may be modified, terminated or
suspended on 60 days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments
to achieve specified lump sums to finance your investment goals.(2)
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years ..................... $ 110 $ 165 $ 220 $ 275
20 Years ..................... 176 264 352 440
15 Years ..................... 296 444 592 740
10 Years ..................... 555 833 1,110 1,388
5 Years ..................... 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
- ----------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room
and board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants.
B-28
<PAGE>
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan. See "Shareholder Investment Account--Automatic
Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the applicable sales charges to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, the administration, custodial fees and other details are available
from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, and 8% rate of return and a 39.6% federal income tax
bracket and shows how much more retirement income can accumulate within an IRA
as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- --------- --------
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ----------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account
B-29
<PAGE>
will be subject to tax when withdrawn from the account. Distributions from
a Roth IRA which meet the conditions required under the Internal Revenue
Code will not be subject to tax upon withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their Prudential
Securities Financial 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, or at the bid price on such
day in the absence of an asked price. Corporate bonds (other than convertible
debt securities) and U.S. Government securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager, in consultation with the Subadviser, to be
over-the-counter, are valued on the basis of valuations provided by an
independent pricing agent or principal market maker which uses information with
respect to transactions in bonds, quotations from bond dealers, agency ratings,
market transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed by the Manager and the Subadviser to be
over-the-counter, are valued at the mean between the last reported bid and asked
prices provided by principal market makers. Options on stock and stock indices
traded on an exchange are valued at the mean between the most recently quoted
bid and asked prices on the respective exchange and futures contracts and
options thereon are valued at their last sale prices as of the close of trading
on the applicable commodities exchange or board of trade or, if there was no
sale on the applicable commodities exchange or board of trade on such day, at
the mean between the most recently quoted bid and asked prices on such exchange
or board of trade. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents at the current rate obtained from a
recognized bank or dealer and 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.
Securities or other assets for which reliable market quotations are not
readily available, or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser.
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 NAV 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 NAV.
In the event the New York Stock Exchange closes early on any business day, the
NAV of the Fund's shares shall be determined at the time between such closing
and 4:15 P.M., New York time. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
NAV is calculated separately for each class. As long as the Fund declares
dividends daily, the NAV of Class A, Class B, Class C and Class Z shares will
generally be the same. It is expected, however, that the dividends, if any, will
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
B-30
<PAGE>
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
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 returns for Class A shares for the one and five
year and since inception (May 26, 1988) periods ended December 31, 1997 were
1.29%, 8.52% and 7.68%, respectively. The average annual total returns for Class
B shares for the one and five year and since inception (January 15, 1992)
periods ended December 31, 1997 were .80%, 8.48% and 7.65%, respectively. The
average annual total returns for Class C shares for the one year and since
inception (August 1, 1994) periods ended December 31, 1997 were 2.80% and 9.82%,
respectively. The average annual total returns for Class Z shares for the one
year and since inception (September 13, 1996) periods ended December 31, 1997
were 4.57% and 7.68%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV-P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one, five or ten year periods
(or fractional portion thereof) at the end of the one,
five or ten year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The Fund's aggregate total returns for Class A shares for the one and five
year and since inception periods ended December 31, 1997 were 4.42%, 55.18% and
109.78%, respectively. The aggregate total returns for Class B shares for the
one and five year and since inception periods ended December 31, 1997 were
3.80%, 50.24% and 55.19%, respectively. The aggregate total returns for Class C
shares for the one year and since inception (August 1, 1994) periods ended
December 31, 1997 were 3.80% and 37.73%, respectively. The aggregate total
returns for the Class Z shares for the one year and since inception (September
13, 1996) periods ended December 31, 1997 were 4.57% and 10.02%, respectively.
YIELD. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. The yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a - b
YIELD = 2[(-------+1)(superior 6)-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.
B-31
<PAGE>
The Fund's 30-day yields for the 30 days ended December 31, 1997, were
4.23%, 3.75%, 3.75% and 4.51% for Class A, Class B, Class C and Class Z shares,
respectively.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS
OVER THE LONG TERM (1/1926 - 9/1997)
--------------------------------------------------------
COMMON STOCKS 11.0%
LONG-TERM GOVT. BONDS 5.1%
INFLATION 3.1%
- --------------------------------------------------------------------------------
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock
returns are based on the Standard & Poor's 500 Stock Index, a
market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not
intended to represent the performance of any particular investment or fund.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL. The Fund has qualified and intends to remain qualified 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,
payments with respect to securities loans 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) diversify its holdings so that, at
the end of each fiscal quarter, (i) 50% of the value of the Fund's assets is
represented by cash, U.S. Government securities and other securities limited, in
respect of any one issuer, to an amount not greater than 5% of the value of the
Fund's assets and no more than 10% of the outstanding voting securities of any
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities) and
(c) the Fund distributes to its shareholders at least 90% of its net investment
income and net short-term gains (i.e., the excess of net short-term capital
gains over net long-term capital losses) in each year. 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
B-32
<PAGE>
income tax purposes at December 31, 1997 of approximately $79,251,000 of which
$37,377,300 expires in 1999, $23,239,700 expires in 2000 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 and Class Z shares as a result of
the higher distribution-related fee applicable to the Class B and Class C
shares. The per share distributions of net capital gains, if any, will be paid
in the same amount for Class A, Class B, Class C and Class Z shares. See "Net
Asset Value."
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. Dividends paid by
the Fund will not be eligible for the dividends received deduction applicable to
corporate shareholders.
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 generally 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.
Forward currency contracts, options and futures contracts entered into by
the Fund may create "straddles" for federal income tax purposes. Positions which
are part of a straddle will be subject to certain wash sale, short sale and
constructive sale provisions of the Internal Revenue Code. In the case of a
straddle, the Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund.
A "passive foreign investment company" (PFIC) is a foreign corporation
that, in general, meets either of the following tests: (a) at least 75% of its
gross income is passive or (b) an average of at least 50% of its assets produce,
or are held for the production of, passive income. If the Fund acquires and
holds stock in a PFIC beyond the end of the year of its acquisition, the Fund
will be subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain from disposition of the stock
(collectively, PFIC income), plus interest thereon, even if the Fund distributes
the PFIC income as a taxable dividend to its shareholders. The balance of the
PFIC income will be included in the Fund's investment company taxable income
and, accordingly, will not be taxable to it to the extent that income is
distributed to its shareholders. The Fund may make a "mark-to-market" election
with respect to any marketable stock it holds of a PFIC. If the election is in
effect, at the end of the Fund's taxable year, the Fund will recognize the
amount of gains, if any, with respect to PFIC stock. No loss will be recognized
on PFIC stock except to the extent of gains recognized in prior years.
Alternatively, the Fund, if it meets certain requirements, may elect to treat
any PFIC in which it invests as a "qualified electing fund," in which case, in
lieu of the foregoing tax and interest obligation, the Fund will be required to
include in income each year its pro rata share of the qualified electing fund's
annual ordinary earnings and net capital gain, even if they are not distributed
to the Fund; those amounts would be subject to the distribution requirements
applicable to the Fund described above.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
B-33
<PAGE>
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested in
various countries is not known.
If the Fund is liable for foreign taxes, the Fund expects to meet the
requirements of the Internal Revenue Code for "passing-through" to its
shareholders foreign taxes paid, but there can be no assurance that the Fund
will be able to do so. Under the Internal Revenue Code, if more than 50% of the
value of the Fund's total assets at the close of its taxable year consists of
stock or securities of foreign corporations, the Fund will be eligible and may
file an election with the Internal Revenue Service to "pass-through" to the
Fund's shareholders the amount of foreign taxes paid by the Fund. Pursuant to
this election shareholders will be required to: (i) include in gross income (in
addition to taxable dividends actually received) their pro rata share of the
foreign taxes paid by the Fund; (ii) treat their pro rata share of foreign taxes
as paid by them; and (iii) either deduct their pro rata share of foreign taxes
in computing their taxable income or, subject to certain limitations, use it as
a foreign tax credit against U.S. income taxes. No deduction for foreign taxes
may be claimed by a shareholder who does not itemize deductions. A shareholder
that is a nonresident alien individual or foreign corporation may be subject to
U.S. withholding tax on the income resulting from the election described in this
paragraph, but may not be able to claim a credit or deduction against such tax
for the foreign taxes treated as having been paid by such shareholder. A
tax-exempt shareholder will not ordinarily benefit from this election. The
amount of foreign taxes for which a shareholder may claim a credit in any year
will generally be subject to various limitations including a separate limitation
for "passive income," which includes, among other things, dividends, interest
and certain foreign currency gains.
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 and
redemption payments 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. In the case of a foreign shareholder who is a
nonresident alien individual, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of distributions of net long-term capital gains
unless IRS Form W-8 is provided. If distributions are effectively connected with
a U.S. trade or business carried on by a foreign shareholder, distributions of
net investment income and net long-term capital gains will be subject to U.S.
income tax at the graduated rates applicable to U.S. citizens or domestic
corporations. The tax consequences to a foreign shareholder entitled to claim
the benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
B-34
<PAGE>
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.
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 LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, PMFS receives an annual fee per
shareholder account ($13.00), a new account set-up fee ($2.00) for each
manually-established account and a monthly inactive zero balance account fee
($.20) per shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage, stationery, printing, allocable
communications expenses and other costs. For the fiscal year ended December 31,
1997, the Fund incurred fees of approximately $320,000 for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
B-35
<PAGE>
Portfolio of Investments PRUDENTIAL INTERMEDIATE GLOBAL
as of December 31, 1997 INCOME FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal US$
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--91.0%
- ------------------------------------------------------------
Australia--6.2%
A$ 2,250 Federal National Mortgage
Association,
6.375%, 8/15/07 $ 1,477,830
2,900 New South Wales Treasury
Corporation,
6.50%, 5/1/06 1,913,700
8,500 Queensland Treasury
Corporation,
8.00%, 8/14/01 5,935,975
------------
9,327,505
- ------------------------------------------------------------
Canada--8.7%
C$ 3,000 British Columbia Provincial
Bonds,
7.75%, 6/16/03 2,304,793
9,500 Canadian Government Bonds,
9.00%, 12/1/04 7,929,212
3,800 Province of Quebec,
6.50%, 10/1/07 2,741,666
------------
12,975,671
- ------------------------------------------------------------
Denmark--6.5%
Danish Government Bonds,
DKr 32,500 7.00%, 12/15/04 5,182,991
26,500 8.00%, 3/15/06 4,486,075
------------
9,669,066
- ------------------------------------------------------------
Germany--13.1%
German Government Bonds,
DM 10,500 7.375%, 1/3/05 6,579,856
5,300 6.00%, 1/5/06 3,082,236
7,000 6.25%, 1/4/24 4,057,237
4,000 Republic of Colombia,
7.25%, 12/21/00 2,297,264
4,000 Tokyo Gas Co. Ltd.,
7.00%, 7/27/05 2,377,439
DM 2,000 United Mexican States,
8.125%, 9/10/04
Zero coupon (until 9/10/01) $ 1,172,016
------------
19,566,048
- ------------------------------------------------------------
Greece--1.2%
GRD 545,000 Hellenic Republic, FRN,
12.60%, 12/31/03 1,855,115
- ------------------------------------------------------------
Hungary--0.4%
HUF 120,000 Hungarian Government Bonds,
16.50%, 4/12/99, Ser 99-F 575,304
- ------------------------------------------------------------
Netherlands--3.6%
Dutch Government Bonds,
NLG 7,000 7.00%, 6/15/05 3,829,813
2,600 7.50%, 1/15/23 1,556,725
------------
5,386,538
- ------------------------------------------------------------
Spain--4.0%
Spanish Government Bonds,
Pts 250,000 10.30%, 6/15/02 1,985,008
500,000 8.20%, 2/28/09 3,954,201
------------
5,939,209
- ------------------------------------------------------------
Sweden--2.0%
SEK 24,000 Swedish Government Bonds,
6.00%, 2/9/05 3,048,974
- ------------------------------------------------------------
United Kingdom--8.4%
BP 1,300 Powergen PLC,
8.875%, 3/26/03 2,283,600
300 Republic of Argentina,
11.50%, 8/14/01 498,872
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36
<PAGE>
Portfolio of Investments PRUDENTIAL INTERMEDIATE GLOBAL
as of December 31, 1997 INCOME FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal US$
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
United Kingdom (cont'd.)
United Kingdom Treasury Bonds,
BP 2,900 7.75%, 9/8/06 $ 5,193,709
2,200 8.75%, 8/25/17 4,608,033
------------
12,584,214
- ------------------------------------------------------------
United States--36.9%
Corporate Bonds--0.5%
US$ 750 Romanian Commercial Bank,
9.125%, 3/10/00 746,250
------------
Sovereign Bonds--10.5%
350 Banco Ganadero S.A.,
9.75%, 8/26/99 359,625
1,100 Financiera Energetica Nacional,
(Colombia),
9.00%, 11/8/99 1,144,000
1,500 Ministry Of Finance (Russia),
10.00%, 6/26/07 1,392,750
750 Municipality of Rio De Janeiro,
10.375%, 7/12/99 751,875
750 National Bank of Romania,
9.75%, 6/25/99 756,563
2,000 Petroleas Mexicano, FRN,
6.71875%, 3/8/99 1,970,000
960 Republic of Argentina, FRB,
6.6875%, 3/31/05 858,048
942 Republic of Brazil, IDU,
6.8125%, 1/1/01 897,255
1,500 Republic of Colombia,
7.25%, 2/23/04 1,442,250
1,416 Republic of Croatia, FRN,
6.625%, 7/31/06 1,288,720
500 Republic of Lithuania,
7.125%, 7/22/02 473,750
2,000 Republic of Poland, FRN,
6.6875%, 10/27/24 1,942,600
750 Sultan of Oman,
7.125%, 3/20/02 759,375
US$ 500 Trinidad & Tobago Republic,
9.75%, 11/3/00 $ 525,000
1,000 United Mexican States,
9.75%, 2/6/01 1,040,000
------------
15,601,811
- ------------------------------------------------------------
Supranational Bonds--0.9%
1,350 Corporacion Andina de Formento,
7.375%, 7/21/00 1,373,625
- ------------------------------------------------------------
U.S. Government Obligations--25.0%
6,700 United States Treasury Bonds,
6.625%, 2/15/27 7,267,691
United States Treasury Notes,
9,600 6.75%, 6/30/99 9,748,512
8,100 6.125%, 9/30/00 8,184,807
6,000 5.75%, 8/15/03 6,003,720
3,100 7.875%, 11/15/04 3,465,707
2,600 6.25%, 2/15/07 2,682,862
------------
37,353,299
------------
55,074,985
------------
Total long-term investments
(cost US$137,718,656) 136,002,629
------------
SHORT-TERM INVESTMENTS--5.5%
- ------------------------------------------------------------
Hungary--0.6%
HUF 180,000 Hungarian Government Bonds,
23.50%, 5/17/98, Ser. 98-I 892,045
- ------------------------------------------------------------
Indonesia--0.4%
IDR 2,000,000 Asia Pulp And Paper, NCD,
14.45%(a), 1/27/98 356,059
2,000,000 Bakrie And Brothers, NCD,
17.50%(a), 2/19/98 163,643
------------
519,702
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
Portfolio of Investments as of December 31, 1997
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal US$
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
United States--4.5%
Repurchase Agreement--3.0%
US$ 4,556 Joint Repurchase Agreement
Account,
6.63%,1/2/98, (Note 5) $ 4,556,000
- ------------------------------------------------------------
Sovereign Bonds--1.5%
2,185 Republic of Colombia,
7.125%, 5/11/98 2,185,000
------------
6,741,000
------------
Total short-term investments
(cost US$9,563,445) 8,152,747
------------
- ------------------------------------------------------------
Total Investments--96.5%
(cost US$147,282,101; Note 4) 144,155,376
Other assets in excess of
liabilities--3.5% 5,256,262
------------
Net Assets--100% $149,411,638
------------
------------
</TABLE>
- ---------------
Portfolio securities are classified according to the securities
currency denomination.
(a) Percentages quoted represent yield-to-maturity as of purchase date.
FRB-Floating Rate Bond.
FRN-Floating Rate Note.
IDU-Interest Due and Unpaid Bonds.
NCD-Negotiable Certificates of Deposit
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-38
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Statement of Assets and Liabilities INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
Assets December 31, 1997
<S> <C>
Investments, at value (cost $147,282,101).............................................................. $144,155,376
Foreign currency, at value (cost $659,871)............................................................. 831,313
Interest receivable.................................................................................... 3,906,233
Forward currency contracts - net amount receivable from counterparties................................. 1,441,702
Receivable for Fund shares sold........................................................................ 38,035
Other assets........................................................................................... 4,113
------------------
Total assets........................................................................................ 150,376,772
------------------
Liabilities
Bank overdraft......................................................................................... 5,664
Accrued expenses....................................................................................... 285,642
Payable for Fund shares reacquired..................................................................... 279,550
Forward currency contracts - net amount payable to counterparties...................................... 245,510
Management fee payable................................................................................. 98,207
Dividends payable...................................................................................... 26,320
Distribution fee payable............................................................................... 24,241
------------------
Total liabilities................................................................................... 965,134
------------------
Net Assets............................................................................................. $149,411,638
------------------
------------------
Net assets were comprised of:
Common stock, at par................................................................................ $ 18,882
Paid-in capital in excess of par.................................................................... 228,898,024
------------------
228,916,906
Undistributed net investment income................................................................. 1,577,820
Accumulated net realized loss on investments........................................................ (79,251,139)
Net unrealized depreciation on investments and foreign currencies................................... (1,831,949)
------------------
Net assets, December 31, 1997.......................................................................... $149,411,638
------------------
------------------
Class A:
Net asset value and redemption price per share
($137,799,207 / 17,415,322 shares of common stock issued and outstanding)........................ $7.91
Maximum sales charge (3.00% of offering price)...................................................... .24
------------------
Maximum offering price to public.................................................................... $8.15
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share
($8,896,288 / 1,123,441 shares of common stock issued and outstanding)........................... $7.92
------------------
------------------
Class C:
Net asset value, offering price and redemption price per share
($198,460 / 25,063 shares of common stock issued and outstanding)................................ $7.92
------------------
------------------
Class Z:
Net asset value, offering price and redemption price per share
($2,517,683 / 318,248 shares of common stock issued and outstanding)............................. $7.91
------------------
------------------
</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, 1997
<S> <C>
Income
Interest and discount earned.......... $ 13,367,597
-----------------
Expenses
Management fee........................ 1,248,195
Distribution fee--Class A............. 229,752
Distribution fee--Class B............. 85,326
Distribution fee--Class C............. 1,600
Transfer agent's fees and expenses.... 399,000
Custodian's fees and expenses......... 188,000
Reports to shareholders............... 115,000
Registration fees..................... 39,000
Audit fee............................. 36,000
Directors' fees and expenses.......... 28,000
Legal fees and expenses............... 26,000
Insurance............................. 3,000
Miscellaneous......................... 10,738
-----------------
Total expenses..................... 2,409,611
-----------------
Net investment income.................... 10,957,986
-----------------
Net Realized and Unrealized Gain
(Loss) on Investments and Foreign
Currency Transactions
Net realized gain on:
Investment transactions............... 231,860
Foreign currency transactions......... 6,242,901
-----------------
6,474,761
-----------------
Net change in unrealized
appreciation/depreciation of:
Investments........................... (11,427,189)
Foreign currencies.................... 1,200,969
-----------------
(10,226,220)
-----------------
Net loss on investments and foreign
currencies............................ (3,751,459)
-----------------
Net Increase in Net Assets
Resulting from Operations................ $ 7,206,527
-----------------
-----------------
</TABLE>
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income.......... $ 10,957,986 $ 12,015,379
Net realized gain on investment
and foreign currency
transactions................ 6,474,761 8,525,984
Net change in unrealized
appreciation/
depreciation on investments
and foreign currencies...... (10,226,220) (1,630,745)
------------ ------------
Net increase in net assets
resulting from operations... 7,206,527 18,910,618
------------ ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (10,144,701) (11,085,209)
Class B..................... (687,169) (920,752)
Class C..................... (13,331) (6,619)
Class Z..................... (112,785) (2,799)
------------ ------------
(10,957,986) (12,015,379)
------------ ------------
Distributions in excess of net
investment income
Class A..................... (4,226,324) (5,793,623)
Class B..................... (259,200) (474,939)
Class C..................... (6,585) (4,101)
Class Z..................... (77,678) (4,774)
------------ ------------
(4,569,787) (6,277,437)
------------ ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
sold........................ 9,602,565 16,398,099
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 6,097,113 6,011,409
Cost of shares reacquired...... (37,313,110) (42,995,654)
------------ ------------
Net decrease in net assets from
Fund share transactions..... (21,613,432) (20,586,146)
------------ ------------
Total decrease.................... (29,934,678) (19,968,344)
Net Assets
Beginning of year................. 179,346,316 199,314,660
------------ ------------
End of year....................... $149,411,638 $179,346,316
------------ ------------
------------ ------------
</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, nondiversified management investment company and
commenced investment operations on May 26, 1988. On October 4, 1991 the Fund
concluded operations as a closed-end investment company and effective October 7,
1991, commenced operations as an open-end, nondiversified investment company.
The Fund's investment objective is to maximize total return, the components of
which are current income and capital appreciation, by investing in a portfolio
consisting primarily of U.S. and foreign government securities. The Fund will
also engage in certain hedging strategies to meet its investment objective. The
ability of issuers of debt securities held by the Fund to meet their obligations
may be affected by economic and political developments in a specific country or
region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current currency rate. Portfolio securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by an independent pricing
service or by principal market makers. Forward currency exchange contracts are
valued at the current cost of covering or offsetting the contract on the day of
valuation. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians under triparty repurchase agreements, as the case may be take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the 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 year end
exchange rates are reflected as a component of net unrealized depreciation on
investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its
- --------------------------------------------------------------------------------
B-41
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- --------------------------------------------------------------------------------
foreign portfolio holdings or on specific receivables and payables denominated
in a foreign currency. The contracts are valued daily at current exchange rates
and any unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
Security Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized gains and losses from security and currency
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Fund amortizes discounts on purchases of debt
securities as adjustments to income. Expenses are recorded on the accrual basis
which may require the use of certain estimates by management.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Dividends and Distributions: The Fund declares dividends of net investment
income daily and pays 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 $4,471,527 of
foreign currency gains from accumulated net realized loss on investments to
undistributed net investment income. Net investment income, net realized gains
and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'): PIC, through an agreement with PRICOA Asset
Management Ltd. ('PRICOA'), furnishes investment advisory services in connection
with the management of the Fund. PIFM pays for the cost of the subadviser's
services, 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 PIFM is computed daily and payable monthly at an annual
rate of .75% of the Fund's average daily net assets.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, B, C and Z shares of the
Fund. The Fund compensates PSI for distributing and servicing the Fund's Class
A, Class B and Class C shares, pursuant to plans of distribution (the 'Class A,
B and C Plans'), regardless of expenses actually incurred by PSI. The
distribution fees are accrued daily and payable monthly. No distribution or
service fees are paid to PSI as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .15 of 1%, .75 of 1% and .75 of 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
year ended December 31, 1997.
PSI has advised the Fund that it has received approximately $28,800 in front-end
sales charges resulting from sales of Class A shares during the year ended
December 31, 1997. From these fees, PSI paid such sales charges to Pruco
Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended December 31, 1997, it received
approximately $13,300 and $500 in contingent deferred sales
- --------------------------------------------------------------------------------
B-42
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- --------------------------------------------------------------------------------
charges imposed upon certain redemptions by Class B and C shareholders,
respectively.
PSI, PIFM, PIC and PRICOA are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purposes of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement during the year
ended December 31, 1997. The Funds pay a commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro-rata basis by the Funds. The Agreement
expired on December 30, 1997 and has been extended through December 29, 1998
under the same terms.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the year ended December 31, 1997,
the Fund incurred fees of approximately $320,000 for the services of PMFS. As of
December 31, 1997, fees of approximately $27,000 were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments
for the year ended December 31, 1997, aggregated $58,632,258 and $69,053,824,
respectively.
At December 31, 1997, the Fund had outstanding forward currency contracts both
to purchase and sell foreign currencies as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Purchase Contracts Receivable Value Depreciation
- ------------------------------ --------------- ----------- ---------------
<S> <C> <C> <C>
Deutschemarks,
expiring 4/30/98............. $ 3,218,913 $ 3,100,748 $ (118,165)
Greek Drachma,
expiring 4/30/98............. 1,460,094 1,418,617 (41,477)
Norwegian Krone,
expiring 1/29/98............. 4,743,173 4,660,521 (82,652)
--------------- ----------- ---------------
$ 9,422,180 $ 9,179,886 $ (242,294)
--------------- ----------- ---------------
--------------- ----------- ---------------
<CAPTION>
Value at
Foreign Currency Settlement Date Current Appreciation
Sale Contracts Payable Value (Depreciation)
- ------------------------------ --------------- ----------- ---------------
<S> <C> <C> <C>
Australian Dollars,
expiring 1/29/98............. $ 9,473,017 $ 9,353,905 $ 119,112
French Francs,
expiring 1/29/98............. 6,185,370 6,117,198 68,172
Greek Drachma,
expiring 4/30/98............. 3,218,913 3,220,633 (1,720)
Indonesian Rupiah,
expiring 1/27/98 - 2/19/98... 1,525,464 719,855 805,609
Netherlands Guilders,
expiring 1/29/98............. 23,955,098 23,671,362 283,736
Swiss Francs,
expiring 1/29/98............. 8,771,930 8,608,353 163,577
--------------- ----------- ---------------
$53,129,792 $51,691,306 $ 1,438,486
--------------- ----------- ---------------
--------------- ----------- ---------------
</TABLE>
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of December
31, 1997 net unrealized depreciation for federal income tax purposes was
$3,126,725 (gross unrealized appreciation--$3,860,513 gross unrealized
depreciation--$6,987,238).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1997, of approximately $79,251,100 of which $37,377,300 expires in
1999, $23,239,700 expires in 2000 and $18,634,100 expires in 2002. Such
carryforward is after utilization of approximately $1,981,200 of net taxable
gains realized and recognized during the year ended December 31, 1997.
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, 1997, the
Fund has a 0.39% undivided interest in the joint account. The undivided interest
for the Fund represents $4,556,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:
Credit Suisse First Boston Corp., 6.75%, in the principal amount of
$342,000,000, repurchase price $342,128,250, due 1/2/98. The value of the
collateral including accrued interest is $353,486,750.
- --------------------------------------------------------------------------------
B-43
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- --------------------------------------------------------------------------------
Deutsche Morgan Grenfell, Inc., 6.80%, in the principal amount of $200,000,000,
repurchase price $200,075,555, due 1/2/98. The value of the collateral including
accrued interest is $204,000,314.
SBC Warburg Dillon Read, Inc., 6.55%, in the principal amount of $142,000,000,
repurchase price $142,051,672, due 1/2/98. The value of the collateral including
accrued interest is $144,862,841.
Morgan Stanley, Dean Witter, Discover & Co., 5.95%, in the principal amount of
$151,553,000, repurchase price $151,603,097, due 1/2/98. The value of the
collateral including accrued interest is $154,584,932.
Salomon Smith Barney Inc., 6.75%, in the principal amount of $342,000,000,
repurchase price $342,128,250, due 1/2/98. The value of the collateral including
accrued interest is $350,295,372.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 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. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
There are 2 billion authorized shares of $.001 par value common stock divided
equally into Class A, B, C and Z shares. Of the 18,882,074 shares of common
stock issued and outstanding at December 31, 1997, PIFM owed 784, 64, 30 and 26
shares of Class A, B, C and Z, respectively.
Transactions in shares of common stock for the fiscal years ended December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- ------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold....................... 542,213 $ 4,459,760
Shares issued in reinvestment of
dividends and distributions..... 653,586 5,300,167
Shares reacquired................. (4,062,149) (33,299,580)
----------- ------------
Net decrease in shares outstanding
before conversion............... (2,866,350) (23,539,653)
Shares issued upon conversion from
Class B......................... 389,219 3,195,679
----------- ------------
Net decrease in shares
outstanding..................... (2,477,131) $(20,343,974)
----------- ------------
----------- ------------
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- ------------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold....................... 1,627,906 $13,874,864
Shares issued in reinvestment of
dividends and distributions..... 623,439 5,190,056
Shares reacquired................. (4,456,896) (37,256,995)
----------- ------------
Net decrease in shares outstanding
before conversion............... (2,205,551) (18,192,075)
Shares issued upon conversion from
Class B......................... 176,554 1,485,956
----------- ------------
Net decrease in shares
outstanding..................... (2,028,997) $(16,706,119)
----------- ------------
----------- ------------
<CAPTION>
Class B
- ----------------------------------
Year ended December 31, 1997:
Shares sold....................... 279,325 $ 2,295,924
Shares issued in reinvestment of
dividends and distributions..... 73,534 596,963
Shares reacquired................. (397,198) (3,261,753)
----------- ------------
Net decrease in shares outstanding
before conversion............... (44,339) (368,866)
Shares reacquired upon conversion
into Class A.................... (388,827) (3,195,679)
----------- ------------
Net decrease in shares
outstanding..................... (433,166) $(3,564,545)
----------- ------------
----------- ------------
Year ended December 31, 1996:
Shares sold....................... 221,716 $ 1,860,253
Shares issued in reinvestment of
dividends and distributions..... 95,574 795,836
Shares reacquired................. (667,933) (5,574,736)
----------- ------------
Net decrease in shares outstanding
before conversion............... (350,643) (2,918,647)
Shares reacquired upon conversion
into Class A.................... (176,501) (1,485,956)
----------- ------------
Net decrease in shares
outstanding..................... (527,144) $(4,404,603)
----------- ------------
----------- ------------
Class C
- ----------------------------------
Year ended December 31, 1997:
Shares sold....................... 19,602 $ 161,438
Shares issued in reinvestment of
dividends and distributions..... 2,366 19,170
Shares reacquired................. (19,641) (160,753)
----------- ------------
Net increase in shares
outstanding..................... 2,327 $ 19,855
----------- ------------
----------- ------------
Year ended December 31, 1996:
Shares sold....................... 33,617 $ 278,856
Shares issued in reinvestment of
dividends....................... 1,399 11,666
Shares reacquired................. (13,861) (116,335)
----------- ------------
Net increase in shares
outstanding..................... 21,155 $ 174,187
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-44
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Notes to Financial Statements INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
Class Z Shares Amount
- ---------------------------------- ----------- ------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold....................... 327,070 $ 2,685,443
Shares issued in reinvestment of
dividends and distributions..... 22,388 180,813
Shares reacquired................. (72,134) (591,024)
----------- ------------
Net increase in shares
outstanding..................... 277,324 $ 2,275,232
----------- ------------
----------- ------------
September 13, 1996(a) through
December 31, 1996:
Shares sold....................... 44,728 $ 384,126
Shares issued in reinvestment of
dividends and distributions..... 1,667 13,851
Shares reacquired................. (5,471) (47,588)
----------- ------------
Net increase in shares
outstanding..................... 40,924 $ 350,389
----------- ------------
----------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-45
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Financial Highlights INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1997(b) 1996 1995(b) 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 8.34 $ 8.30 $ 7.32 $ 8.43 $ 7.77
-------- -------- -------- -------- --------
Income from investment operations
Net investment income........................................ .54 .56 .52 .50 .59
Net realized and unrealized gain (loss) on investment and
foreign currency transactions............................. (.18) .33 1.20 (1.09) .63
-------- -------- -------- -------- --------
Total from investment operations.......................... .36 .89 1.72 (.59) 1.22
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income......................... (.54) (.56) (.52) (.29) (.48)
Distributions in excess of net investment income............. (.25) (.29) (.22) -- --
Distributions from capital gains............................. -- -- -- (.01) (.08)
Tax return of capital distributions.......................... -- -- -- (.22) --
-------- -------- -------- -------- --------
Total distributions....................................... (.79) (.85) (.74) (.52) (.56)
-------- -------- -------- -------- --------
Net asset value, end of year................................. $ 7.91 $ 8.34 $ 8.30 $ 7.32 $ 8.43
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):............................................. 4.42% 11.13% 24.01% (7.02)% 16.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $137,799 $165,829 $181,985 $207,153 $320,406
Average net assets (000)..................................... $153,168 $169,219 $200,759 $262,882 $355,018
Ratios to average net assets:
Expenses, including distribution fees..................... 1.41% 1.40% 1.40% 1.46% 1.41%
Expenses, excluding distribution fees..................... 1.26% 1.25% 1.25% 1.31% 1.26%
Net investment income..................................... 6.62% 6.55% 6.09% 6.04% 7.42%
For Class A, B, C and Z shares:
Portfolio turnover rate................................... 40% 45% 220% 554% 361%
</TABLE>
- ---------------
(a) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Calculated based upon average shares outstanding during the fiscal year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Financial Highlights INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
1997(b) 1996 1995(b) 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 8.34 $ 8.31 $ 7.33 $ 8.44 $ 7.79
------- ------- ------- ------- -------
Income from investment operations
Net investment income........................................ .50 .53 .47 .45 .54
Net realized and unrealized gain (loss) on
investment and foreign currency transactions.............. (.18) .30 1.20 (1.09) .63
------- ------- ------- ------- -------
Total from investment operations.......................... .32 .83 1.67 (.64) 1.17
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income......................... (.50) (.53) (.47) (.26) (.44)
Distributions in excess of net investment income............. (.24) (.27) (.22) -- --
Distributions from capital gains............................. -- -- -- (.01) (.08)
Tax return of capital distributions.......................... -- -- -- (.20) --
------- ------- ------- ------- -------
Total distributions....................................... (.74) (.80) (.69) (.47) (.52)
------- ------- ------- ------- -------
Net asset value, end of year................................. $ 7.92 $ 8.34 $ 8.31 $ 7.33 $ 8.44
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(a):............................................. 3.80% 10.36% 23.25% (7.69)% 15.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $ 8,896 $12,987 $17,317 $22,906 $39,440
Average net assets (000)..................................... $11,377 $15,491 $19,336 $31,835 $36,197
Ratios to average net assets:
Expenses, including distribution fees..................... 2.01% 2.00% 2.00% 2.07% 2.01%
Expenses, excluding distribution fees..................... 1.26% 1.25% 1.25% 1.31% 1.26%
Net investment income..................................... 6.04% 5.94% 5.49% 5.44% 6.67%
</TABLE>
- ---------------
(a) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Calculated based upon average shares outstanding during the fiscal year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Financial Highlights INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
----------------------------------------------------
August 1,
1994(e)
Year Ended December 31, Through
----------------------------------- December 31,
1997(b) 1996 1995(b) 1994
------- --------- --------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 8.34 $ 8.31 $ 7.33 $ 7.69
------- --------- --------- -----
Income from investment operations
Net investment income........................................ .50 .53 .47 .14
Net realized and unrealized gain (loss) on investment and
foreign currency transactions............................. (.18 ) .30 1.20 (.32)
------- --------- --------- -----
Total from investment operations.......................... .32 .83 1.67 (.18)
------- --------- --------- -----
Less distributions
Dividends from net investment income......................... (.50 ) (.53) (.47) (.10)
Distributions in excess of net investment income............. (.24 ) (.27) (.22) --
Tax return of capital distributions.......................... -- -- -- (.08)
------- --------- --------- -----
Total distributions....................................... (.74 ) (.80) (.69) (.18)
------- --------- --------- -----
Net asset value, end of period............................... $ 7.92 $ 8.34 $ 8.31 $ 7.33
------- --------- --------- -----
------- --------- --------- -----
TOTAL RETURN(a):............................................. 3.80 % 10.36% 23.25% (2.44)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 198 $ 190 $ 13 $ 193(d)
Average net assets (000)..................................... $ 213 $ 110 $ 11 $ 197(d)
Ratios to average net assets:
Expenses, including distribution fees..................... 2.01 % 2.00% 2.00% 1.05%(c)
Expenses, excluding distribution fees..................... 1.26 % 1.25% 1.25% .30%(c)
Net investment income..................................... 6.25 % 6.02% 5.49% 3.30%(c)
<CAPTION>
Class Z
------------------------------
September 13,
1996(f)
Year Ended Through
December 31, December 31,
1997(b) 1996
------------ -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 8.34 $ 8.39
------------ -----
Income from investment operations
Net investment income........................................ .55 .32
Net realized and unrealized gain (loss) on investment and
foreign currency transactions............................. (.18) .12
------------ -----
Total from investment operations.......................... .37 .44
------------ -----
Less distributions
Dividends from net investment income......................... (.55) (.32)
Distributions in excess of net investment income............. (.25) (.17)
Tax return of capital distributions.......................... -- --
------------ -----
Total distributions....................................... (.80) (.49)
------------ -----
Net asset value, end of period............................... $ 7.91 $ 8.34
------------ -----
------------ -----
TOTAL RETURN(a):............................................. 4.57% 5.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 2,518 $ 341
Average net assets (000)..................................... $ 1,668 $ 142
Ratios to average net assets:
Expenses, including distribution fees..................... 1.26% 1.11%(c)
Expenses, excluding distribution fees..................... 1.26% 1.11%(c)
Net investment income..................................... 6.76% 6.94%(c)
</TABLE>
- ---------------
(a) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Calculated based upon average shares outstanding during the fiscal year.
(c) Annualized.
(d) Figures are actual and not rounded to the nearest thousand.
(e) Commencement of offering of Class C shares.
(f) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
PRUDENTIAL INTERMEDIATE GLOBAL
Report of Independent Accountants INCOME FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and the Board of Directors of
Prudential Intermediate Global Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Intermediate Global
Income Fund, Inc. (the 'Fund') at December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as 'financial statements') are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1997 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 13, 1998
- --------------------------------------------------------------------------------
B-49
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This following chart shows the long-term performance of various asset
classes and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE DATA
[CHART]
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
Value of $1.00 invested on 1/1/26 through 12/31/97
SMALL STOCKS $5,519.97
COMMON STOCKS $1,828.33
LONG-TERM BONDS $ 39.07
TREASURY BILLS $ 14.25
INFLATION $ 9.02
- --------------------------------------------------------------------------------
- ----------
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due mainly to reinvesting interest. Also, stock
prices are usually more volatile than bond prices over the long-term. Small
stock returns for 1926-1980 are those of stocks comprising the 5th quintile of
the New York Stock Exchange. Thereafter, returns are those of the Dimensional
Fund Advisors (DFA) Small Company Fund. Common stock returns are based on the
S&P Composite Index, a market-weighted, unmanaged index of 500 stocks
(currently) in a variety of industries. It is often used as a broad measure of
stock market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
<TABLE>
Historical Total Returns of Different Bond Market Sectors
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY BONDS(1) ........... 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
U.S. GOVERNMENT
MORTGAGE SECURITIES(2) ...... 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
U.S. INVESTMENT GRADE
CORPORATE BONDS(3)........... 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
U.S. HIGH YIELD
CORPORATE BONDS(4)........... 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
WORLD GOVERNMENT
BONDS(5) .................... 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)%
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT .............. 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1
</TABLE>
- ----------
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one
year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of
the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S.
dollar-denominated issues and include debt issued or guaranteed by foreign
sovereign governments, municipalities, governmental agencies or
international agencies. All bonds in the index have maturities of at least
one year.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at
least one year.
(5) SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada,
Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
- --------------------------------------------------------------------------------
CHART
- --------------------------------------------------------------------------------
- ----------
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1997. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-3
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1996. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and 6,400
financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It ensures or provides financial services to nearly 50 million people
worldwide. Long one of the largest issuers of individual life insurance,
Prudential has 22 million life insurance policies in force today with a face
value of $1 trillion. Prudential has the largest capital base ($12.1 billion) of
any life insurance company in the United States. Prudential provides auto
insurance for approximately 1.6 million cars and insures more than 1.2 million
homes.
Money Management. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1996, Prudential had more than $322 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $190 billion in assets of
institutions and individuals. In Pensions and Investments, May 12, 1996,
Prudential was ranked third in terms of total assets under management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents across the United States.(2)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of October 31, 1997, Prudential Investments Fund Management was the
17th largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage
over $55 billion in mutual fund and variable annuity assets. Some of
Prudential's portfolio managers have over 20 years of experience managing
investment portfolios.
- ----------
(1) PIC serves as the Subadviser to substantially all of the Prudential Mutual
funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates LLC as the subadviser to
Prudential Jennison Series Fund, Inc. and Mercator Asset Management LP as
the subadviser to International Stock Series, a portfolio of Prudential
World Fund, Inc. There are multiple subadvisers for The Target Portfolio
Trust.
(2) As of December 31, 1996.
III-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates LLC, a premier institutional equity manager
and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wire data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
- ----------
(3) As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-U.S. accounts
managed by Prudential Investments, a business group of PIC, for the year
ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General US. Government and Mortgage Funds.
(6) As of December 31, 1994.
III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at Prudential Securities.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs receive a grade of A- (compared to an industry average
of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects (SM), a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
(7) As of December 31, 1994.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighing them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
(1) Financial Statements incorporated by reference in the Prospectus
constituting Part A of this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at December 31, 1997.
Statement of Assets and Liabilities at December 31, 1997.
Statement of Operations for the Fiscal Year Ended December 31,
1997.
Statement of Changes in Net Assets for the Fiscal Years ended
December 31, 1997 and 1996.
Notes to Financial Statements.
Financial Highlights.
Report of Independent Accountants.
(B) EXHIBITS:
1 (a) Restated Articles of Incorporation. Incorporated by reference
to Exhibit 1 to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed via EDGAR on March 1,
1995 (File No. 33-42093).
(b) Articles Supplementary. Incorporated by reference to Exhibit
1(b) to Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A filed via EDGAR on August 15, 1996 (File
No. 33-42093).
2. Amended By-Laws of Registrant. Incorporated by reference to
Exhibit 2 to Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A filed via EDGAR on February 28, 1997 (File
No. 33-42093).
3. Not Applicable.
4. (a) Specimen stock certificate.*
(b) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibit 4(b) to Post-Effective Amendment No. 4 to
the Registration Statement on form N-1A filed via EDGAR on March
2, 1994 (File No. 33-42093).
5. (a) Management Agreement between Registrant and Prudential Mutual
Fund Management, Inc. Incorporated by reference to Exhibit 5(a)
to Post-Effective Amendment No. 10 to the Registration Statement
on Form N-1A filed via EDGAR on February 28, 1997 (File No.
33-42093).
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.
Incorporated by reference to Exhibit 5(b) to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A filed
via EDGAR on February 28, 1997 (File No. 33-42093).
6. (a) Selected Dealer Agreement. Incorporated by reference to
Exhibit 6(a) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed via EDGAR on February
28, 1997 (File No. 33-42093).
(b) Amended and Restated Distribution Agreement. Incorporated by
reference to Exhibit 6(b) to Post-Effective Amendment No. 9 to
the Registration Statement on Form N-1A filed via EDGAR on August
15, 1996 (File No. 33-42093).
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 10 to the Registration Statement on
Form N-1A filed via EDGAR on February 28, 1997 (File No.
33-42093).
- ----------
* Filed herewith.
C-1
<PAGE>
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference
to Exhibit 9 to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed via EDGAR on February
28, 1997 (File No. 33-42093).
10. (Opinion of Shereff, Friedman, Hoffman & Goodman, LLP, dated
October 3, 1991. Incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A filed via EDGAR on March 1, 1996 (File No. 33-42093).
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A shares.
Incorporated by reference to Exhibit 15(e) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A filed
via EDGAR on March 1, 1995 (File No. 33-42093).
(b) Distribution and Service Plan for Class B shares.
Incorporated by reference to Exhibit 15(f) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A filed
via EDGAR on March 1, 1995 (File No. 33-42093).
(c) Distribution and Service Plan for Class C shares.
Incorporated by reference to Exhibit 15(g) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A filed
via EDGAR on March 1, 1995 (File No. 33-42093).
16. (a) Schedule of Computation of Performance Quotations.
Incorporated by reference to Exhibit 16(a) to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A filed
via EDGAR on February 28, 1997 (File No. 33-42093).
(b) Schedule of Calculation of Aggregate Total Return for Class A
and Class B shares. Incorporated by reference to Exhibit 16(b) to
Post-Effective Amendment No. 4 to the Registration Statement on
form N-1A filed via EDGAR on March 2, 1994 (File No. 33-42093).
17. Financial Data Schedules filed as Exhibit 27 for electronic
purposes.*
18. Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to
Post-Effective Amendment No. 9 to the Registration Statement on
Form N-1A filed via EDGAR on August 15, 1996 (File No. 33-42093).
- ----------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of February 6, 1998 there were 20,332, 944, 50 and 512 record holders of
Class A, Class B, Class C and Class Z shares of common stock, $.001 par value
per share, of the Registrant, respectively.
ITEM 27. INDEMNIFICATION
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VII of the Fund's
By-Laws (Exhibit 2 to the Registration Statement), officers, directors,
employees and agents of the Registrant will not be liable to the Registrant, any
stockholder, officer, director, employee, agent or other person for any action
or failure to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be indemnified
against liabilities in connection with the Registrant, subject to the same
exceptions. Section 2-418 of Maryland General Corporation Law permits
indemnification of directors who acted in good faith and reasonably believed
that the conduct was in the best interests of the Registrant. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution
Agreement (Exhibit 6 (b) to the Registration Statement), each Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
C-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC
See "How the Fund is Managed--Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. The address of each person is Gateway
Center Three, 100 Mulberry Street, Newark, NJ 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Frank W. Giordano Executive Vice Executive Vice President, Secretary and
President, Secretary General Counsel, PIFM; Senior Vice
and General Counsel President, Prudential Securities Incorporated
Robert F. Gunia Executive Vice Vice President, Prudential Investments;
President Executive Vice President and Treasurer,
and Treasurer PIFM; Senior Vice President of Prudential
Securities
Neil A. McGuinness Executive Vice Executive Vice President and Director of
President Marketing, Prudential Mutual Funds &
Annuities (PMF & A); Executive Vice
President, PIFM
Brian Storms Officer-In-Charge, President, PMF & A; Officer-In-Charge,
President, Chief President, Chief Executive Officer and
Executive Officer Chief Operating Officer, PIFM
and Chief
Operating Officer
Robert J. Sullivan Executive Vice Executive Vice President, PMF & A;
President Executive Vice President, PIFM
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-3
<PAGE>
The business and other connections of PIC's directors and executive
officers are as set forth below. The address of each person is Prudential
Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of Prudential
President and Chief Investments (PIC) of The Prudential
Executive Officer Insurance Company of America (Prudential)
and Director
Jonathan M. Greene Senior Vice President--Investment Management of
President and Prudential Investments of Prudential;
Director Senior Vice President and Director, PIC
John R. Strangfeld Vice President and President of Private Asset Management
Director Group of Prudential; Senior Vice
President, Prudential; Vice President and
Director, PIC
(c) PRICOA Asset Management Ltd. (PRICOA)
</TABLE>
See "How the Fund is Managed--Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PRICOA's directors and officers are
as set forth below. The address of each person is 115 Houndsditch, London-EC3A
7BV, England.
<TABLE>
<CAPTION>
NAME POSITION WITH PRICOA PRINCIPAL OCCUPATIONS
- ---- -------------------- ---------------------
<S> <C> <C>
Simon J. Wells CEO and Director CEO and Director, PRICOA; Employee
of PIC and Prudential-Bache
Securities (U.K.) Inc.
J. Gabriel Irwin Chairman and Chairman and Director, PRICOA;
Director Employee of PIC and Prudential-
Bache Securities (U.K.) Inc.
Peter G. Spenser Financial Compliance Financial Compliance Officer and
Officer and Director Director, PRICOA
Stephen Auth Director Director, PRICOA
Jean-Yves Chereau Director Director, PRICOA
William N. Jones Secretary Secretary, PRICOA
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities is distributor for Cash Accumulation Trust, Command
Government Fund, Command Money Fund, Command Tax-Free Fund, The Global Total
Return Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Balanced Fund, Prudential
California Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential
Distressed Securities Fund, Inc., Prudential Emerging Growth Fund, Inc.,
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe
Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global
Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Government Securities Trust, Prudential High Yield Fund, Inc., Prudential Index
Series Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential International Bond Fund, Inc.,
Prudential Jennison Series Fund, Inc., Prudential MoneyMart Assets, Inc.,
Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Small-Cap Quantum Fund, Inc.,
Prudential Small Company Value Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund,
Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio Trust. Prudential Securities is also a depositor for the following
unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
C-4
<PAGE>
(b) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
------- ----------- -------------
Alan D. Hogan .......... Executive Vice President, Chief
Administrative Officer and Director None
William Horan .......... Chief Financial Officer None
George A. Murray ....... Executive Vice President and Director None
Leland B. Paton ........ Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff ...... Executive Vice President and Director None
Vincent T. Pica, II Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons ....... Chief Executive Officer, President
and Director None
Lee B. Spencer, Jr. .... General Counsel, Executive Vice
President and Director None
Brian Storms ........... Director None
Gateway Center Three
Newark, NJ 07102
- ----------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, The Prudential Investment Corporation, Prudential
Plaza, 745 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, PRICOA Asset
Management Ltd, 115 Houndsditch, London EC3A 7BU, England, and Prudential Mutual
Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents
required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11), 31a-1(f),
31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center Three, and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept by
State Street Bank and Trust Company and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed--Distributor" in the Prospectus
and the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Post-Effective
Amendment to the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark, and State of New Jersey, on the 26th day of February, 1998.
PRUDENTIAL INTERMEDIATE GLOBAL INCOME
FUND, INC.
/s/ RICHARD A. REDEKER
--------------------------------------
Richard A. Redeker, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ EDWARD D. BEACH Director February 26, 1998
- -----------------------------
Edward D. Beach
/s/ DELAYNE D. GOLD Director February 26, 1998
- -----------------------------
Delayne D. Gold
/s/ ROBERT F. GUNIA Director February 26, 1998
- -----------------------------
Robert F. Gunia
/s/ DOUGLAS H. McCORKINDALE Director February 26, 1998
- -----------------------------
Douglas H. McCorkindale
/s/ MENDEL A. MELZER Director February 26, 1998
- -----------------------------
Mendel A. Melzer
/s/ THOMAS T. MOONEY Director February 26, 1998
- -----------------------------
Thomas T. Mooney
/s/ STEPHEN P. MUNN Director February 26, 1998
- -----------------------------
Stephen P. Munn
/s/ RICHARD A. REDEKER Director February 26, 1998
- -----------------------------
Richard A. Redeker
/s/ ROBIN B. SMITH Director February 26, 1998
- -----------------------------
Robin B. Smith
/s/ LOUIS A. WEIL, III Director February 26, 1998
- -----------------------------
Louis A. Weil, III
/s/ CLAY T. WHITEHEAD Director February 26, 1998
- -----------------------------
Clay T. Whitehead
/s/ GRACE C. TORRES Principal Financial February 26, 1998
- ----------------------------- and Accounting Officer
Grace C. Torres
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1. (a) Restated Articles of Incorporation. Incorporated by reference to
Exhibit 1 to Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A filed via EDGAR on March 1, 1995 (File No.
33-42093).
(b) Articles Supplementary. Incorporated by reference to Exhibit 1(b)
to Post-Effective Amendment No. 9 to the Registration Statement on
Form N-1A filed via EDGAR on August 15, 1996 (File No. 33-42093).
2. Amended By-Laws of Registrant. Incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 10 to the Registration Statement on
Form N-1A filed via EDGAR on February 28, 1997 (File No. 33-42093).
3. Not Applicable.
4. (a) Specimen stock certificate.*
(b) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibit 4(b) to Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A filed via EDGAR on March 2, 1994
(File No. 33-42093).
5. (a) Management Agreement between Registrant and Prudential Mutual Fund
Management, Inc. Incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 10 to the Registration Statement on Form
N-1A filed via EDGAR on February 28, 1997 (File No. 33-42093).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed via EDGAR on February 28,
1997 (File No. 33-42093).
6. (a) Selected Dealer Agreement. Incorporated by reference to Exhibit
6(a) to Post-Effective Amendment No. 10 to the Registration Statement
on Form N-1A filed via EDGAR on February 28, 1997 (File No. 33-42093).
(b) Amended and Restated Distribution Agreement. Incorporated by
reference to Exhibit 6 to Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A filed via EDGAR on August 15,
1996. (File No. 33-42093).
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 10 to the Registration Statement on Form
N-1A filed via EDGAR on February 28, 1997 (File No. 33-42093).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A filed via EDGAR on February 28, 1997 (File No.
33-42093).
10. Opinion of Shereff, Friedman, Hoffman & Goodman, LLP, dated October 3,
1991. Incorporated by reference to Exhibit 10 to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A filed via
EDGAR on March 1, 1996 File No. 33-42093).
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A shares. Incorporated by
reference to Exhibit 15(e) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed via EDGAR on March 1, 1995
(File No. 33-42093).
(b) Distribution and Service Plan for Class B shares. Incorporated by
reference to Exhibit 15(f) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed via EDGAR on March 1, 1995
(File No. 33-42093).
(c) Distribution and Service Plan for Class C shares. Incorporated by
reference to Exhibit 15(g) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed via EDGAR on March 1, 1995
(File No. 33-42093).
16. (a) Schedule of Computation of Performance Quotations. Incorporated by
reference to Exhibit 16(a) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed via EDGAR on February 28,
1997 (File No. 33-42093)
(b) Schedule of Calculation of Aggregate Total Return for Class A and
Class B shares. Incorporated by reference to Exhibit 16(b) to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A filed via EDGAR on March 2, 1994 (File No. 33-42093).
17. Financial Data Schedules filed as Exhibit 27 for electronic purposes.*
18. Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to
Post-Effective Amendment No. 9 to the Registration Statement on Form
N-1A filed via EDGAR on August 15, 1996 (File No. 33-42093).
- ----------
* Filed herewith.
CLASS
================= =================
NUMBER SHARES
================= =================
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
ACCOUNT NO. ALPHA CODE -----------------------
| CUSIP 74435G 40 1 |
-----------------------
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY that
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.001 EACH
OF THE COMMON STOCK OF
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
hearafter called the "Corporation", transferable on the books of the Corporation
by the owner in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be
held subject to the provisions of the Charter and By-Laws of the Corporation and
all amendments thereof, copies of which are on file at the office of the
Corporation, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed in its name by the proper officers and to be sealed with its Corporate
Seal.
[Corporate Seal]
Dated: _________________
/s/ S. JANE ROSE
----------------------------------
Secretary
/s/ LAWRENCE C. MCQUADE
----------------------------------
President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 11 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 13, 1998, relating to the financial statements and financial highlights
of Prudential Intermediate Global Income Fund, Inc., which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading "Custodian,
Transfer and Dividend Disbursing Agent and Independent Accountants" in such
Statement of Additional Information and to the references to us under the
headings "Financial Highlights" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
- -------------------------
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 25, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000831015
<NAME> PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC. (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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