AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2001
REGISTRATION NO. 333-54928
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ Pre-Effective Amendment No. 1 / / Post-Effective Amendment No. _____
(Check appropriate box or boxes)
- ---------------------------------------------------------------------------------------------------------------------------------
Exact Name of Registrant as Specified in Charter: Area Code and Telephone Number
Prudential Global Total Return Fund, Inc. (973) 367-7525
- ---------------------------------------------------------------------------------------------------------------------------------
Address of Principal Executive Offices: (Number, Street, City, State, Zip Code)
Gateway Center Three, 100 Mulberry Street, 4th Floor, Newark, New Jersey 07102-4077
- ---------------------------------------------------------------------------------------------------------------------------------
Name and Address of Agent for Service: Approximate Date of Proposed Public Offering:
Marguerite E.H. Morrison, Esq.
- ---------------------------------------------------------------------------------------------------------------------------------
(Number and Street) (City) (State) (Zip Code) AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE
Gateway Center Three, 100 Mulberry Street, 4th Floor
Newark, New Jersey 07102-4077 REGISTRATION STATEMENT.
- ---------------------------------------------------------------------------------------------------------------------------------
Title of Securities Being Registered.............................................Shares of Common Stock, par value $.01 per share
No filing fee is required because of reliance on section 24(f) of the
Investment Company Act of 1940. Pursuant to Rule 429 under the Securities Act of
1933, the Prospectus and Proxy Statement relates to shares previously registered
on Form N-1A (File No. 33-63943).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET, 4TH FLOOR
NEWARK, NEW JERSEY 07102-4077
------------------------
IMPORTANT PROXY MATERIALS
---------------------
PLEASE VOTE NOW!
---------------------
March 15, 2001
Dear Shareholder:
I am inviting you to vote on an important proposal to reorganize Prudential
International Bond Fund, Inc. into Prudential Global Total Return Fund, Inc. A
shareholder meeting of Prudential International Bond Fund, Inc. is scheduled for
April 19, 2001. This package contains information about the proposal and
includes materials you will need to vote by mail, through the internet or by
telephone.
The Board of Directors of Prudential International Bond Fund, Inc. has
reviewed the reorganization proposal and has recommended that it be presented to
shareholders for their consideration. Although the Directors have determined
that a reorganization is in the shareholders' best interest, the final decision
is yours.
If approved, the reorganization would give you the opportunity to
participate in a larger fund with similar investment policies and identical
investment objectives and class structures. The combined fund would have a
better long-term performance record and benefit from increased economies of
scale. To help you understand the proposal, we are including a section that
answers commonly asked questions about these transactions. The accompanying
proxy statement includes a detailed description of the proposed reorganization.
Please read the enclosed materials carefully and cast your vote. Remember,
your vote is extremely important, no matter how large or small your holdings. By
voting now, you can help avoid additional costs that are incurred with follow-up
letters and calls.
To vote, you may use any of the following methods:
- BY MAIL. Please complete, date and sign your proxy card before mailing it
in the enclosed postage-paid envelope.
- BY INTERNET. Have your proxy card available. Go to the web site:
www.proxyvote.com. Enter your 12-digit control number from your proxy
card. Follow the simple instructions found on the web site.
- BY TELEPHONE. Call 1-800-690-6903 toll free. Enter your 12-digit control
number from your proxy card. Follow the simple instructions.
SPECIAL NOTE FOR SYSTEMATIC INVESTMENT PLANS AND THOSE WITH OUTSTANDING
CERTIFICATES (E.G., AUTOMATIC INVESTMENT PLAN, SYSTEMATIC EXCHANGE,
ETC.)Shareholders on systematic investment plans must contact their Financial
Advisor or call our customer service division, toll free, at 1-800-225-1852 to
change their options. Otherwise, starting April 27, 2001, future purchases shall
be made in shares of the Prudential Global Total Return Fund, Inc. if the
reorganization is approved.
Shareholders with outstanding certificates are also urged to contact their
Financial Advisors or call our customer service division to deposit their
certificates.
If you have any questions before you vote, please call us at 1-800-225-1852.
We're glad to help you understand the proposal and assist you in voting. Thank
you for your participation.
Sincerely,
/s/ David R. Odenath, Jr.
David R. Odenath, Jr.
PRESIDENT
IMPORTANT INFORMATION TO HELP YOU UNDERSTAND
AND VOTE ON THE PROPOSAL
Please read the enclosed proxy statement for a complete description of the
reorganization proposal. As a quick reference, the following provides a brief
overview of the proposal.
WHAT PROPOSAL AM I BEING ASKED TO VOTE ON?
You are being asked to approve a reorganization of Prudential International
Bond Fund, Inc. (International Fund) into Prudential Global Total Return Fund,
Inc. (Total Return Fund).
WHAT IS THE REASON FOR THIS REORGANIZATION?
The proposed reorganization is intended to combine two similarly managed
funds with the goal of increased economies of scale and a better long-term total
return performance record. The reorganization is also desirable because of the
inability of International Fund to keep its net outflows to a minimum, increase
its net asset base, keep investors and build an investment portfolio that can
effectively pursue the Fund's objective. Total Return Fund has built an
investment portfolio that can more fully implement its objective of total
return, made up of current income and capital appreciation.
DO THE FUNDS HAVE SIMILAR INVESTMENT POLICIES?
Yes. Both Funds are classified as "global income funds" by Lipper Inc.,
which means they invest primarily in U.S. dollar debt securities of issuers
located in at least three countries, one of which may be the United States. The
Funds have the same investment objectives and very similar principal strategies.
Both Funds seek total return, made up of current income and capital
appreciation. International Fund normally invests at least 65% of its total
assets in income-producing debt securities of issuers in at least three
different countries excluding the United States. Total Return Fund normally
invests 65% of its assets in income-producing debt securities of the United
States and foreign countries.
WHO ARE THE PORTFOLIO MANAGERS FOR THESE FUNDS?
The Global Bond Team, headed by David Bessey and Steve Koomar, currently
manages both the Total Return Fund and International Fund.
HOW DO THE EXPENSE STRUCTURES OF THE FUNDS COMPARE?
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND* TOTAL RETURN FUND* COMBINED*
------------------- ------------------ -----------------
Class A................................. 2.09% 1.67% 1.64%
Class B................................. 2.79% 2.37% 2.34%
Class C................................. 2.79% 2.37% 2.34%
Class Z................................. 1.79% 1.37% 1.34%
- ------------------------
* Ratios are for the fiscal year ended December 31, 2000, without reflecting
the distribution and service (12b-1) fee waiver for Class A, B and C shares.
For the fiscal year ended December 31, 2000, the Distributor contractually
agreed to reduce its distribution and service (12b-1) fees to .25 of 1% of
the average daily net assets of Class A shares and to .75 of 1% of the
average daily net assets of both the Class B and Class C shares. The
Distributor voluntarily reduced its distribution and service (12b-1) fees to
.25 of 1% of the average daily net assets of both the Class B and Class C
shares of International Fund effective August 23, 2000.
IS THE REORGANIZATION A TAXABLE EVENT FOR FEDERAL INCOME TAX PURPOSES?
Typically, the exchange of shares pursuant to a reorganization does not
result in a gain or loss for federal income tax purposes. A description of the
conditions necessary to avoid tax recognition is included in the proxy
statement.
WHAT WILL BE THE SIZE OF TOTAL RETURN FUND AFTER THE REORGANIZATION?
If the proposal is approved, the combined fund is estimated to have over
$281 million in assets, based on the size of the Funds at December 31, 2000.
WHAT HAS BEEN THE COMPARATIVE PERFORMANCE OF THE FUNDS?
The table below shows average annual total returns (which include the
deduction of sales charges) for Total Return Fund and International Fund, their
Lipper peer group and a relevant index over the 1, 5 and 10 year and since
inception periods. Please keep in mind that past performance is no guarantee of
future results and you may have a gain or loss when you sell your shares.
AVERAGE ANNUAL TOTAL RETURN(1) (AS OF DECEMBER 31, 2000)
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
-------------- -------- -------- ------------------
Class A shares................................. -.65% 4.22% 6.46% 8.56% (7-7-86)(4)
Class B shares................................. -2.18% N/A N/A 4.23% (1-15-96)
Class C shares................................. .79% N/A N/A 4.19% (1-15-96)
Class Z shares................................. 3.78% N/A N/A 3.76% (3-17-97)
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
-------------- -------- -------- ------------------
Class A shares................................. -1.29% 3.81% 6.41% 7.11% (7-31-87)(4)
Class B shares................................. -2.46% N/A N/A 3.94% (1-15-96)
Class C shares................................. .52% N/A N/A 3.90% (1-15-96)
Class Z shares................................. 3.27% N/A N/A 3.13% (3-17-97)
Morgan GBI(2).................................. 2.34% 3.47% 6.86%
Lipper Average(3).............................. 3.63% 4.08% 6.09%
- ------------------------
1. Both Funds' returns are after deduction of sales charges and expenses.
Without the distribution and service (12b-1) fee waivers, the returns would
have been lower for both Funds.
2. The J.P. Morgan Government Bond Index -- Global (Morgan GBI) is a weighted
index of the total return of government bonds in the following nations:
Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, the
Netherlands, Spain, Sweden, the United Kingdom and the United States. The
Morgan GBI is an unmanaged index and is traded, unhedged and measured in
U.S. Dollars. The securities in the Morgan GBI may be very different than
those in each Fund. These returns do not include the effect of any sales
charges or operating expenses of a mutual fund. These returns would be lower
if they included the effect of sales charges and operating expenses. Morgan
GBI returns since the inception of each class are 7.62% for Class A shares,
3.74% for Class B and Class C shares and 4.56% for Class Z shares of Total
Return Fund and 7.65% for Class A shares, 3.74% for Class B and Class C
shares and 4.56% for Class Z shares of International Fund. Source: Lipper
Inc.
3. The Lipper Average is based on the average return of all mutual funds in the
Lipper Global Income Funds category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Lipper returns since the inception of each class
are 7.46% for Class A shares, 3.86% for Class B and Class C shares and 3.28%
for Class Z shares of Total Return Fund and 7.10% for Class A shares, 3.86%
for Class B and Class C shares and 3.28% for Class Z shares of International
Fund. Source: Lipper Inc.
4. Prior to 1-15-96, each Fund operated as a closed-end investment company.
HOW WILL YOU DETERMINE THE NUMBER OF SHARES OF PRUDENTIAL GLOBAL TOTAL RETURN
FUND, INC. THAT I WILL RECEIVE?
As of the close of business of the New York Stock Exchange on the Closing
Date of the reorganization, shareholders will receive the number of full and
fractional Class A, Class B, Class C or Class Z shares of Total Return Fund,
respectively, that is equal in value to the net asset value of their Class A,
Class B, Class C or Class Z shares of International Fund on that date. The
anticipated closing date is April 27, 2001.
WHAT IF THERE ARE NOT ENOUGH VOTES TO REACH QUORUM BY THE SCHEDULED SHAREHOLDER
MEETING DATE?
If we do not receive sufficient votes to hold the meeting, we or Georgeson
Shareholder Communications Inc., a proxy solicitation firm, may contact you by
mail or telephone to encourage you to vote. Shareholders should review the proxy
materials and cast their vote to avoid additional mailings or telephone calls.
If there are not sufficient votes to approve the proposal by the time of the
Shareholder Meeting (April 19, 2001), the meeting may be adjourned to permit
further solicitation of proxy votes.
HAS EACH FUND'S BOARD OF DIRECTORS APPROVED THE PROPOSAL?
Yes. Each Board has approved the proposal and recommends that you vote to
approve it.
HOW MANY VOTES AM I ENTITLED TO CAST?
As a shareholder, you are entitled to one vote for each share you own of
International Fund on the record date. The record date is February 16, 2001.
HOW DO I VOTE MY SHARES?
You can vote your shares by completing and signing the enclosed proxy card,
and mailing it in the enclosed postage paid envelope. You can also vote your
shares by calling 1-800-690-6903, entering your 12-digit control number from
your proxy card and following the simple instructions. Lastly, you can vote your
shares by going to the Internet web site: www.proxyvote.com, entering your
12-digit control number from your proxy card and following the simple
instructions found on the web site. If you need any assistance, or have any
questions regarding the proposal or how to vote your shares, please call
Prudential at (800) 225-1852.
HOW DO I SIGN THE PROXY CARD?
INDIVIDUAL ACCOUNTS: Shareholders should sign exactly as their names appear
on the account registration shown on the card.
JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.
ALL OTHER ACCOUNTS: The person signing must indicate his or her capacity.
For example, a trustee for a trust should include his/her title, such as "Jane
Doe, Trustee"; or an authorized officer of a company should indicate his/her
position with the company, such as "John Smith, President."
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET, 4TH FLOOR
NEWARK, NEW JERSEY 07102-4077
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
---------------------
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the Meeting)
of Prudential International Bond Fund, Inc. (International Fund) will be held at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102, on
April 19, 2001, at 9:00 a.m. Eastern time, for the following purposes:
1. To approve an Agreement and Plan of Reorganization between
International Fund and Prudential Global Total Return Fund, Inc. (Total Return
Fund), providing for the transfer of all of the assets of International Fund to
Total Return Fund in exchange solely for Class A, Class B, Class C and Class Z
shares of common stock of Total Return Fund and the assumption by Total Return
Fund of International Fund's liabilities, followed by the distribution of Total
Return Fund Class A, Class B, Class C and Class Z shares to shareholders of
International Fund in termination of International Fund.
2. To transact such other business as may properly come before the Meeting
or any adjournments of the Meeting.
The Board of Directors has fixed the close of business on February 16, 2001
as the record date for the determination of the shareholders of International
Fund entitled to notice of, and to vote at, this Meeting and any adjournments.
/s/ Marguerite E. H. Morrison
Marguerite E. H. Morrison
SECRETARY
Dated: March 15, 2001
PROXY CARDS FOR YOUR FUND ARE ENCLOSED ALONG WITH THE PROXY STATEMENT. PLEASE
VOTE YOUR SHARES TODAY BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD IN THE
POSTAGE PREPAID ENVELOPE PROVIDED. YOU CAN ALSO VOTE YOUR SHARES THROUGH THE
INTERNET OR BY TELEPHONE USING THE 12-DIGIT "CONTROL" NUMBER THAT APPEARS ON
THE ENCLOSED PROXY CARD AND FOLLOWING THE SIMPLE INSTRUCTIONS. THE BOARD OF
YOUR FUND RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL.
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PROSPECTUS
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
PROXY STATEMENT
GATEWAY CENTER THREE
100 MULBERRY STREET, 4TH FLOOR
NEWARK NEW JERSEY 07102-4077
(800) 225-1852
------------------------
MARCH 15, 2001
------------------------
This Proxy Statement and Prospectus (Proxy Statement) is being furnished to
shareholders of Prudential International Bond Fund, Inc. (International Fund) in
connection with the solicitation of proxies by the International Fund's Board of
Directors for use at the Special Meeting of Shareholders of International Fund
and at any adjournments of the meeting (the Meeting). The Meeting will be held
on Thursday, April 19, 2001, at 9:00 a.m. Eastern time at Gateway Center Three,
100 Mulberry Street, 14th Floor, Newark, New Jersey 07102.
The purpose of the Meeting is to vote on a proposed reorganization
(Reorganization) between International Fund and Prudential Global Total Return
Fund, Inc. (Total Return Fund). Under an Agreement and Plan of Reorganization
and Liquidation (the Agreement), International Fund would transfer all of its
assets to Total Return Fund in exchange solely for Class A, Class B, Class C and
Class Z shares of common stock of Total Return Fund and the assumption by Total
Return Fund of International Fund's liabilities. The number of shares issued to
shareholders of International Fund in the proposed Reorganization would be based
upon the relative net asset values per share of the two Funds at the time of the
exchange. International Fund would distribute Class A, Class B, Class C and
Class Z shares of Total Return Fund to its shareholders in liquidation of
International Fund on April 27, 2001, or a later date as the parties may agree
(the Closing Date).
Total Return Fund is a nondiversified fund registered as an open-end
management investment company that is organized as a Maryland corporation. Total
Return Fund's investment objective is to seek total return, made up of current
income and capital appreciation. Total Return Fund seeks to achieve its
investment objective by investing at least 65% of its total assets in
income-producing debt securities of the U.S. and foreign governments,
supranational organizations, semi-governmental entities or government agencies,
authorities or instrumentalities and short-term bank debt securities or bank
deposits. Total Return Fund will invest in issuers from at least three
countries, including the United States, and in at least three currencies. Total
Return Fund invests primarily in securities that are "investment grade"
securities, or securities that major rating services have rated within one of
their four highest quality grades. The Fund has a dollar-weighted average
maturity of not more than 10 years. Total Return Fund also may use cross-
currency hedges and derivatives for "hedging" to help protect the value of the
Fund's securities or enhance return.
International Fund is a nondiversified fund registered as an open-end
management investment company and is organized as a Maryland corporation.
International Fund's investment objective is identical to Total Return Fund's:
to seek total return, made up of current income and capital appreciation.
International Fund seeks to achieve its investment objective by investing at
least 65% of its total assets in income-producing debt securities of issuers in
at least three countries, excluding the United States.
(CONTINUED ON NEXT PAGE)
------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE TOTAL
RETURN FUND'S SHARES, NOR HAS THE COMMISSION DETERMINED THAT THIS PROXY
STATEMENT AND
PROSPECTUS IS COMPLETE OR ACCURATE.
IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
International Fund may invest up to 30% of its total assets in securities
denominated in a particular currency. It may invest up to 65% of its total
assets in securities denominated in the euro and up to 50% of its total assets
in securities denominated in Japanese or British currencies. International Fund
invests primarily in "investment grade" securities. The Fund has a
dollar-weighted average maturity of between 3 and 15 years. International Fund
also may use derivatives for hedging or to enhance its return.
This Proxy Statement should be retained for your future reference. It sets
forth concisely the information about the Reorganization and Total Return Fund
that a shareholder should know before voting on the proposed Reorganization. A
Statement of Additional Information dated March 15, 2001, which relates to this
Proxy Statement, has been filed with the Securities and Exchange Commission
(Commission) and is incorporated into this Proxy Statement by reference. This
Proxy Statement is accompanied by the Prospectus, dated March 8, 2000, and
supplemented on March 27, 2000 and August 30, 2000, which offers shares of Total
Return Fund. The Statement of Additional Information for the Total Return Fund,
dated March 8, 2000, is available upon request. The Prospectus, Prospectus
Supplements and Statement of Additional Information for Total Return Fund have
been filed with the Commission and are incorporated into this Proxy Statement by
reference. The Prospectus dated March 8, 2000 and Prospectus Supplements dated
March 27, 2000, August 28, 2000 and August 30, 2000 and the Statement of
Additional Information dated March 8, 2000 for International Fund have been
filed with the Commission and are incorporated into this Proxy Statement by
reference. Copies of the documents referred to above may be obtained without
charge by contacting Prudential Mutual Fund Services LLC at Post Office
Box 8098, Philadelphia, PA 19101, or by calling (800) 225-1852.
ii
SPECIAL MEETING OF SHAREHOLDERS OF
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
TO BE HELD ON APRIL 19, 2001 AT:
GATEWAY CENTER THREE, 14TH FLOOR
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
------------------------
PROXY STATEMENT AND PROSPECTUS
------------------------
VOTING INFORMATION
This Proxy Statement and Prospectus (Proxy Statement) is furnished in
connection with a solicitation of proxies made by, and on behalf of, the Board
of Directors of Prudential International Bond Fund, Inc. (International Fund) to
be used at the Special Meeting of Shareholders of International Fund and at any
adjournments of the Special Meeting (the Meeting), to be held on Thursday,
April 19, 2001 at 9:00 a.m. Eastern time at Gateway Center Three, 14th Floor,
100 Mulberry Street, Newark, New Jersey 07102.
The purpose of the Meeting is described in the accompanying Notice. The
solicitation is made primarily by first mailing this Proxy Statement and the
accompanying proxy card on or about March 16, 2001. Supplementary solicitations
may be made by mail, telephone, telegraph, facsimile, electronic means or by
personal interview by representatives of International Fund. In addition,
Georgeson Shareholder Communications Inc., a proxy solicitation firm, may be
retained to solicit shareholders on behalf of International Fund. Solicitation
fees and expenses are estimated to be $130,000. The expenses of the
Reorganization and the solicitation of proxies will be borne by Prudential
Global Total Return Fund, Inc. (Total Return Fund) and International Fund (each,
a Fund, and collectively, the Funds) in proportion to their respective assets
and will include reimbursement of brokerage firms and others for expenses in
forwarding proxy solicitation materials to the shareholders of International
Fund. Any expenses related to the Reorganization incurred subsequent to the
Reorganization will be borne solely by Total Return Fund.
Even if you sign and return the enclosed proxy card, you may revoke your
proxy at any time prior to its use by written notification received by the
International Fund, by submitting a later-dated proxy card, or by attending the
Meeting and voting in person.
All proxy cards that are properly completed and received by the Secretary of
International Fund before the Meeting, and which are not revoked, will be voted
at the Meeting. Shares represented by proxies will be voted in accordance with
the instructions you provide. If no instruction is made on a proxy card, it will
be voted FOR Proposal No. 1. Only proxies that are actually voted will be
counted toward establishing a quorum, which is the minimum number of shares
necessary to transact business at the Meeting. One-third of International Fund's
outstanding shares constitutes a quorum for the transaction of business.
If a proxy that is properly signed and returned is accompanied by
instructions to withhold authority to vote (an abstention) or represents a
broker "non-vote" (that is, a proxy from a broker or nominee indicating that
they have not received instructions from the beneficial owner or other person
entitled to vote shares on this matter for which the broker or nominee does not
have discretionary power), the shares represented by the proxy will be
considered present for purposes of determining the existence of a quorum for the
transaction of business, but will have the effect of a vote against Proposal
No. 1.
International Fund also may arrange to have votes recorded by telephone. The
expenses associated with telephone voting will be borne by International Fund
and Total Return Fund in proportion to their respective assets. If International
Fund takes votes by telephone, it will use procedures designed to authenticate
shareholders' identities, to allow shareholders to authorize the voting of their
shares in accordance with their instructions, and to confirm that their
instructions have been properly recorded. Proxies given by telephone or via the
internet may be revoked at any time before they are voted in the same manner
that proxies voted by mail may be revoked.
If a quorum is not present at the Meeting, or if a quorum is present at the
Meeting but sufficient votes to approve Proposal No. 1 are not received, or if
other matters arise requiring shareholder attention, the persons named as proxy
agents may propose one or more adjournments of the Meeting to permit the further
solicitation of proxies. An adjournment will require the affirmative vote of a
majority of shares present at the Meeting or represented by proxy, so
abstentions and broker non-votes will not be counted towards this vote. When
voting on a proposed adjournment, the persons named as proxy agents will vote
FOR the proposed adjournment all shares that they are entitled to vote with
respect to Proposal No. 1, unless directed to vote AGAINST the Proposal, in
which case such shares will be voted against the proposed adjournment. A
shareholder vote may be taken on the Reorganization described in this Proxy
Statement or on any other business properly presented at the Meeting prior to
adjournment if sufficient votes have been received.
On February 16, 2001, there were 8,270,090 Class A shares, 281,015 Class B
shares, 23,885 Class C shares and 439,302 Class Z shares issued and outstanding
for International Fund. Shareholders of record at the close of business on
February 16, 2001, will be entitled to vote at the Meeting. Each such
shareholder will be entitled to one vote for each share (each fractional share
is entitled to a proportionate fractional vote) held on that date. The following
shareholders held 5% or more of the class of shares indicated of International
Fund on February 16, 2001:
CLASS NUMBER OF SHARES
NAME ADDRESS OF SHARES (% OF CLASS)
- ---- ----------------------- --------- ----------------
Prudential Securities C/F 6426 Canterbury Dr. B 20,368 (7.2%)
IRA Rollover DTD 5/21/96 Hudson, OH 44236
Mr. Mark F. Joyce
Mrs. Kathleen B. Collins TTEE 340 Holloway Rd. B 14,525 (5.2%)
Kathleen B. Collins Rev Lvg Tr Ballwin, MO 63011
UA DTD 01/09/97
Prudential Securities C/F 59503 Cary B 15,491 (5.5%)
Mr. Gerald L. Wehmueller Chapel Hill, NC 27514
IRA Rollover DTD 06/03/97
Prudential Securities C/F 560 W. Oak Road C 2,703 (11.3%)
Barbara J. Golla Vineland, NJ 08360
Vineland Anesthia Consult PC
SEP DTD 00/00/00
Prudential Securities C/F 7483 Lime Hollow Dr. SE C 5,651 (24%)
Dr. John F. Butzer MD Grand Rapids, MI 49546
IRA DTD 12/18/97
Prudential Securities C/F 2256 Ridgewood Ave. SE C 1,537 (6.4%)
Ms. Martha D. Lecuru Grand Rapids, MI 49546
IRA DTD 12/17/97
Prudential Securities C/F 4274 Castle Dr. SE C 2,722 (11.3%)
Mr. Thomas F. Hauck Grand Rapids, MI 49546
IRA DTD 12/17/97
Mr. John C. Galloway 4265 Rose Creek Road C 3,017 (13%)
Mrs. Laura V. Galloway CO-TTEES Roseville, CA 95747
The Galloway Family Trust
UA DTD 03/17/97
2
CLASS NUMBER OF SHARES
NAME ADDRESS OF SHARES (% OF CLASS)
- ---- ----------------------- --------- ----------------
Prudential Trust Company 8000 Cooper Ave. C 2,035 (8.5%)
FBO Collegiate Bookstores Building 19
Glendale, NY 11385
Prudential Bank & Trust C/F 6157 Fruitwood Ln Z 23,483 (5.3%)
Susie A. Mallavia Pocatello, ID 83204
IRA DTD 01/05/00
On February 16, 2001, there were 28,806,884 Class A shares, 856,698 Class B
shares, 55,905 Class C shares and 1,474,497 Class Z shares issued and
outstanding for Total Return Fund. Shareholders of Total Return Fund are not
entitled to vote on this matter. The following shareholders held 5% or more of
the class of shares of Total Return Fund indicated on February 16, 2001:
CLASS NUMBER OF SHARES
NAME ADDRESS OF SHARES (% OF CLASS)
- ---- ------------------------- --------- ----------------
Ms. Betty J. Hewitt, Ms. Gayleen Weller 7299 Flamingo St C 7,042 (12.6%)
Co-Ttees, Ms. Marion E. Hurley Algonac, MI 48001-4131
Marion E. Hurley Revoc Trust UA DTD 2/28/90
Mrs. Pamella B. Thayer TTEE 2938 Cherry Ln C 4,678 (8.4%)
Pamella B. Thayer Trust UA DTD 1/13/97 Northbrook, IL 60062-4312
Prudential Trust Company 4605 Wedgewood Blvd C 12,209 (22%)
FBO Metropolitan Steel Inc. Frederick, MN 21703-0000
As of February 16, 2001, the Directors and officers of both International
Fund and Total Return Fund owned, in the aggregate, less than 1% of each class
of each Fund's total outstanding shares. Prudential intends to vote any shares
for which it has direct voting authority FOR the Proposal.
VOTE REQUIRED
APPROVAL OF THE REORGANIZATION REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY
OF THE SHARES PRESENT IN PERSON OR BY PROXY OF THE COMMON STOCK OF INTERNATIONAL
FUND. APPROVAL OF THE REORGANIZATION BY THE SHAREHOLDERS OF TOTAL RETURN FUND IS
NOT REQUIRED, AND THE AGREEMENT IS NOT BEING SUBMITTED FOR THEIR APPROVAL.
SYNOPSIS
The following is a summary of information contained elsewhere in this Proxy
Statement, in the Agreement, and in the Prospectuses of International Fund and
Total Return Fund, which are incorporated into this Proxy Statement by
reference. Shareholders should read the Proxy Statement and the Prospectus of
Total Return Fund for more complete information.
The Reorganization would transfer the assets and liabilities of
International Fund to Total Return Fund, a mutual fund also managed by
Prudential Investments Fund Management LLC (PIFM). If the Reorganization is
approved, International Fund will be liquidated and current shareholders of
International Fund will become shareholders of Total Return Fund instead.
INVESTMENT OBJECTIVES AND POLICIES
International Fund and Total Return Fund have the same investment objective
and substantially similar investment policies. Both Fund's objectives are "to
seek total return, made up of current income and capital appreciation". Both
Funds have the same Manager (PIFM) and the same investment adviser, The
Prudential Investment Corporation (PIC). The portfolio managers of both Funds
are the Global Bond Team, led by David Bessey and Steve Koomar (both having
begun managing each Fund as of March 2000).
3
The address of PIFM is Gateway Center Three, 14th Floor, 100 Mulberry Street,
Newark, New Jersey 07102-4077.
One benchmark for both International Fund and Total Return Fund is the
Lipper Global Income Funds average (the Lipper average). Both Funds also compare
their performance to that of the J.P. Morgan Government Bond Index.
International Fund pays any dividends from net investment income typically
every month. Total Return Fund pays any dividends from net investment income
typically every quarter. Net realized capital gains for both Funds, if any, are
distributed annually.
The investment objective of each Fund is a fundamental policy. This means
that the objective cannot be changed without the approval of shareholders of the
Fund. There can be no assurance that either International Fund or Total Return
Fund will achieve its objective. With the exception of fundamental policies,
investment policies (other than specified investment restrictions) of the Funds
can be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
International Fund and Total Return Fund have similar investment strategies.
International Fund normally invests at least 65% of its total assets in
income-producing debt securities of issuers in at least 3 different countries,
excluding the United States. Total Return Fund normally invests at least 65% of
its total assets in income-producing debt securities of the U.S. and foreign
governments, supranational organizations, semi-governmental entities or
government agencies, authorities or instrumentalities and short-term bank debt
securities or bank deposits. Effective April 30, 2001, Total Return Fund's Board
has authorized corporate debt securities to be included in this 65% test.
International Fund invests up to 30% of its assets in securities denominated in
a particular currency. Total Return Fund generally invests up to 40% of its
assets in a particular currency (except for the euro, in which the Total Return
Fund may invest up to 65%). The Board of Total Return Fund has approved the
elimination of any specific limit on the Fund's investment in foreign
currencies, to take effect on April 30, 2001.
Total Return Fund currently maintains dollar-weighted average maturity of
not more than 10 years. International Fund's debt obligations have a
dollar-weighted average maturity of between 3 and 15 years, but may go below 3
years for temporary defensive purposes. Total Return Fund's Board has approved a
change to an average duration to be within a range of 2 to 7 years. Duration
measures the potential of the price of a portfolio of bonds prior to maturity.
Duration is the magnitude of the change in price of a bond relative to a given
change in the market interest rate. It incorporates a bond's yield, coupon
interest payments, final maturity, call and put features and prepayment exposure
into one measure. Currently, each Fund can invest up to 15% of its total assets
in non-investment grade debt, or "junk" bonds (none rated lower than B).
However, the Board of Total Return Fund has approved an increase in that limit
to 35% of that Fund's total assets and to allow investment in with a minimum
rating of C. This change will not occur until April 30, 2001.
The investment restrictions of the Funds are substantially similar.
COMPARISON OF OTHER POLICIES OF THE FUNDS
DIVERSIFICATION
International Fund and Total Return Fund are both nondiversified funds. This
means that each Fund may invest more than 5% of its total assets in the
securities of a single issuer.
4
BORROWING
Each Fund may borrow money for temporary, extraordinary or emergency
purposes, for the clearance of transactions or for investment purposes. Neither
Fund may borrow money in an amount exceeding 20% of its total assets and no Fund
will purchase portfolio securities when borrowings exceed 5% of the value of its
total assets.
LENDING
Neither Fund may make loans, except through repurchase agreements and the
purchase of debt obligations and bank deposits.
ILLIQUID SECURITIES
Each Fund may invest in illiquid securities, including those without a
readily available market and repurchase agreements with maturities longer than
seven days. Each Fund may hold up to 15% of its net assets in illiquid
securities.
TEMPORARY DEFENSIVE INVESTMENTS
Although PIC normally invests each Fund's assets according to the Fund's
investment strategy, there are times when each Fund may temporarily invest up to
100% of its assets in U.S. Treasury or other U.S. dollar-denominated securities
or money market instruments in response to adverse market, economic or political
conditions. Investing heavily in these securities is not consistent with the
Funds' investment strategy and may limit the Funds' ability to achieve their
investment objective.
For more information about the risks and restrictions associated with these
policies, see each Fund's Prospectus, and for a more detailed discussion of the
Funds' investments, see their Statements of Additional Information, all of which
are incorporated into this Proxy Statement by reference.
EXPENSE STRUCTURES
Currently, International Fund and Total Return Fund each pay a monthly
management fee to PIFM at an annual rate of .75% of average daily net assets.
The management fee covers PIFM's oversight of the Fund's respective investment
portfolios. PIFM also administers each Fund's business affairs and furnishes the
Funds with office facilities, together with those ordinary clerical and
bookkeeping services that are not furnished by the Funds' custodian or transfer
and dividend disbursing agent. Officers of PIFM serve as officers and Directors
of the Funds without compensation by the Funds.
The Funds' distribution expense structures are the same. Prudential
Investment Management Services LLC (PIMS or the Distributor), the Funds'
Distributor, has contractually agreed to waive a portion of the distribution and
service (12b-1) fee to limit fees for the fiscal year ended December 31, 2000
payable by Class A shares of both Funds to .25 of 1% of average net assets and
has contractually agreed to waive a portion of the distribution and service
(12b-1) fee of the Class B and Class C shares of both Funds so that they are
limited to .75 of 1% of average net assets. The contractual waivers for Total
Return Fund extend through December 31, 2001. Effective August 23, 2000, in
contemplation of the Reorganization, PIMS voluntarily agreed to waive a portion
of its distribution and service (12b-1) fee for International Fund's Class B and
Class C shares so that it is limited to .25 of 1% of average daily net assets.
The Funds have the same purchase procedures, exchange rights and redemption
procedures.
Overall, the proposed Reorganization would provide International Fund
shareholders with the following benefits:
- the opportunity to participate in a fund with a better long-term
performance record;
5
- investment in a fund with an investment objective and policies similar to
International Fund's investment objective and policies;
- increased economies of scale; and
- annual operating expenses that are estimated to be lower than those of
International Fund.
THE BOARD OF DIRECTORS BELIEVES THAT THE REORGANIZATION WILL BENEFIT
INTERNATIONAL FUND SHAREHOLDERS AND RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR
OF THE REORGANIZATION.
THE PROPOSED REORGANIZATION
Shareholders of International Fund will be asked at the Meeting to vote upon
and approve the Reorganization and the Agreement, which provide for the
acquisition by Total Return Fund of all of the assets of International Fund in
exchange solely for Class A, Class B, Class C and Class Z shares of Total Return
Fund and the assumption by Total Return Fund of the liabilities of International
Fund. Class A, Class B, Class C and Class Z shares of Total Return Fund will be
distributed to International Fund Class A, Class B, Class C and Class Z
shareholders, so that each shareholder will receive the number of full and
fractional shares of Total Return Fund equal in value to the aggregate net asset
value of the shareholder's shares of International Fund on or about Friday,
April 27, 2001 (the Closing Date). The exchange of International Fund's assets,
subject to its liabilities, for Total Return Fund's shares will occur as of the
close of business of the New York Stock Exchange (NYSE) on the Closing Date or
such other time and date as the parties may agree. International Fund will then
be liquidated as soon as practicable after the Closing Date. International Fund
also will file an application on Form N-8F with the Commission to deregister as
an investment company. Approval of the Reorganization will be determined solely
by approval of the shareholders of International Fund. No vote by shareholders
of Total Return Fund is required.
The Funds have received an opinion of counsel that the Reorganization will
not result in any gain or loss for federal income tax purposes to either
International Fund, Total Return Fund, or the shareholders of each Fund. The
rights and privileges of the former shareholders of International Fund will be
effectively unchanged by the Reorganization.
FUND OPERATING EXPENSES
Each Fund pays a management fee to PIFM for managing its investments and
business affairs which is calculated and paid to PIFM every month. International
Fund's Management Agreement provides for payment to PIFM at an annual rate of
.75% of average daily net assets up to $1 billion and .70% of such assets in
excess of $1 billion. Total Return Fund's Management Agreement provides for
payment to PIFM at an annual rate of .75% of average daily net assets up to $500
million, .70% of such assets between $500 million and $1 billion and .65% of
such assets in excess of $1 billion. PIFM, in turn, pays the investment adviser,
PIC, at the annual rate of .375% of average daily net assets up to $1 billion
and .333% of such assets over $1 billion for International Fund, and .375% of
average daily net assets up to $500 million, .333% of such assets between $500
million and $1 billion and .293% of such assets over $1 billion for Total Return
Fund for providing advisory services to Total Return Fund.
In addition to the management fee, each Fund incurs other expenses for
services such as maintaining shareholder records and furnishing shareholder
statements and financial reports. If shareholders approve the Reorganization,
the combined fund will retain Total Return Fund's expense structure. ASSUMING
CONTINUATION OF TOTAL RETURN FUND'S CURRENT EXPENSE STRUCTURE, CONTRACTUAL FEE
WAIVERS AND REDUCED ANNUAL OPERATING EXPENSES FOR A LARGER TOTAL RETURN FUND, IT
IS ESTIMATED THAT SHAREHOLDERS OF ALL SHARE CLASSES WOULD ENJOY LOWER NET
OPERATING EXPENSES. THIS EXPENSE STRUCTURE IS EXPECTED TO DECREASE THE TOTAL
OPERATING EXPENSES CURRENTLY INCURRED BY CLASS A SHAREHOLDERS OF INTERNATIONAL
FUND FROM 2.04% TO 1.59% OF AVERAGE NET ASSETS, FROM 2.54% TO 2.09% OF AVERAGE
NET ASSETS FOR CLASS B AND CLASS C SHAREHOLDERS AND FROM 1.79% TO 1.34% OF
AVERAGE NET ASSETS FOR CLASS Z SHAREHOLDERS, BASED ON EXPENSES INCURRED FOR THE
YEAR ENDED
6
DECEMBER 31, 2000. However, if the proposed Reorganization is not approved,
International Fund is expected to maintain its current fee structure, although
there can be no assurance that waivers of a portion of the distribution and
service fees would continue. For more information about the Funds' current fees,
refer to their Prospectuses. See the Pro Forma Capitalization and Ratios below
for estimates of expenses if the Reorganization is approved.
COMPARATIVE FEE TABLES
The following table shows the fees and expenses of Class A, Class B,
Class C and Class Z shares of International Fund and Total Return Fund for the
fiscal years ended December 31, 2000 and pro forma fees for the combined fund
based on the same time periods after giving effect to the Reorganization,
including the effect of PIMS's contractual expense waivers previously described
and the increased size of the combined fund.
Fund operating expenses are paid out of each Fund's assets. Expenses are
factored into each Fund's share price or dividends and are not charged directly
to shareholder accounts. The following figures are based on historical expenses
of each Fund for the 12-month periods ended December 31, 2000 for each Fund, and
are calculated as a percentage of average net assets of each Fund.
CLASS A SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS A SHARES CLASS A SHARES CLASS A SHARES
SHAREHOLDER FEES ------------------ ----------------- -----------------
Maximum sales charge (load) imposed on
purchases (as a percentage of offering
price)..................................... 4% 4% 4%
Maximum deferred sales charge (load) (as a
percentage of the lower of original
purchase price or sale proceeds)........... None None None
Maximum sales charge (load) imposed on
reinvested dividends and other
distributions.............................. None None None
Redemption fees.............................. None None None
Exchange fee................................. None None None
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS A SHARES CLASS A SHARES CLASS A SHARES
ANNUAL FUND OPERATING EXPENSES ------------------ ----------------- -----------------
Management fees.............................. .75% .75% .75%
+ Distribution and service (12b-1) fees...... .30% .30% .30%
+ Other expenses............................. 1.04% .62% .59%
= Total annual operating expenses............ 2.09% 1.67% 1.64%
- Fee waiver............................... .05% .05% .05%
= NET ANNUAL OPERATING EXPENSES.............. 2.04% 1.62% 1.59%
7
CLASS B SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS B SHARES CLASS B SHARES CLASS B SHARES
SHAREHOLDER FEES ------------------ ----------------- -----------------
Maximum sales charge (load) imposed on
purchases (as a percentage of offering
price)..................................... None None None
Maximum deferred sales charge (load) (as a
percentage of the lower of original
purchase price or sale proceeds)........... 5% 5% 5%
Maximum sales charge (load) imposed on
reinvested dividends and other
distributions.............................. None None None
Redemption fees.............................. None None None
Exchange fee................................. None None None
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS B SHARES CLASS B SHARES CLASS B SHARES
ANNUAL FUND OPERATING EXPENSES ------------------ ----------------- -----------------
Management fees.............................. .75% .75% .75%
+ Distribution and service (12b-1) fees...... 1.00% 1.00% 1.00%
+ Other expenses............................. 1.04% .62% .59%
= Total annual operating expenses............ 2.79% 2.37% 2.34%
- Fee waiver............................... .25% .25% .25%
= NET ANNUAL OPERATING EXPENSES.............. 2.54% 2.12% 2.09%
CLASS C SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS C SHARES CLASS C SHARES CLASS C SHARES
SHAREHOLDER FEES ------------------ ----------------- -----------------
Maximum sales charge (load) imposed on
purchases (as a percentage of offering
price)..................................... 1% 1% 1%
Maximum deferred sales charge (load) (as a
percentage of the lower of original
purchase price or sale proceeds)........... 1% 1% 1%
Maximum sales charge (load) imposed on
reinvested dividends and other
distributions.............................. None None None
Redemption fees.............................. None None None
Exchange fee................................. None None None
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS C SHARES CLASS C SHARES CLASS C SHARES
ANNUAL FUND OPERATING EXPENSES ------------------ ----------------- -----------------
Management fees.............................. .75% .75% .75%
+ Distribution and service (12b-1) fees...... 1.00% 1.00% 1.00%
+ Other expenses............................. 1.04% .62% .59%
= Total annual operating expenses............ 2.79% 2.37% 2.34%
- Fee waiver............................... .25% .25% .25%
= NET ANNUAL OPERATING EXPENSES.............. 2.54% 2.12% 2.09%
8
CLASS Z SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS Z SHARES CLASS Z SHARES CLASS Z SHARES
SHAREHOLDER FEES ------------------ ----------------- -----------------
Maximum sales charge (load) imposed on
purchases (as a percentage of offering
price)..................................... None None None
Maximum deferred sales charge (load) (as a
percentage of the lower of original
purchase price or sale proceeds)........... None None None
Maximum sales charge (load) imposed on
reinvested dividends and other
distributions.............................. None None None
Redemption fees.............................. None None None
Exchange fee................................. None None None
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS Z SHARES CLASS Z SHARES CLASS Z SHARES
ANNUAL FUND OPERATING EXPENSES ------------------ ----------------- -----------------
Management fees.............................. .75% .75% .75%
+ Distribution and service (12b-1) fees...... None None None
+ Other expenses............................. 1.04% .62% .59%
= Total annual operating expenses............ 1.79% 1.37% 1.34%
- Fee waiver............................... None None None
= NET ANNUAL OPERATING EXPENSES.............. 1.79% 1.37% 1.34%
EXAMPLES OF THE EFFECT OF FUND EXPENSES
The following table illustrates the expenses on a hypothetical $10,000
investment in each Fund under the current and pro forma (Combined Fund) expenses
calculated at the rates stated above for the first year, and thereafter using
gross expenses with no fee waivers, assuming a 5% annual return, and assuming
that you sell your shares at the end of each period.
CLASS A SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS A SHARES CLASS A SHARES CLASS A SHARES
------------------ ----------------- -----------------
1 Year....................................... $ 599 $ 558 $ 555
3 Years...................................... $1,024 $ 901 $ 892
5 Years...................................... $1,474 $1,267 $1,252
10 Years..................................... $2,720 $2,293 $2,262
CLASS B SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS B SHARES CLASS B SHARES CLASS B SHARES
------------------ ----------------- -----------------
1 Year....................................... $ 757 $ 715 $ 712
3 Years...................................... $1,142 $1,016 $1,007
5 Years...................................... $1,552 $1,343 $1,328
10 Years..................................... $2,855 $2,431 $2,400
9
CLASS C SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS C SHARES CLASS C SHARES CLASS C SHARES
------------------ ----------------- -----------------
1 Year....................................... $ 455 $ 413 $ 410
3 Years...................................... $ 933 $ 808 $ 799
5 Years...................................... $1,538 $1,330 $1,315
10 Years..................................... $3,170 $2,760 $2,730
CLASS Z SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS Z SHARES CLASS Z SHARES CLASS Z SHARES
------------------ ----------------- -----------------
1 Year....................................... $ 182 $ 139 $ 136
3 Years...................................... $ 563 $ 434 $ 425
5 Years...................................... $ 970 $ 750 $ 734
10 Years..................................... $2,105 $1,646 $1,613
You would pay the following expenses on the same investment if you did not
sell your shares:
CLASS A SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS A SHARES CLASS A SHARES CLASS A SHARES
------------------ ----------------- -----------------
1 Year....................................... $ 599 $ 558 $ 555
3 Years...................................... $1,024 $ 901 $ 892
5 Years...................................... $1,474 $1,267 $1,252
10 Years..................................... $2,720 $2,293 $2,262
CLASS B SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS B SHARES CLASS B SHARES CLASS B SHARES
------------------ ----------------- -----------------
1 Year....................................... $ 257 $ 215 $ 212
3 Years...................................... $ 842 $ 716 $ 707
5 Years...................................... $1,452 $1,243 $1,228
10 Years..................................... $2,855 $2,431 $2,400
CLASS C SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS C SHARES CLASS C SHARES CLASS C SHARES
------------------ ----------------- -----------------
1 Year....................................... $ 355 $ 313 $ 310
3 Years...................................... $ 933 $ 808 $ 799
5 Years...................................... $1,538 $1,330 $1,315
10 Years..................................... $3,170 $2,760 $2,730
10
CLASS Z SHARES
TOTAL RETURN FUND
PRO FORMA
INTERNATIONAL FUND TOTAL RETURN FUND COMBINED
CLASS Z SHARES CLASS Z SHARES CLASS Z SHARES
------------------ ----------------- -----------------
1 Year....................................... $ 182 $ 139 $ 136
3 Years...................................... $ 563 $ 434 $ 425
5 Years...................................... $ 970 $ 750 $ 734
10 Years..................................... $2,105 $1,646 $1,613
These examples assume that all dividends and other distributions are
reinvested. These examples illustrate the effect of expenses, but are not meant
to suggest actual or expected expenses, which may vary. The assumed return of 5%
is not a prediction of, and does not represent, actual or expected performance
of any Fund.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of International Fund and the
Total Return Fund as of December 31, 2000 and the pro forma combined
capitalization as if the Reorganization had occurred on December 31, 2000.
TOTAL RETURN FUND
INTERNATIONAL TOTAL RETURN PRO FORMA
FUND FUND COMBINED
------------- ------------ -----------------
Net Assets (000s)
Class A............................................ $51,239 $208,101 $259,340
Class B............................................ $ 1,736 $ 6,145 $ 7,881
Class C............................................ $ 144 $ 424 $ 568
Class Z............................................ $ 2,760 $ 10,551 $ 13,311
Net Asset Value per share
Class A............................................ $ 6.10 $ 7.10 $ 7.10
Class B............................................ $ 6.14 $ 7.10 $ 7.10
Class C............................................ $ 6.14 $ 7.10 $ 7.10
Class Z............................................ $ 6.12 $ 7.10 $ 7.10
Shares Outstanding (000s)
Class A............................................ 8,395 29,326 36,543
Class B............................................ 283 865 1,110
Class C............................................ 23 60 80
Class Z............................................ 451 1,485 1,874
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of International Fund
and Total Return Fund for the fiscal year ended December 31, 2000, including the
Distributor's contractual agreement to limit distribution and service (12b-1)
fees for Class A, Class B and Class C shares. The ratios also are shown on a pro
forma combined basis as of December 31, 2000.
TOTAL RETURN FUND
INTERNATIONAL TOTAL RETURN PRO FORMA
FUND FUND COMBINED
------------- ------------ -----------------
Ratio of expenses to average net assets
Class A............................................ 2.04% 1.62% 1.59%
Class B............................................ 2.54% 2.12% 2.09%
Class C............................................ 2.54% 2.12% 2.09%
Class Z............................................ 1.79% 1.37% 1.34%
Ratio of net investment income to average net assets
Class A............................................ 5.25% 5.74% 5.75%
Class B............................................ 4.90% 5.24% 5.27%
Class C............................................ 4.94% 5.29% 5.31%
Class Z............................................ 5.49% 5.98% 6.00%
11
PERFORMANCE COMPARISONS OF THE FUNDS
TOTAL RETURN FUND
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ANNUAL RETURNS* (CLASS A SHARES)
1991 10.91%
1992 -0.68%
1993 18.12%
1994 -6.78%
1995 25.45%
1996 13.15%
1997 4.55%
1998 8.92%
1999 -3.95%
2000 3.49%
BEST QUARTER: 11.06% (1st quarter of 1995) WORST QUARTER: -6.79% (3rd quarter of
1992)
*THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE
DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE BEEN
LOWER, TOO.
INTERNATIONAL FUND
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ANNUAL RETURNS* (CLASS A SHARES)
1991 10.45%
1992 -0.08%
1993 18.38%
1994 -5.62%
1995 25.14%
1996 14.02%
1997 3.62%
1998 8.00%
1999 -4.27%
2000 2.82%
BEST QUARTER: 10.59% (1st quarter of 1995) WORST QUARTER: -5.20% (3rd quarter of
1992)
*THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE
DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE BEEN
LOWER, TOO.
The following table compares each Fund's average annual total returns for
the one, five and ten years ended December 31, 2000. Average annual total
returns include the deduction of applicable sales charges, are based on past
results and are not an indication of future performance.
AVERAGE ANNUAL TOTAL RETURNS (CLASS A SHARES)
(PERIODS ENDED DECEMBER 31, 2000)
1 YEAR* 5 YEARS* 10 YEARS* SINCE INCEPTION*
-------------- -------- --------- ----------------
International Fund............................... -1.29% 3.81% 6.41% 7.11% (7-31-87)
Total Return Fund................................ -.65% 4.22% 6.46% 8.56% (7-07-86)
- ------------------------
* If the Fund's Distributor had not waived a portion of its fees during the
periods shown, total returns would have been lower.
12
AVERAGE ANNUAL TOTAL RETURNS (CLASS B SHARES)
(PERIODS ENDED DECEMBER 31, 2000)
1 YEAR* SINCE INCEPTION*
-------------- ----------------
International Fund.......................................... -2.46% 3.94% (1-15-96)
Total Return Fund........................................... -2.18% 4.23% (1-15-96)
- ------------------------
* If the Fund's Distributor had not waived a portion of its fees during the
periods shown, total returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS (CLASS C SHARES)
(PERIODS ENDED DECEMBER 31, 2000)
1 YEAR* SINCE INCEPTION*
-------- ----------------
International Fund.......................................... .52% 3.90% (1-15-96)
Total Return Fund........................................... .79% 4.19% (1-15-96)
- ------------------------
* If the Fund's Distributor had not waived a portion of its fees during the
periods shown, total returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS (CLASS Z SHARES)
(PERIODS ENDED DECEMBER 31, 2000)
1 YEAR SINCE INCEPTION
-------- ---------------
International Fund.......................................... 3.27% 3.13% (3-17-97)
Total Return Fund........................................... 3.78% 3.76% (3-17-97)
COMPARISON OF PRINCIPAL RISK FACTORS
As described more fully above, each Fund has the same investment objectives
and substantially similar investment policies and permissible investments.
Because each Fund normally invests in similarly-rated income-producing debt
securities, the Funds have substantially similar levels of risk. These risks
include market risk, credit risk and interest rate risk.
Both Funds may also use investment strategies such as derivatives that
involve above average risks. The Funds may use these risk management techniques
to try to preserve assets or enhance return. Derivatives may not fully offset
the underlying positions and this could result in losses to the Fund that would
not otherwise have occurred. Both Funds may borrow for investment purposes,
i.e., use "leverage". Leverage risk is the risk associated with investments or
trading strategies that relatively small market movements may result in large
changes in the value of an investment.
Like any mutual fund, an investment in either International Fund or Total
Return Fund could lose value. For a more complete discussion of the risks
associated with either Fund, please refer to the "Risk/ Return Summary" and the
section entitled "Investment Risks" in each Fund's Prospectus.
OPERATIONS OF TOTAL RETURN FUND
FOLLOWING THE REORGANIZATION
PIFM and PIC do not expect Total Return Fund to revise its investment
policies, management or general investment approach as a result of the
Reorganization. The Board of Total Return Fund has approved certain changes to
that Fund's investment policies summarized in "Principal Investment Strategies"
above. However, these changes will be implemented regardless of whether the
Reorganization is approved. In addition, David Bessey and Steve Koomar, together
with a global team of professionals, will continue to serve as co-portfolio
managers of Total Return Fund following the Reorganization. The agents
13
that provide Total Return Fund with services, such as its Custodian and Transfer
Agent, which also provide these services to International Fund, are not expected
to change. The Directors and officers of the respective Funds are the same.
All of the current investments of International Fund are permissible
investments for Total Return Fund. Nevertheless, PIC may sell securities held by
International Fund or Total Return Fund between shareholder approval and the
Closing Date of the Reorganization as may be necessary or desirable in the
ongoing management of each Fund and the adjustment of each Fund's portfolio in
anticipation of the Reorganization. Transaction costs associated with such
adjustments will be borne by the Fund that incurred them. Transaction costs
associated with such adjustments that occur after the Closing Date will be borne
by Total Return Fund.
PURCHASES, REDEMPTIONS AND EXCHANGES
PURCHASING SHARES
The price to buy one share of each Fund is each Fund's net asset value, or
NAV, plus, in the case of Class A and Class C shares, a front-end sales charge.
Each Fund offers Class A, Class B, Class C and Class Z shares.
The Class A shares you receive in the Reorganization are not subject to a
front-end sales charge although additional purchases after the Reorganization
will be subject to the Total Return Fund Class A sales charge schedule (which is
the same as that for International Fund Class A shares).
The contingent deferred sales charge (CDSC) imposed on Class B shares of
International Fund is identical to that charged by Total Return Fund. Class B
shares are sold with a 5% CDSC that declines over seven years. Each CDSC
declines by 1% every year with Class B shares automatically converting to
Class A shares (which have a lower 12b-1 fee) approximately seven years after
they are purchased.
The sales charge imposed on Class C shares of Total Return Fund is identical
to that charged by International Fund. Class C shares are sold with a 1%
front-end load and a 1% CDSC for shares redeemed within 18 months of purchase.
The Class B or Class C shares you receive in the Reorganization will be
subject to the identical CDSC that is applicable to your International Fund
investment. In other words, the contingent deferred sales charge will be
calculated from the first day of the month after your purchase of shares of
International Fund, exclusive of any time during which you may have been
invested in a money market fund.
Both Funds also offer Class Z shares, which are sold without either a
front-end load or a CDSC and are available only to a limited group of investors.
You will receive the same class of shares in Total Return Fund that you own
in International Fund. Shares in both Funds are purchased at the next NAV
calculated after your investment is received and accepted. Each Fund's NAV is
normally calculated each business day at 4:15 p.m., New York time. Refer to each
Fund's Prospectus for more information regarding how to buy shares.
REDEEMING SHARES
The redemption policies for each Fund are identical. Your shares will be
sold at the next NAV, less any applicable CDSC imposed on Class B and Class C
shares, calculated after your order is received and accepted. Refer to each
Fund's Prospectus for more information regarding how to sell shares.
MINIMUM INVESTMENT REQUIREMENTS
For both Funds, the minimum initial investment amount is $1,000 for Class A
and Class B shares and $2,500 for Class C shares. The minimum additional
investment amount is $100. There is no minimum investment for Class Z shares.
14
PURCHASES AND REDEMPTIONS OF INTERNATIONAL FUND
On August 28, 2000, International Fund stopped accepting orders to purchase
or exchange into its shares of any class, except for purchases by certain
automatic investment, retirement and savings programs and plans (excluding IRA
accounts). International Fund shareholders may continue to acquire shares
through dividend reinvestment.
Shareholders of International Fund may redeem shares of International Fund
through the Closing Date of the Reorganization. If the Reorganization is
approved, the purchase and redemption policies of the combined fund will be the
same as the current policies of Total Return Fund.
EXCHANGES OF FUND SHARES
The exchange privilege currently offered by each Fund is the same and is not
expected to change after the Reorganization. Shareholders of the Funds may
exchange their shares for shares of the same class of any other Prudential
Mutual Fund. If you wish to exchange into a money market fund, you must exchange
into Special Money Market Fund, Inc. During the time you are invested in Special
Money Market Fund, Inc., the calculation of contingent deferred sales charge is
frozen. Refer to each Fund's Prospectus for restrictions governing exchanges.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund distributes substantially all of its net investment income and
capital gains to shareholders each year. International Fund pays any dividends
from net investment income typically every month. Total Return Fund pays any
dividends from net investment income typically every quarter. Net realized
capital gains for both Funds, if any, are distributed annually. On or before the
Closing Date, International Fund may declare additional dividends or other
distributions in order to distribute substantially all of its investment company
taxable income and net realized capital gains.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
Each Fund has received an opinion of outside counsel that the Reorganization
will constitute a tax-free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the Internal Revenue
Code). Accordingly, no gain or loss will be recognized by the Funds or their
shareholders as a result of the Reorganization. Please see the section entitled
"The Proposed Transaction -- Federal Income Tax Considerations" for more
information.
During the period between shareholder approval and the Closing Date, PIC may
sell certain securities to make portfolio adjustments to International Fund and
Total Return Fund in connection with the Reorganization. Selling these
securities may result in realization of capital gains, which, when distributed,
would be taxable to the selling Fund's shareholders.
THE PROPOSED TRANSACTION
REORGANIZATION PLAN
The Agreement and Plan of Reorganization describes the terms and conditions
under which the proposed transaction may be completed. Significant provisions of
the Agreement are summarized below; however, this summary is qualified in its
entirety by reference to the Agreement, a copy of which is attached as Appendix
A to this Proxy Statement.
The Agreement contemplates (a) Total Return Fund acquiring as of the Closing
Date all of the assets of International Fund in exchange solely for shares of
Total Return Fund and the assumption by Total Return Fund of International
Fund's liabilities; and (b) the distribution of shares of Total Return Fund to
the shareholders of International Fund as provided for in the Agreement.
15
The assets of International Fund to be acquired by Total Return Fund include
all cash, cash equivalents, securities, receivables (including interest or
dividends receivable), claims and other property owned by International Fund,
and any deferred or prepaid expenses shown as an asset on the books of
International Fund on the Closing Date. Total Return Fund will assume from
International Fund all liabilities, debts and obligations of International Fund
of whatever kind or nature, whether absolute, accrued, contingent or otherwise,
whether or not arising in the ordinary course of business, whether or not
determinable on the Closing Date and whether or not specifically referred to in
the Agreement; provided, however, that International Fund will use its best
efforts, to the extent practicable, to discharge all of its known liabilities
prior to the Closing Date, other than liabilities incurred in the ordinary
course of business.
Total Return Fund will deliver to International Fund the number of full and
fractional shares of Total Return Fund having an aggregate net asset value equal
to the value of the assets of International Fund less the liabilities of
International Fund as of the Closing Date. International Fund will then
distribute the Total Return Fund shares PRO RATA to its shareholders, Class A
shares for Class A shares, Class B shares for Class B shares, Class C shares for
Class C shares and Class Z shares for Class Z shares.
The value of International Fund's assets to be acquired by Total Return Fund
and the amount of its liabilities to be assumed by Total Return Fund will be
determined as of the close of business on the Closing Date, using the valuation
procedures set forth in International Fund's Prospectus and Statement of
Additional Information. The net asset value of a share of Total Return Fund will
be determined as of the same time using the valuation procedures set forth in
its Prospectus and Statement of Additional Information.
As of the Closing Date, International Fund will distribute to its
shareholders of record the shares of Total Return Fund it receives, so that each
International Fund shareholder will receive the number of full and fractional
shares of Total Return Fund equal in value to the aggregate net asset value of
shares of International Fund held by such shareholder on the Closing Date.
International Fund will then be terminated as soon as practicable. The
distribution of shares of Total Return Fund will be accomplished by opening
accounts on the books of Total Return Fund in the names of the International
Fund shareholders and by transferring to such accounts shares of Total Return
Fund. Each International Fund shareholder's account will be credited with the
respective PRO RATA number of full and fractional shares of Total Return Fund
due that shareholder. If requested, Total Return Fund will issue certificates
representing its shares only upon surrender of shares of International Fund.
Immediately after the Reorganization, each former International Fund
shareholder will own shares of Total Return Fund equal to the aggregate net
asset value of that shareholder's shares of International Fund immediately prior
to the Reorganization. The net asset value per share of Total Return Fund will
not be affected by the transaction. Thus, the Reorganization will not result in
a dilution of any shareholder's interest.
Any transfer taxes payable upon issuance of shares of Total Return Fund in a
name other than that of the registered holder of the shares on the books of
International Fund as of that time will be payable by the person to whom such
shares are to be issued as a condition of such transfer. Any reporting
responsibility of International Fund is and will continue to be its
responsibility up to and including the Closing Date and such later date on which
International Fund is terminated.
The completion of the Reorganization is subject to a number of conditions
set forth in the Agreement, some of which may be waived by a Fund. In addition,
the Agreement may be amended in any mutually agreeable manner, except that no
amendment that may have a materially adverse effect on the shareholders'
interests may be made subsequent to the Meeting.
16
REASONS FOR THE REORGANIZATION
The Board of Directors (the Boards) of each Fund have each determined that
the Reorganization is in the best interests of the shareholders of their
respective Fund and that the Reorganization will not result in a dilution of the
interests of shareholders of either Fund.
In considering the Reorganization, the Boards each considered a number of
factors, including the following:
- the compatibility of the Funds' investment objectives, policies and
restrictions;
- the relative past and current growth in assets and investment performance
of the Funds and future prospects for Total Return Fund;
- expense structures and expense ratios;
- portfolio composition;
- the estimated costs of the Reorganization;
- affiliation issues;
- the tax consequences of the Reorganization; and
- the benefits to the shareholders of the Funds.
PIFM and PIC recommended the Reorganization to the Boards at the meeting of
the Boards held on August 23, 2000. In recommending the Reorganization, PIFM and
PIC advised the Boards that the Funds have similar investment objectives,
policies and investment portfolios. PIFM and PIC informed the Boards that the
Funds differed primarily with respect to the Funds' net asset sizes. The Boards
of the two Funds are comprised of the same individuals.
The Board considered that, if the Reorganization is approved, shareholders
of International Fund would likely incur lower total combined fund operating
expenses. It is expected that if the Reorganization is consummated, total
operating expenses would be lowered from 2.04% to 1.59% of average daily net
assets for Class A shares, from 2.54% to 2.09% of average daily net assets for
Class B and Class C shares, and from 1.79% to 1.34% of average daily net assets
for Class Z shares, based on results for the fiscal year ended December 31, 2000
without taking into consideration PIMS's voluntary agreement to limit
distribution and service (12b-1) fees for Class B and Class C shares to .25% of
average net assets.
DESCRIPTION OF THE SECURITIES TO BE ISSUED
Total Return Fund was incorporated in Maryland on May 6, 1986 originally as
a nondiversified and closed-end management investment company. The Fund is
authorized to issue 2 billion shares of common stock, $.01 par value per share,
divided equally into four classes of shares, designated as Class A, Class B,
Class C and Class Z common stock. Each class of common stock represents an
interest in the same assets of Total Return Fund and is identical in all
respects except that:
- each class is subject to different sales charges and distribution and/or
service (12b-1) fees, except for Class Z shares, which are not subject to
any sales charges or distribution and/or service fees;
- each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangement and has separate
voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class;
- each class has a different exchange privilege;
- only Class B shares have a conversion feature whereby Class B shares held
for at least 6 years will automatically convert to Class A shares, on a
quarterly basis, approximately seven years after purchase; and
17
- Class Z shares are offered exclusively for sale to a limited group of
investors.
Shares of Total Return Fund, when issued, are fully paid, nonassessable,
fully transferable and redeemable at the option of the shareholder. Except for
the conversion feature applicable to Class B shares, there are no conversion,
preemptive or other subscription rights. The voting and dividend rights, the
right of redemption and the privilege of exchange are described in Total Return
Fund's Prospectus.
Total Return Fund does not hold annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing Directors
unless less than a majority of the Directors holding office have been elected by
shareholders, at which time the Directors then in office will call a shareholder
meeting for the election of Directors. Under the Investment Company Act of 1940
(the 1940 Act), shareholders of record of at least two-thirds of the outstanding
shares of an investment company may remove a Director by votes cast in person or
by proxy at a meeting called for that purpose. The Directors are required to
call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director, or to transact any other business, when requested in
writing to do so by the shareholders of record holding at least 10% of the
Fund's outstanding shares.
FORMS OF ORGANIZATION
International Fund was originally a nondiversified, closed-end management
investment company, which was organized as a Maryland corporation on April 20,
1987. It operated as a closed-end fund prior to January 15, 1996. On
December 6, 1995, shareholders approved open-ending the Fund, and since
January 15, 1996, International Fund has operated as an open-end fund.
International Fund is authorized to issue 2 billion shares of common stock, $.01
per share, divided equally into four classes.
Total Return Fund also was originally a nondiversified, closed-end
management investment company, which was organized as a Maryland corporation on
May 6, 1986. It operated as a closed-end fund prior to January 15, 1996. On
December 6, 1995, shareholders approved open-ending the Fund, and since
January 15, 1996, Total Return Fund has operated as an open-end fund. Total
Return Fund is authorized to issue 2 billion shares of common stock, par value
$.01 per share, divided equally into four classes.
Both International Fund and Total Return Fund are Maryland corporations and
the rights of their shareholders are governed by their Articles of
Incorporation, By-Laws and the Maryland General Corporation Law. Because the
Funds are both organized as Maryland corporations under substantially similar
Articles of Incorporation, and because each Fund has adopted substantially
similar By-laws, the rights of security holders of each Fund under state law and
the governing documents would be expected to remain unchanged after the
Reorganization.
FEDERAL INCOME TAX CONSIDERATIONS
The exchange of International Fund's assets for Total Return Fund's shares
and the assumption of the liabilities of International Fund by Total Return Fund
is intended to qualify for federal income tax purposes as a tax-free
reorganization under the Internal Revenue Code. The Reorganization will not
occur unless the Funds receive an opinion from Gardner, Carton & Douglas,
counsel to International Fund and Total Return Fund, based upon representations
made by both International Fund and Total Return Fund, substantially to the
effect that, for federal income tax purposes:
(1) The acquisition by Total Return Fund of all of the assets of
International Fund in exchange solely for voting shares of Total Return
Fund and the assumption by Total Return Fund of International Fund's
liabilities, if any, followed by the distribution of Total Return Fund's
voting shares by International Fund PRO RATA to its shareholders, as a
liquidating distribution, and the liquidation of International Fund
pursuant to the Agreement and constructively in exchange for their
International Fund shares will constitute a reorganization within the
meaning of section 368(a) of the
18
Internal Revenue Code, and International Fund and Total Return Fund each
will be "a party to a reorganization" within the meaning of section
368(b) of the Code;
(2) No gain or loss will be recognized by International Fund upon the
transfer of all of its assets to Total Return Fund in exchange solely for
Class A, Class B, Class C and Class Z shares of Total Return Fund and the
assumption by Total Return Fund of International Fund's liabilities, if
any. In addition, no gain or loss will be recognized by International
Fund on the distribution of such shares to the International Fund
shareholders in liquidation of International Fund;
(3) No gain or loss will be recognized by Total Return Fund upon the
acquisition of International Fund's assets in exchange solely for
Class A, Class B, Class C and Class Z shares of Total Return Fund and the
assumption of International Fund's liabilities, if any;
(4) International Fund's shareholders will recognize no gain or loss upon
the receipt of Class A, Class B, Class C and Class Z shares of Total
Return Fund solely in exchange for and in cancellation of International
Fund shares of common stock, as described above and in the Agreement;
(5) Total Return Fund's basis in the assets acquired from International Fund
will be the same as the basis of such assets in the hands of
International Fund immediately before the Reorganization, and the holding
period of such assets acquired by Total Return Fund will include the
holding period thereof when held by International Fund immediately before
the Reorganization;
(6) International Fund shareholders' basis in the Class A, Class B, Class C
and Class Z shares of Total Return Fund to be received by them pursuant
to the Reorganization will be the same as their respective basis in the
Class A, Class B, Class C and Class Z shares of International Fund to be
constructively surrendered in exchange therefor; and
(7) The holding period of Total Return Fund shares to be received by
International Fund shareholders will include the period during which
International Fund shares to be constructively surrendered in exchange
therefor were held; provided such International Fund shares were held as
capital assets by those shareholders on the date of the Reorganization.
Shareholders of International Fund should consult their tax advisers
regarding the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Because the foregoing discussion relates only to the
federal income tax consequences of the Reorganization, shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization. If the Reorganization occurs, any capital loss carryforwards
of International Fund will be limited.
CONCLUSION
The Agreement and Plan of Reorganization was approved by the Board of
Directors of International Fund and Total Return Fund, at meetings held on
August 23, 2000 and again on February 28, 2001. The Boards of both Funds
determined that the proposed Reorganization is in the best interests of
shareholders of each Fund and that the interests of existing shareholders of
International Fund and Total Return Fund would not be diluted as a result of the
Reorganization. If the Reorganization is not completed, International Fund will
continue to engage in business as a registered investment company and the Board
of Directors of International Fund will consider other proposals for the Fund,
including proposals for the reorganization or liquidation of the Fund.
ADDITIONAL INFORMATION ABOUT TOTAL RETURN FUND
Total Return Fund's Prospectus dated March 8, 2000, is enclosed with this
Proxy Statement and is incorporated into this Proxy Statement by reference. The
Prospectus contains additional information about Total Return Fund, including
its investment objective and policies, Manager, investment adviser, advisory
19
fees and expenses and procedures for purchasing and redeeming shares. The
Prospectus also contains Total Return Fund's financial highlights for the fiscal
years ended December 31, 1999. The performance overview is incorporated by
reference from Total Return Fund's Annual Report for the year ended
December 31, 2000, which is enclosed with this Proxy Statement. The Annual
Report includes Total Return Fund's financial highlights for each of the five
years ended December 31, 2000.
MISCELLANEOUS
LEGAL MATTERS
Certain legal matters in connection with the issuance of Total Return Fund
shares have been passed upon by Piper Marbury Rudnick & Wolfe LLP, special
Maryland counsel to Total Return Fund. Certain legal and tax matters in
connection with the Reorganization will be passed upon by Gardner, Carton &
Douglas, counsel to Total Return Fund and International Fund.
INDEPENDENT ACCOUNTANTS
The financial statements of International Fund and Total Return Fund,
included in the Statement of Additional Information which relates to this Proxy
Statement, have been audited by PricewaterhouseCoopers LLP, independent
accountants, whose reports thereon are included in the Annual Report to
Shareholders for International Fund's fiscal year ended December 31, 2000 and
Total Return Fund's fiscal year ended December 31, 2000. The financial
statements audited by PricewaterhouseCoopers LLP have been included in reliance
on their reports given on their authority as experts in auditing and accounting.
AVAILABLE INFORMATION
Information about the Funds (including the Statements of Additional
Information) can be reviewed and copied at the Commission's Public Reference
Room in Washington, D.C. For hours of operation and other information on the
operation of the Public Reference Room, call 1-202-942-8090. Reports and other
information about the Funds are also available on the EDGAR Database on the
Commission's Internet site at http://www.sec.gov, and copies of this information
may be obtained by electronic request at: publicinfo@sec.gov, or by writing the
Commission at Public Reference Section, Washington, D.C. 20549-0102. The
Commission charges a fee to copy documents.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING DIRECTORS AND THEIR NOMINEES
Please advise Total Return Fund, in care of Prudential Investment Management
Services LLC, Gateway Center Three, 100 Mulberry Street, 4th Floor, Newark, New
Jersey 07102-4077, whether other persons are beneficial owners of shares for
which proxies are being solicited and, if so, the number of copies of the Proxy
Statement you wish to receive in order to supply copies to the beneficial owners
of the shares.
SHAREHOLDER PROPOSALS
Any shareholder of International Fund who wishes to submit a proposal to be
considered by the Fund's shareholders at the next meeting of shareholders should
send the proposal to International Fund at Gateway Center Three, 100 Mulberry
Street, 4th Floor, Newark, New Jersey 07102-4077, so as to be received within a
reasonable time (at least 120 days) before the Board of Directors of
International Fund makes the solicitation relating to such meeting. Shareholder
proposals that are submitted in a timely manner will not necessarily be included
in the International Fund's proxy materials. Including shareholder proposals in
proxy materials is subject to limitations under federal securities laws. If the
Reorganization is approved, it is unlikely that International Fund will hold any
more shareholders' meetings.
20
The International Fund's By-Laws provide that the Fund will not be required
to hold annual meetings of shareholders if the election of Directors is not
required under the 1940 Act. It is the present intention of the Board of
Directors not to hold annual meetings of shareholders unless required to do so
by the 1940 Act.
OTHER BUSINESS
Management of International Fund knows of no business to be presented at the
Meeting other than the Proposal described in this Proxy Statement. However, if
any other matter requiring a shareholder vote should arise, the proxies will
vote according to their best judgment in the interest of International Fund.
By order of the Board of Directors,
/s/ Marguerite E. H. Morrison
MARGUERITE E. H. MORRISON
SECRETARY
March 15, 2001
IT IS IMPORTANT THAT YOU EXECUTE AND RETURN YOUR PROXY PROMPTLY.
21
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the 28th day of February, 2001, by and between Prudential International Bond
Fund, Inc. (International Bond Fund) and Prudential Global Total Return
Fund, Inc. (Global Total Return Fund) (collectively, the Funds and each
individually, a Fund). International Bond Fund and Global Total Return Fund are
both corporations organized under the laws of the State of Maryland.
International Bond Fund and Global Total Return Fund each maintains its
principal place of business at Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077. Shares of each Fund are divided into four
classes, designated Class A, Class B, Class C and Class Z.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). Upon receipt of such representations
from each of the Funds as Gardner, Carton & Douglas may require, Gardner, Carton
& Douglas will deliver the opinion referenced in paragraph 8.6 herein. The
reorganization will comprise the transfer of all of the assets of International
Bond Fund, in exchange solely for shares of common stock of Global Total Return
Fund, and Global Total Return Fund's assumption of International Bond Fund's
liabilities, if any, and the constructive distribution, after the Closing Date
hereinafter referred to, of such shares of Global Total Return Fund to the
shareholders of International Bond Fund, in termination of International Bond
Fund as provided herein, all upon the terms and conditions as hereinafter set
forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF INTERNATIONAL BOND FUND IN EXCHANGE FOR SHARES OF
GLOBAL TOTAL RETURN FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND LIQUIDATION
OF INTERNATIONAL BOND FUND.
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, International Bond Fund
agrees to sell, assign, transfer and deliver its assets, as set forth in
paragraph 1.2, to Global Total Return Fund, and Global Total Return Fund agrees
(a) to issue and deliver to International Bond Fund in exchange therefor the
number of shares in Global Total Return Fund determined by dividing the net
asset value of International Bond Fund allocable to Class A, Class B, Class C
and Class Z shares of common stock (computed in the manner and as of the time
and date set forth in paragraph 2.1) by the net asset value allocable to a Class
A, Class B, Class C and Class Z share of Global Total Return Fund (rounded to
the third decimal place) (computed in the manner and as of the time and date set
forth in paragraph 2.2); and (b) to assume all of International Bond Fund's
liabilities, if any, as set forth in paragraph 1.3. Such transactions shall take
place at the closing provided for in paragraph 3 (Closing).
1.2 The assets of International Bond Fund to be acquired by Global Total
Return Fund shall include without limitation all cash, cash equivalents,
securities, receivables (including interest and dividends receivable) and other
property of any kind owned by International Bond Fund and any deferred or
prepaid expenses shown as assets on the books of International Bond Fund on the
closing date provided in paragraph 3 (Closing Date). Global Total Return Fund
has no plan or intent to sell or otherwise dispose of any assets of
International Bond Fund, other than in the ordinary course of business.
1.3 Except as otherwise provided herein, Global Total Return Fund will
assume from International Bond Fund all debts, liabilities, obligations and
duties of International Bond Fund of whatever kind or nature, whether absolute,
accrued, contingent or otherwise, whether or not determinable as of the Closing
Date and whether or not specifically referred to in this Agreement; provided,
however, that International Bond Fund agrees to utilize its best efforts to
discharge all of its known debts, liabilities, obligations and duties prior to
the Closing Date.
A-1
1.4 On or immediately prior to the Closing Date, International Bond Fund
will declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in any
event not less than ninety-eight percent) of its investment company taxable
income (computed without regard to any deduction for dividends paid), and
realized net capital gains, if any, for all taxable years through the Closing
Date so as to retain its qualification as a regulated investment company
pursuant to Section 851 of the Internal Revenue Code.
1.5 On a date (Liquidation Date) as soon after the Closing Date as is
conveniently practicable but in any event within 30 days of the Closing Date,
International Bond Fund will distribute PRO RATA to its Class A, Class B, Class
C and Class Z shareholders of record, determined as of the close of business on
the Closing Date, the Class A, Class B, Class C and Class Z shares of Global
Total Return Fund received by International Bond Fund pursuant to paragraph 1.1
in exchange for their interest in International Bond Fund. Such distribution
will be accomplished by opening accounts on the books of Global Total Return
Fund in the names of International Bond Fund shareholders and transferring
thereto the shares credited to the account of International Bond Fund on the
books of Global Total Return Fund. Each account opened shall be credited with
the respective PRO RATA number of Global Total Return Fund Class A, Class B,
Class C and Class Z shares due International Bond Fund's Class A, Class B, Class
C and Class Z shareholders, respectively. Fractional shares of Global Total
Return Fund shall be rounded to the third decimal place. On or about the Closing
Date, if appropriate, Global Total Return Fund will file Articles of Transfer
with the State Department of Assessments and Taxation of the State of Maryland.
Upon the receipt of an order from the Securities and Exchange Commission (SEC)
indicating acceptance of the Form N-8F that International Bond Fund must file
pursuant to the Investment Company Act of 1940, as amended (Investment Company
Act) to deregister as an investment company, International Bond Fund will file
with the State of Maryland Articles of Dissolution, but in any event such
liquidation will be completed within twelve months following the Closing Date.
1.6 Global Total Return Fund shall not issue stock certificates in
connection with such exchange. With respect to any International Bond Fund
shareholder holding International Bond Fund stock certificates as of the Closing
Date, until Global Total Return Fund is notified by International Bond Fund's
transfer agent that such shareholder has surrendered his or her outstanding
International Bond Fund stock certificates or, in the event of lost, stolen or
destroyed stock certificates, posted adequate bond or submitted a lost
certificate form, as the case may be. Global Total Return Fund will not permit
such shareholder to (1) receive dividends or other distributions on Global Total
Return Fund shares in cash (although such dividends and distributions shall be
credited to the account of such shareholder established on Global Total Return
Fund's books pursuant to paragraph 1.5, as provided in the next sentence),
(2) exchange Global Total Return Fund shares credited to such shareholder's
account for shares of other Prudential Mutual Funds, or (3) pledge or redeem
such shares. In the event that a shareholder is not permitted to receive
dividends or other distributions on Global Total Return Fund shares in cash as
provided in the preceding sentence, Global Total Return Fund shall pay such
dividends or other distributions in additional Global Total Return Fund shares,
notwithstanding any election such shareholder shall have made previously with
respect to the payment of dividends or other distributions on shares of
International Bond Fund. International Bond Fund will, at its expense, request
its shareholders to surrender their outstanding International Bond Fund stock
certificates, post adequate bond or submit a lost certificate form, as the case
may be.
1.7 Ownership of Global Total Return Fund shares will be shown on the books
of Global Total Return Fund's transfer agent. Shares of Global Total Return Fund
will be issued in the manner described in Global Total Return Fund's
then-current prospectus and statement of additional information.
1.8 Any transfer taxes payable upon issuance of shares of Global Total
Return Fund in a name other than the registered holder of the shares being
exchanged on the books of International Bond Fund as of that time shall be paid
by the person to whom such shares are to be issued as a condition to the
registration of such transfer.
A-2
1.9. Any reporting responsibility with the SEC or any state securities
commission of International Bond Fund is, and shall remain, the responsibility
of International Bond Fund up to and including the Liquidation Date.
1.10 All books and records of International Bond Fund, including all books
and records required to be maintained under the Investment Company Act and the
rules and regulations thereunder, shall be available to Global Total Return Fund
from and after the Closing Date and shall be turned over to Global Total Return
Fund on or prior to the Liquidation Date.
2. VALUATION
2.1 The value of International Bond Fund's assets and liabilities to be
acquired and assumed, respectively, by Global Total Return Fund shall be the net
asset value computed as of 4:15 p.m., New York time, on the Closing Date (such
time and date being hereinafter called the Valuation Time), using the valuation
procedures set forth in International Bond Fund's then-current prospectus and
statement of additional information.
2.2 The net asset value of Class A, Class B, Class C and Class Z shares of
Global Total Return Fund shall be the net asset value for Class A, Class B,
Class C and Class Z shares computed as of the Valuation Time, using the
valuation procedures set forth in Global Total Return Fund's then-current
prospectus and statement of additional information.
2.3 The number of Global Total Return Fund shares to be issued (including
fractional shares, if any) in exchange for International Bond Fund's net assets
shall be calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the
direction of Prudential Investments Fund Management LLC (PIFM) in accordance
with its regular practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be April 27, 2001 or such later date as the
parties may agree. All acts taking place at the Closing shall be deemed to take
place simultaneously as of the close of business on the Closing Date unless
otherwise provided. The Closing shall be at the office of Global Total Return
Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for
International Bond Fund, shall deliver to Global Total Return Fund at the
Closing a certificate of an authorized officer of State Street stating that (a)
International Bond Fund's portfolio securities, cash and any other assets have
been transferred in proper form to Global Total Return Fund on the Closing Date
and (b) all necessary taxes, if any, have been paid, or provision for payment
has been made, in conjunction with the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New
York Stock Exchange (NYSE) or other primary exchange is closed to trading or
trading thereon is restricted or (b) trading or the reporting of trading on the
NYSE or other primary exchange or elsewhere is disrupted so that accurate
appraisal of the value of the net assets of International Bond Fund and of the
net asset value per share of Global Total Return Fund is impracticable, the
Closing Date shall be postponed until the first business day after the date when
such trading shall have been fully resumed and such reporting shall have been
restored.
3.4 International Bond Fund shall deliver to Global Total Return Fund on or
prior to the Liquidation Date the names and addresses of its shareholders and
the number of outstanding shares owned by each such shareholder, all as of the
close of business on the Closing Date, certified by the Transfer Agent of
International Bond Fund. Global Total Return Fund shall issue and deliver to
International Bond Fund at the Closing a confirmation or other evidence
satisfactory to International Bond Fund that shares of
A-3
Global Total Return Fund have been or will be credited to International Bond
Fund's account on the books of the Global Total Return Fund. At the Closing each
party shall deliver to the other such bills of sale, checks, assignments, stock
certificates, receipts and other documents as such other party or its counsel
may reasonably request to effect the transactions contemplated by this
Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 International Bond Fund represents and warrants as follows:
4.1.1 International Bond Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland;
4.1.2 International Bond Fund is an open-end management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;
4.1.3 International Bond Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision
of the Articles of Incorporation or By-Laws of International Bond Fund or of
any material agreement, indenture, instrument, contract, lease or other
undertaking to which International Bond Fund is a party or by which
International Bond Fund is bound;
4.1.4 All material contracts or other commitments to which
International Bond Fund, or the properties or assets of International Bond
Fund, is subject, or by which International Bond Fund is bound, except this
Agreement, will be terminated on or prior to the Closing Date without
International Bond Fund or Global Total Return Fund incurring any liability
or penalty with respect thereto;
4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against International Bond Fund or
any of its properties or assets. International Bond Fund knows of no facts
that might form the basis for the institution of such proceedings, and
International Bond Fund is not a party to or subject to the provisions of
any order, decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to consummate
the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Cash Flows, Statement of
Changes in Net Assets, and Financial Highlights of International Bond Fund
at December 31, 2000 and for the year then ended (copies of which have been
furnished to Global Total Return Fund) have been audited by
PricewaterhouseCoopers LLP, independent accountants, in accordance with
generally accepted auditing standards. Such financial statements are
prepared in accordance with generally accepted accounting principles and
present fairly, in all material respects, the financial condition, results
of operations, changes in net assets and financial highlights of
International Bond Fund as of and for the period ended on such date, and
there are no material known liabilities of International Bond Fund
(contingent or otherwise) not disclosed therein;
4.1.7 Since December 31, 2000, there has not been any material adverse
change in International Bond Fund's financial condition, assets, liabilities
or business other than changes occurring in the ordinary course of business,
or any incurrence by International Bond Fund of indebtedness maturing more
than one year from the date such indebtedness was incurred, except as
otherwise disclosed to and accepted by Global Total Return Fund. For the
purposes of this paragraph 4.1.7, a decline in net asset value, net asset
value per share or change in the number of shares outstanding shall not
constitute a material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other
tax returns and reports of International Bond Fund required by law to have
been filed on or before such dates shall have been timely filed, and all
federal and other taxes shown as due on said returns and reports shall have
been paid insofar as due, or provision shall have been made for the payment
thereof, and, to the best of
A-4
International Bond Fund's knowledge, all federal or other taxes required to
be shown on any such return or report have been shown on such return or
report, no such return is currently under audit and no assessment has been
asserted with respect to such returns;
4.1.9 For each past taxable year since it commenced operations,
International Bond Fund has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and intends to meet those requirements for the current
taxable year; and, for each past calendar year since it commenced
operations, International Bond Fund has made such distributions as are
necessary to avoid the imposition of federal excise tax or has paid or
provided for the payment of any excise tax imposed;
4.1.10 All issued and outstanding shares of International Bond Fund
are, and at the Closing Date will be, duly and validly authorized, issued
and outstanding, fully paid and non-assessable. All issued and outstanding
shares of International Bond Fund will, at the time of the Closing, be held
in the name of the persons and in the amounts set forth in the list of
shareholders submitted to Global Total Return Fund in accordance with the
provisions of paragraph 3.4. International Bond Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares, nor is there outstanding any security
convertible into any of its shares, except for the Class B shares which have
the conversion feature described in International Bond Fund's current
prospectus;
4.1.11 At the Closing Date, International Bond Fund will have good and
marketable title to its assets to be transferred to Global Total Return Fund
pursuant to paragraph 1.1, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment for
such assets, Global Total Return Fund will acquire good and marketable title
thereto;
4.1.12 The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Directors of International Bond Fund
and by all necessary corporate action, other than shareholder approval, on
the part of International Bond Fund, and this Agreement constitutes a valid
and binding obligation of International Bond Fund, subject to shareholder
approval;
4.1.13 The information furnished and to be furnished by International
Bond Fund for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is in compliance and shall comply in all material
respects with applicable federal securities and other laws and regulations;
and
4.1.14 On the effective date of the registration statement filed with
the SEC by Global Total Return Fund on Form N-14 relating to the shares of
Global Total Return Fund issuable thereunder, and any supplement or
amendment thereto (Registration Statement), at the time of the meeting of
the shareholders of International Bond Fund and on the Closing Date, the
Proxy Statement of International Bond Fund, the Prospectus of Global Total
Return Fund and the Statements of Additional Information of both Funds to be
included in the Registration Statement (collectively, Proxy Statement)
(i) will comply in all material respects with the provisions and regulations
of the Securities Act of 1933 (1933 Act), the Securities Exchange Act of
1934 (1934 Act) and the Investment Company Act and (ii) will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein in light of the circumstances under which they
were made or necessary to make the statements therein not misleading;
provided, however, that the representations and warranties in this paragraph
4.1.14 shall not apply to statements in or omissions from the Proxy
Statement and Registration Statement made in reliance upon and in conformity
with information furnished by Global Total Return Fund for use therein.
A-5
4.2 Global Total Return Fund represents and warrants as follows:
4.2.1 Global Total Return Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland;
4.2.2 Global Total Return Fund is an open-end management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;
4.2.3 Global Total Return Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision
of the Articles of Incorporation or By-Laws of Global Total Return Fund or
of any material agreement, indenture, instrument, contract, lease or other
undertaking to which Global Total Return Fund is a party or by which Global
Total Return Fund is bound;
4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or threatened against Global Total Return Fund or any of its
properties or assets, except as previously disclosed in writing to
International Bond Fund. Global Total Return Fund knows of no facts that
might form the basis for the institution of such proceedings, and the
Company on behalf of Global Total Return Fund is not a party to or subject
to the provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business or its
ability to consummate the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of Global Total Return Fund at December 31, 2000
and for the fiscal year then ended (copies of which have been furnished to
International Bond Fund) have been audited by PricewaterhouseCoopers LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with
generally accepted accounting principles and present fairly, in all material
respects, the financial condition, results of operations, changes in net
assets and financial highlights of Global Total Return Fund as of and for
the period ended on such date, and there are no known material liabilities
of Global Total Return Fund (contingent or otherwise) not disclosed therein;
4.2.6 Since December 31, 2000, there has not been any material adverse
change in Global Total Return Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary course
of business, or any incurrence by Global Total Return Fund of indebtedness
maturing more than one year from the date such indebtedness was incurred,
except as otherwise disclosed to and accepted by International Bond Fund.
For the purposes of this paragraph, a decline in net asset value, net asset
value per share or a decrease in the number of shares outstanding shall not
constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other
tax returns and reports of Global Total Return Fund required by law to have
been filed on or before such dates shall have been filed, and all federal
and other taxes shown as due on said returns and reports shall have been
paid insofar as due, or provision shall have been made for the payment
thereof, and, to the best of Global Total Return Fund's knowledge, all
federal or other taxes required to be shown on any such return or report are
shown on such return or report, no such return is currently under audit and
no assessment has been asserted with respect to such returns;
4.2.8 For each past taxable year since it commenced operations, Global
Total Return Fund has met the requirements of Subchapter M of the Internal
Revenue Code for qualification and treatment as a regulated investment
company and intends to meet those requirements for the current taxable year;
and, for each past calendar year since it commenced operations, Global Total
Return Fund has made such distributions as are necessary to avoid the
imposition of federal excise tax or has paid or provided for the payment of
any excise tax imposed;
A-6
4.2.9 All issued and outstanding shares of Global Total Return Fund
are, and at the Closing Date will be, duly and validly authorized, issued
and outstanding, fully paid and non-assessable. Except as contemplated by
this Agreement, Global Total Return Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of its
shares nor is there outstanding any security convertible into any of its
shares, except for Class B shares which have a conversion feature described
in Global Total Return Fund's current prospectus;
4.2.10 The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Directors of Global Total Return Fund
and by all necessary corporate action on the part of Global Total Return
Fund, and this Agreement constitutes a valid and binding obligation of
Global Total Return Fund;
4.2.11 The shares of Global Total Return Fund to be issued and
delivered to International Bond Fund pursuant to this Agreement will, at the
Closing Date, have been duly authorized and, when issued and delivered as
provided in this Agreement, will be duly and validly issued and outstanding
shares of Global Total Return Fund, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by Global Total
Return Fund for use in applications for orders, registration statements,
proxy materials and other documents which may be necessary in connection
with the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is and shall comply in all material
respects with applicable federal securities and other laws and regulations;
and
4.2.13 On the effective date of the Registration Statement, at the time
of the meeting of the shareholders of International Bond Fund and on the
Closing Date, the Proxy Statement and the Registration Statement (i) will
comply in all material respects with the provisions and regulations of the
1933 Act, the 1934 Act and the Investment Company Act, (ii) will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading and (iii) with respect to the Registration Statement, at the
time it becomes effective, it will not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this paragraph 4.2.13 shall not apply to statements in or
omissions from the Proxy Statement and the Registration Statement made in
reliance upon and in conformity with information furnished by International
Bond Fund for use therein.
5. COVENANTS OF GLOBAL TOTAL RETURN FUND AND INTERNATIONAL BOND FUND
5.1 International Bond Fund and Global Total Return Fund each covenants to
operate its respective business in the ordinary course between the date hereof
and the Closing Date, it being understood that the ordinary course of business
will include declaring and paying customary dividends and other distributions
and such changes in operations as are contemplated by the normal operations of
the Funds, except as may otherwise be required by paragraph 1.4 hereof.
5.2 International Bond Fund covenants to call a shareholders' meeting to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated hereby (including the
determinations of its Board of Directors as set forth in Rule 17a-8(a) under the
Investment Company Act).
5.3 International Bond Fund covenants that Global Total Return Fund shares
to be received by International Bond Fund in accordance herewith are not being
acquired for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.
A-7
5.4 International Bond Fund covenants that it will assist Global Total
Return Fund in obtaining such information as Global Total Return Fund reasonably
requests concerning the beneficial ownership of International Bond Fund's
shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or
cause to be taken, all action, and will do, or cause to be done, all things
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 International Bond Fund covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each such Act.
5.7 International Bond Fund covenants that it will, from time to time, as
and when requested by Global Total Return Fund, execute and deliver or cause to
be executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action, as Global Total Return Fund may
deem necessary or desirable in order to vest in and confirm to Global Total
Return Fund title to and possession of all the assets of International Bond Fund
to be sold, assigned, transferred and delivered hereunder and otherwise to carry
out the intent and purpose of this Agreement.
5.8 Global Total Return Fund covenants to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of Global Total Return Fund's Board of
Directors as set forth in Rule 17a-8(a) thereunder) and such of the state Blue
Sky or securities laws as it may deem appropriate in order to continue its
operations after the Closing Date.
5.9 Global Total Return Fund covenants that it will, from time to time, as
and when requested by International Bond Fund, execute and deliver or cause to
be executed and delivered all such assignments and other instruments, and will
take and cause to be taken such further action, as International Bond Fund may
deem necessary or desirable in order to (i) vest in and confirm to International
Bond Fund title to and possession of all the shares of Global Total Return Fund
to be transferred to International Bond Fund pursuant to this Agreement and (ii)
assume all of International Bond Fund's liabilities in accordance with this
Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF INTERNATIONAL BOND FUND
The obligations of International Bond Fund to consummate the transactions
provided for herein shall be subject to the performance by Global Total Return
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:
6.1 All representations and warranties of Global Total Return Fund
contained in this Agreement shall be true and correct in all material respects
as of the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date.
6.2 Global Total Return Fund shall have delivered to International Bond
Fund on the Closing Date a certificate executed in Global Total Return Fund's
name by its President or a Vice President in form and substance satisfactory to
International Bond Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Global Total Return Fund in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other matters
as International Bond Fund shall reasonably request.
A-8
6.3 International Bond Fund shall have received on the Closing Date a
favorable opinion from Piper Marbury Rudnick & Wolfe LLP, special Maryland
counsel to Global Total Return Fund, dated as of the Closing Date, to the effect
that:
6.3.1 Global Total Return Fund is duly incorporated and validly
existing as a Maryland corporation, with power under its charter to own all
of its properties and assets and, to the knowledge of such counsel, to carry
on its business as described in its Charter;
6.3.2 This Agreement has been duly authorized for execution and
delivery by an authorized officer of Global Total Return Fund and, assuming
due authorization, execution and delivery of this Agreement by International
Bond Fund, is a valid and binding obligation of the Global Total Return
Fund, enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity);
6.3.3 The shares of Global Total Return Fund to be distributed to
International Bond Fund shareholders under this Agreement, assuming their
due delivery as contemplated by this Agreement, will be validly issued,
fully paid and non-assessable, and no shareholder of Global Total Return
Fund has any statutory pre-emptive right under Maryland law to subscribe for
or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict
with Global Total Return Fund's charter or By-Laws or (ii) result in a
default or a breach of (a) the Management Agreement dated October 3, 1988,
and amended and restated as of January 15, 1996, between Global Total Return
Fund and Prudential Investments Fund Management LLC, (b) the Custodian
Contract dated September 5, 1990 between Global Total Return Fund and State
Street Bank and Trust Company, (c) the Distribution Agreement dated June 1,
1998, between Global Total Return Fund and Prudential Investment Management
Services LLC, and (d) the Transfer Agency and Service Agreement dated
January 15, 1996 between Global Total Return Fund and Prudential Mutual Fund
Services, Inc.; provided, however, that such counsel may state that they
express no opinion with respect to federal or state securities laws, other
antifraud laws and fraudulent transfer laws; and provided further that
insofar as performance by Global Total Return Fund of its obligations under
this Agreement is concerned, such counsel may state that they express no
opinion as to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
6.3.5 To the knowledge of such counsel and without independent inquiry
or investigation, no consent, approval, authorization, filing or order of
any court or governmental authority is required for the consummation by
Global Total Return Fund of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and the
Investment Company Act and such as may be required under state Blue Sky or
securities laws;
6.3.6 Global Total Return Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and
6.3.7 Such counsel knows of none and has not made independent inquiry
or investigation to ascertain the existence of any litigation or government
proceeding instituted or threatened against Global Total Return Fund that
could be required to be disclosed in its registration statement on Form N-1A
and is not so disclosed.
A-9
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF GLOBAL TOTAL RETURN FUND
The obligations of Global Total Return Fund to complete the transactions
provided for herein shall be subject to the performance by International Bond
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:
7.1 All representations and warranties of International Bond Fund contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date.
7.2 International Bond Fund shall have delivered to Global Total Return
Fund on the Closing Date a statement of its assets and liabilities, which
statement shall be prepared in accordance with generally accepted accounting
principles consistently applied, together with a list of its portfolio
securities showing the adjusted tax bases of such securities by lot, as of the
Closing Date, certified by the Treasurer or Assistant Treasurer of International
Bond Fund.
7.3 International Bond Fund shall have delivered to Global Total Return
Fund on the Closing Date a certificate executed in its name by the President or
a Vice President of International Bond Fund, in form and substance satisfactory
to Global Total Return Fund and dated as of the Closing Date, to the effect that
the representations and warranties of International Bond Fund made in this
Agreement are true and correct at and as of the Closing Date except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as Global Total Return Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, International Bond Fund
shall have declared and paid to its shareholders of record one or more dividends
and/or other distributions so that it will have distributed substantially all
(and in any event not less than ninety-eight percent) of such Fund's investment
company taxable income (computed without regard to any deduction for dividends
paid), and realized net capital gain, if any, of International Bond Fund for all
completed taxable years from the inception of the Fund through the Closing Date.
7.5 Global Total Return Fund shall have received on the Closing Date a
favorable opinion from Gardner, Carton & Douglas, counsel to International Bond
Fund, dated as of the Closing Date, to the effect that:
7.5.1 International Bond Fund is duly incorporated and validly existing
as a Maryland corporation with power under its Articles of Incorporation to
own all of its properties and assets and, to the knowledge of such counsel,
to carry on its business as described in its Charter;
7.5.2 This Agreement has been duly authorized for execution and
delivery by an authorized officer of International Bond Fund and, assuming
due authorization, execution and delivery of the Agreement by Global Total
Return Fund, is a valid and legally binding obligation of the International
Bond Fund, enforceable against International Bond Fund in accordance with
its terms, except to the extent that enforcement thereof may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles (regardless of whether enforcement
is sought in a proceeding at law or in equity), provided that such counsel
may state that they express no opinion as to the validity or enforceability
of any provision regarding New York law to govern this Agreement;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by International Bond Fund of its obligations hereunder will
not, (i) violate International Bond Fund's Articles of Incorporation or
By-Laws or (ii) result in a default or a breach of (a) the Management
Agreement, dated September 13, 1995, between International Bond Fund and
Prudential Investments Fund Management LLC as successor to Prudential Mutual
Fund Management, Inc., (b) the Custodian Contract, dated January 16, 1996,
between International Bond Fund and State Street Bank and Trust
A-10
Company, (c) the Distribution Agreement dated June 1, 1998 between
International Bond Fund and Prudential Investment Management Services LLC,
and (d) the Transfer Agency and Service Agreement, dated September 13, 1995,
between International Bond Fund and Prudential Mutual Fund Services, Inc.;
provided, however, that such counsel may state that they express no opinion
in their opinion pursuant to this paragraph 7.5.3 with respect to federal or
state securities laws, other antifraud laws and fraudulent transfer laws;
provided further that insofar as performance by International Bond Fund of
its obligations under this Agreement is concerned, such counsel may state
that they express no opinion as to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
7.5.4 All regulatory consents, authorizations and approvals required to
be obtained by International Bond Fund under the federal laws of the United
States, and the laws of the State of Maryland for the consummation of the
transactions contemplated by this Agreement have been obtained (other than
such as may be required under Maryland securities laws or Blue Sky laws as
to which such counsel may state that they express no opinion);
7.5.5 Such counsel knows of no litigation or any governmental
proceeding instituted or threatened against International Bond Fund that
would be required to be disclosed in the Registration Statement and is not
so disclosed; and
7.5.6 International Bond Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration.
Such opinion may rely on an opinion of Maryland counsel to the extent it
addresses Maryland law. As to paragraph 7.5.2, such counsel may state that they
have assumed that the agreement is governed by the laws of the State of
Illinois.
8. Further Conditions Precedent to Obligations of Global Total Return Fund
and International Bond Fund
The obligations of each Fund hereunder are subject to the further conditions
that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Board of Directors of International
Bond Fund and the Board of Directors of Global Total Return Fund, as to the
determinations set forth in Rule 17a-8(a) under the Investment Company Act, (b)
the Board of Directors of Global Total Return Fund as to the assumption by
Global Total Return Fund of the liabilities of International Bond Fund and (c)
the holders of the outstanding shares of International Bond Fund in accordance
with the provisions of International Bond Fund's Articles of Incorporation, and
certified copies of the resolutions evidencing such approvals shall have been
delivered to Global Total Return Fund and International Bond Fund, as
applicable.
8.2 Any proposed change to Global Total Return Fund's operations that may
be approved by the Board of Directors of Global Total Return Fund subsequent to
the date of this Agreement but in connection with and as a condition to
implementing the transactions contemplated by this Agreement, for which the
approval of Global Total Return Fund's shareholders is required pursuant to the
Investment Company Act or otherwise, shall have been approved by the requisite
vote of the holders of the outstanding shares of the Global Total Return Fund in
accordance with the Investment Company Act and Maryland law, and certified
copies of the resolutions evidencing such approval shall have been delivered to
International Bond Fund.
A-11
8.3 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by Global Total Return Fund or International
Bond Fund to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order or permit would not involve a risk of a material adverse
effect on the assets or properties of Global Total Return Fund or International
Bond Fund, provided that either party hereto may for itself waive any part of
this condition.
8.5 The Registration Statement shall have become effective under the 1933
Act, and no stop orders suspending the effectiveness thereof shall have been
issued, and to the best knowledge of the parties hereto, no investigation or
proceeding under the 1933 Act for that purpose shall have been instituted or be
pending, threatened or contemplated.
8.6 International Bond Fund and Global Total Return Fund shall have
received on or before the Closing Date an opinion of Gardner, Carton & Douglas
satisfactory to International Bond Fund and to Global Total Return Fund,
substantially to the effect that for federal income tax purposes:
8.6.1 The acquisition by Global Total Return Fund of the assets of
International Bond Fund in exchange solely for voting shares of Global Total
Return Fund and the assumption by Global Total Return Fund of International
Bond Fund's liabilities, if any, followed by the distribution of Global
Total Return Fund's voting shares by International Bond Fund PRO RATA to its
shareholders, as a liquidating distribution and the liquidation of
International Bond Fund pursuant to the reorganization and constructively in
exchange for their International Bond Fund shares, will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, and International Bond Fund and Global Total Return Fund each will be
"a party to a reorganization" within the meaning of Section 368(b) of the
Internal Revenue Code;
8.6.2 International Bond Fund's shareholders will recognize no gain or
loss upon the receipt of Class A, Class B, Class C and Class Z shares of
Global Total Return Fund solely in exchange for and in cancellation of
International Bond Fund shares of common stock as described above and in the
Agreement;
8.6.3 No gain or loss will be recognized by International Bond Fund
upon the transfer of all of its assets to Global Total Return Fund in
exchange solely for Class A, Class B, Class C and Class Z shares of Global
Total Return Fund and the assumption by Global Total Return Fund of
International Bond Fund's liabilities, if any. In addition, no gain or loss
will be recognized by International Bond Fund on the distribution of such
shares to the International Bond Fund shareholders in liquidation of
International Bond Fund;
8.6.4 No gain or loss will be recognized by Global Total Return Fund
upon the acquisition of International Bond Fund's assets in exchange solely
for Class A, Class B, Class C and Class Z shares of Global Total Return Fund
and the assumption of International Bond Fund's liabilities, if any;
8.6.5 Global Total Return Fund's basis in the assets acquired from
International Bond Fund will be the same as the basis of such assets in the
hands of International Bond Fund immediately before the reorganization, and
the holding period of such assets acquired by Global Total Return Fund will
include the holding period thereof when held by International Bond Fund
immediately before the reorganization;
8.6.6 International Bond Fund shareholders' basis in the Class A,
Class B, Class C and Class Z shares of Global Total Return Fund to be
received by them pursuant to the reorganization will be the
A-12
same as their basis in the Class A, Class B, Class C and Class Z shares of
International Bond Fund to be constructively surrendered in exchange
therefor; and
8.6.7 The holding period of Global Total Return Fund shares to be
received by International Bond Fund shareholders will include the period
during which International Bond Fund shares to be constructively surrendered
in exchange therefor were held; provided such International Bond Fund shares
were held as capital assets by those shareholders on the date of the
reorganization.
In rendering this opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the representations made in
this Agreement (or in separate letters addressed to such counsel) and the
certificates delivered pursuant to paragraph 3.4.
9. FINDER'S FEES AND EXPENSES
9.1 Each Fund represents and warrants to the other that there are no
finder's fees payable in connection with the transactions provided for herein.
9.2 The expenses incurred in connection with the entering into and carrying
out of the provisions of this Agreement shall be allocated to International Bond
Fund and Global Total Return Fund PRO RATA in a fair and equitable manner in
proportion to their respective assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
Either Fund may at its option terminate this Agreement at or prior to the
Closing Date because of:
11.1 A material breach by the other of any representation, warranty or
covenant contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of
either party not having been met and it reasonably appearing that it will not or
cannot be met; or
11.3 A mutual written agreement of International Bond Fund and Global Total
Return Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director or officer
of Global Total Return Fund or International Bond Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by International Bond Fund pursuant to paragraph 5.2, no such amendment may have
the effect of changing the provisions for determining the number of shares of
Global Total Return Fund to be distributed to International Bond Fund
shareholders under this Agreement to the detriment of such shareholders without
their further approval.
13. NOTICES
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Investments Fund Management LLC, Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102 Attention: Marguerite E. H. Morrison.
A-13
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York; provided that, in the case of any conflict
between such laws and the federal securities laws, the latter shall govern.
14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its President or Vice President.
Prudential International Bond Fund, Inc.
By: /s/ David R. Odenath, Jr.
------------------------------------------
David R. Odenath, Jr.
President
Prudential Global Total Return Fund, Inc.
By: /s/ Robert F. Gunia
------------------------------------------
Robert F. Gunia
Vice President
A-14
TABLE OF CONTENTS
1 VOTING INFORMATION
3 SYNOPSIS
3 Investment Objectives and Policies
4 Principal Investment Strategies
4 Comparison of Other Policies of the Funds
5 Expense Structures
6 The Proposed Reorganization
6 Fund Operating Expenses
7 Comparative Fee Tables
9 Examples of the Effect of Fund Expenses
11 Pro Forma Capitalization and Ratios
12 Performance Comparisons of the Funds
13 COMPARISON OF PRINCIPAL RISK FACTORS
13 OPERATIONS OF TOTAL RETURN FUND FOLLOWING THE REORGANIZATION
14 PURCHASES, REDEMPTIONS AND EXCHANGES
14 Purchasing Shares
14 Redeeming Shares
14 Minimum Investment Requirements
15 Purchases and Redemptions of International Fund
15 Exchanges of Fund Shares
15 Dividends and Other Distributions
15 FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
15 THE PROPOSED TRANSACTION
15 Reorganization Plan
17 Reasons for the Reorganization
17 Description of the Securities to be Issued
18 Forms of Organization
18 Federal Income Tax Considerations
19 Conclusion
19 ADDITIONAL INFORMATION ABOUT TOTAL RETURN FUND
20 MISCELLANEOUS
20 Legal Matters
20 Independent Accountants
20 Available Information
20 Notice to Banks, Broker-Dealers and Voting Directors and
Their Nominees
20 SHAREHOLDER PROPOSALS
21 OTHER BUSINESS
A-1 APPENDIX A: Agreement and Plan of Reorganization and
Liquidation between Prudential International Bond
Fund, Inc. and Prudential Global Total Return Fund, Inc.
ENCLOSURES: Annual Report of Total Return Fund for the
fiscal year ended December 31, 2000
Prospectus of Total Return Fund dated March 8,
2000, as supplemented on March 27, 2000, and August 30, 2000
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 15, 2001
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
This Statement of Additional Information specifically relates to the
proposed transfer of all of the assets and the assumption of all of the
liabilities, if any, of Prudential International Bond Fund, Inc. (International
Bond Fund) by Prudential Global Total Return Fund, Inc. (Total Return Fund).
This Statement of Additional Information consists of this cover page and the
following described documents, each of which is attached hereto and incorporated
herein by reference:
1. Pro Forma Financial Statements as of December 31, 2000.
2. Statement of Additional Information of Total Return Fund dated March 8,
2000.
3. Annual Report of Total Return Fund for the fiscal year ended
December 31, 2000.
4. Annual Report of International Bond Fund for the fiscal year ended
December 31, 2000.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated
March 15, 2001, relating to the above-referred matter. A copy of the Prospectus
and Proxy Statement may be obtained from Total Return Fund without charge by
writing or calling Total Return Fund at the address or phone number listed
above.
FINANCIAL STATEMENTS
The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of Prudential International Bond
Fund, Inc. will be exchanged for shares of Prudential Global Total Return Fund,
Inc. and Prudential Global Total Return Fund, Inc. will assume the liabilities,
if any, of Prudential International Bond Fund, Inc. Immediately thereafter, the
shares of Prudential Global Total Return Fund, Inc. will be distributed to the
shareholders of Prudential International Bond Fund, Inc. in a total liquidation
of Prudential International Bond Fund, Inc. The following pro forma financial
statements include a pro forma Schedule of Investments at December 31, 2000, a
pro forma Statement of Assets and Liabilities at December 31, 2000 and a pro
forma Statement of Operations for the 12 months ended December 31, 2000.
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA SCHEDULE OF INVESTMENTS
DECEMBER 31, 2000
(Unaudited)
PRINCIPAL AMOUNT (000) VALUE ($)
- ----------------------------------------- ---------------------------------------
PRO FORMA:
PRUDENTIAL PRUDENTIAL
PRO FORMA: GLOBAL GLOBAL
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL TOTAL TOTAL
INTERNATIONAL GLOBAL TOTAL GLOBAL TOTAL INTERNATIONAL RETURN RETURN
BOND FUND, RETURN FUND, RETURN FUND, DESCRIPTION BOND FUND, FUND, FUND,
INC. INC. INC. INC. INC. INC.*
- ------------- ------------ ------------ -------------------------------------------------- ------------- ---------- ------------
LONG-TERM INVESTMENTS - 96.7%
C$ C$ C$ CANADA - 4.1%
Government of Canada
2,194 4,557 6,751 6.00%, 9/1/05 1,503,178 3,122,143 4,625,321
660 - 660 8.75%, 12/1/05 503,515 - 503,515
1,177 8,325 9,502 5.75%, 9/01/06 801,299 5,667,639 6,468,938
------------- ---------- ------------
2,807,992 8,789,782 11,597,774
------------- ---------- ------------
DKK DKK DKK DENMARK - 1.3%
6,040 24,180 30,220 Kingdom of Denmark, 5.00%, 8/15/05 753,899 3,018,090 3,771,989
------------- ---------- ------------
EURO EURO EURO EURO - 27.1%
370 1,490 1,860 Callahan Nordrhein Westfalen, 14.00%, 7/15/10 302,954 1,220,006 1,522,960
- 2,000 2,000 Cesp Cia Energetic, 9.25%, 5/10/01 - 957,647 957,647
760 2,889 3,649 Depfa Bank Ag, 5.50%, 2/12/08 718,456 2,731,079 3,449,535
- 480 480 East Telecom Group PLC (United Kingdom), 11.875%,
11/1/09 - 559,220 559,220
370 1,473 1,843 Flags Telecom Holdings Ltd., 11.625%, 3/30/10 313,799 1,249,259 1,563,058
700 2,540 3,240 French Government Bonds, 8.50%, 4/25/23 903,048 3,276,774 4,179,822
2,920 10,200 13,120 German Government Bonds, 6.25%, 1/04/24 3,013,057 10,525,062 13,538,119
1,440 5,410 6,850 Kingdom of Belgium, 5.50%, 03/28/2028 1,295,365 4,866,614 6,161,979
325 1,304 1,629 Kingdom of Spain, 5.40%, 7/30/11 298,314 1,196,927 1,495,241
- 500 500 Municipality of Sophia (France), 9.75%, 6/3/02 - 468,947 468,947
257 1,017 1,274 Neste Chemicals International Oy, 12.25%, 8/15/10 204,094 807,639 1,011,733
490 1,960 2,450 Netia Holdings BV, (Nederlands), 13.75%, 6/15/10 393,459 1,573,837 1,967,296
1,912 7,762 9,674 Osprey Trust, 6.375%, 1/15/03 1,801,525 7,313,512 9,115,037
Republic of Austria
3,630 15,350 18,980 3.40%, 10/20/04 3,229,935 13,658,263 16,888,198
690 3,830 4,520 4.00%, 07/15/09 591,869 3,285,304 3,877,173
Republic of Italy
800 3,400 4,200 4.50%, 7/1/01 743,169 3,158,468 3,901,637
605 2,425 3,030 6.75%, 7/1/07 616,062 2,469,339 3,085,401
812 1,761 2,573 6.00%, 5/01/31 781,969 1,695,870 2,477,839
---------------------------------------
15,207,075 61,013,767 76,220,842
---------------------------------------
GRD GRD GRD GREECE - 0.6%
131,000 425,000 556,000 Republic of Greece, 6.50%, 10/22/19 377,664 1,225,247 1,602,911
---------------------------------------
HUF HUF HUF HUNGARY - 0.7%
80,000 480,000 560,000 Hungarian Government Bonds, 15.00%, 7/24/01 286,836 1,721,013 2,007,849
---------------------------------------
JPY JPY JPY JAPAN - 16.0%
Japanese Government Bonds,
445,000 1,795,000 2,240,000 Zero Coupon, 11/20/02 3,883,354 15,664,317 19,547,671
133,000 541,500 674,500 1.20%, 12/20/05 1,171,304 4,768,880 5,940,184
246,000 1,252,000 1,498,000 1.80%, 6/20/08 2,213,046 11,263,146 13,476,192
133,000 541,500 674,500 1.80%, 6/21/10 1,174,120 4,780,344 5,954,464
---------------------------------------
8,441,824 36,476,687 44,918,511
---------------------------------------
NZ$ NZ$ NZ$ NEW ZEALAND - 5.1%
3,500 14,900 18,400 Federal National Mortgage Association, 7.25%,
6/20/02 1,561,696 6,648,363 8,210,059
2,500 10,000 12,500 New Zealand Government Bonds, 8.00%, 11/15/06 1,209,422 4,837,689 6,047,111
---------------------------------------
2,771,118 11,486,052 14,257,170
---------------------------------------
RUB RUB RUB RUSSIA - 0.2%
European Bank Reconstruction Development,
4,500 18,900 23,400 Zero Coupon, 5/28/02 119,660 502,572 622,232
------------- ----------- ------------
SEK SEK SEK SWEDEN - 6.5%
Swedish Government Bond
31,820 132,300 164,120 6.00%, 2/9/05 3,536,746 14,704,950 18,241,696
------------- ----------- ------------
GBP GBP GBP UNITED KINGDOM - 2.3%
500 2,000 2,500 Abbey National Treasury, 8.00%, 4/02/03 777,080 3,108,321 3,885,401
- 342 342 Banco Central del Uruguay, FRN, 7.25%, 2/19/07 - 474,994 474,994
- 1,300 1,300 Powergen PLC, 8.875%, 3/26/03 - 2,041,758 2,041,758
- 300 300 United Kingdom Treasury Bond, 5.00%, 6/7/04 - 445 445
------------- ----------- ------------
777,080 5,625,518 6,402,598
------------- ----------- ------------
US$ US$ US$ UNITED STATES - 32.8%
CORPORATE BONDS - 11.2%
- 750 750 Banco del Estado Chile, 8.39%, 8/1/01 - 755,198 755,198
- 1,000 1,000 Central Bank of Tunisia, 7.50%, 9/19/07 - 942,500 942,500
300 1,300 1,600 Chonhung Bank, 11.90375%, 1/7/05 289,500 1,254,500 1,544,000
945 3,807 4,752 Fideicomiso Petalco, 10.16%, 12/23/09 926,100 3,730,860 4,656,960
160 670 830 Hanvit Bank (Korea), 12.75%, 3/1/10 160,000 670,000 830,000
500 2,030 2,530 Industrial Bank of Korea, 8.375%, 9/30/02 511,000 2,074,660 2,585,660
980 3,930 4,910 Korea Development Bank, 6.625%, 11/21/03 963,830 3,865,155 4,828,985
Korea Electric Power Corp.
219 875 1,094 7.00%, 10/1/02 218,253 872,016 1,090,269
1,360 5,170 6,530 6.375%, 12/1/03 1,320,560 5,020,070 6,340,630
705 2,840 3,545 Level 3 Communications, Inc., 10.75%, 3/15/08 551,012 2,219,681 2,770,693
555 2,210 2,765 Partner Communications Company Limited, 13.00%,
8/15/10 477,300 1,900,600 2,377,900
300 1,300 1,600 Philippine Long Dist. Telephone Co. (Philippines),
10.50%, 4/15/09 252,000 1,092,000 1,344,000
300 1,300 1,600 Sakura Capital Funding (Cayman Island), 7.4775%,
9/29/49 287,844 1,247,323 1,535,167
------------- ----------- ------------
5,957,399 25,644,563 31,601,962
------------- ----------- ------------
SOVEREIGN BONDS - 7.8%
70,000 300,000 370,000 Banque Central De Tunisie, 3.30%, 8/02/10 597,691 2,561,533 3,159,224
400 1,600 2,000 Embotelladura Andina SA, 7.875%, 10/1/97 302,538 1,210,152 1,512,690
- 500 500 Jamaican Government Bonds, 9.625%, 7/2/02 - 485,000 485,000
500 2,250 2,750 Oman Sultante, 7.125%, 3/20/02 498,750 2,244,375 2,743,125
92 338 430 Republic of Brazil, FRN, 7.875%, 1/1/01 92,250 338,250 430,500
750 2,750 3,500 Republic of Bulgaria, 3.00%, 7/28/12 555,000 2,035,000 2,590,000
500 3,300 3,800 Republic of Columbia, 7.25%, 2/23/04 431,000 2,844,600 3,275,600
787 4,028 4,815 Republic of Croatia, 7.75%, 3/31/06 749,393 3,836,891 4,586,284
- 1,000 1,000 Republic of Italy, 7.00%, 9/18/01 - 1,003,500 1,003,500
400 1,700 2,100 Republic of Lithuania, 7.125%, 7/22/02 397,000 1,687,250 2,084,250
------------- ----------- ------------
PRINCIPAL AMOUNT (000) VALUE ($)
- ----------------------------------------- ---------------------------------------
PRO FORMA:
PRUDENTIAL PRUDENTIAL
PRO FORMA: GLOBAL GLOBAL
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL TOTAL TOTAL
INTERNATIONAL GLOBAL TOTAL GLOBAL TOTAL INTERNATIONAL RETURN RETURN
BOND FUND, RETURN FUND, RETURN FUND, DESCRIPTION BOND FUND, FUND, FUND,
INC. INC. INC. INC. INC. INC.*
- ------------- ------------ ------------ -------------------------------------------------- ------------- ---------- -----------
------------ ----------- -----------
3,623,622 18,246,551 21,870,173
------------ ----------- -----------
SUPRANATIONAL BONDS - 0.2%
- 500 500 Corporacion Andina de Formento, 7.63%, 4/03/01 - 497,500 497,500
---------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 13.6%
570 - 570 United States Treasury Bonds, 6.625%, 2/15/27 651,048 - 651,048
United States Treasury Notes,
4,410 13,030 17,440 5.625%, 5/15/08 4,525,763 13,372,037 17,897,800
3,550 14,170 17,720 6.50%, 2/15/10 3,883,913 15,502,830 19,386,743
- 150 150 5.75%, 8/15/10 - 157,196 157,196
------------ ----------- -----------
9,060,724 29,032,063 38,092,787
------------ ----------- -----------
TOTAL LONG-TERM INVESTMENTS (COST $53,727,542
AND $219,368,598 RESPECTIVELY) 53,721,639 217,984,355 271,705,994
------------ ----------- -----------
SHORT-TERM INVESTMENTS - 0.8%
REPURCHASE AGREEMENT - 0.8%
Joint Repurchase Agreement Account,
- 301 301 5.921%, 1/02/01 - 301,000 301,000
1,827 - 1,827 Prudential Core Investment Fund Taxable
Money Market Series (a) 1,826,555 - 1,826,555
---------------------------------------
1,826,555 301,000 2,127,555
---------------------------------------
U.S. GOVERNMENT OBLIGATIONS
United States Treasury Bills,
65 80 145 6.60%(b), 4/12/01 63,897 77,592 141,489
---------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,890,452 AND
$379,681 RESPECTIVELY) 1,890,452 378,592 2,269,044
------------ ----------- -----------
TOTAL INVESTMENTS (COST $55,617,994 AND
$219,748,279 RESPECTIVELY) - 97.5% 55,612,091 218,362,947 273,975,038
OTHER ASSETS IN EXCESS OF LIABILITIES - 2.5% 266,824 6,857,329 7,124,153
------------ ----------- -----------
NET ASSETS-- 100% $ 55,878,915 $ 225,220,276 $ 281,099,191
============ ============= =============
* Prudential Global Total Return Fund, Inc. does not
anticipate having to sell any securities as a
result of the Merger.
(a) An affiliate of the investment advisor.
(b) Rate quoted represents yield to maturity as of
purchase date.
Portfolio securities are classified according to the
security's currency denomination.
FRN - Floating Rate Note.
See notes to proforma financial statements
PRO-FORMA STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2000
(Unaudited)
PRO FORMA:
PRUDENTIAL PRUDENTIAL GLOBAL PRUDENTIAL GLOBAL
INTERNATIONAL BOND TOTAL RETURN PRO FORMA TOTAL RETURN
FUND, INC. FUND, INC. ADJUSTMENTS FUND, INC.
------------------ ----------------- ---------------- -----------------
Assets
Investments, at value (cost $55,617,994 and
$219,748,279, respectively) ......................... $ 55,612,091 $ 218,362,947 $ 273,975,038
Foreign currency, at value (cost $74,976 and
$240,268, respectively) ............................. 75,460 240,784 316,244
Unrealized appreciation on forward currency contracts . 2,163,810 8,308,551 10,472,361
Interest receivable ................................... 1,120,827 4,647,064 5,767,891
Receivable for investments sold ....................... 52,500 4,673,874 4,726,374
Receivable for Fund shares sold ....................... 3,867 25,807 29,674
Other assets .......................................... 2,714 9,268 11,982
------------------ ----------------- -----------------
Total assets .................................. 59,031,269 236,268,295 295,299,564
------------------ ----------------- -----------------
LIABILITIES
Payable to custodian .................................. 53,720 98,792 152,512
Unrealized depreciation on forward currency contracts . 2,557,139 9,805,398 12,362,537
Payable for Fund shares reacquired .................... 116,283 695,467 811,750
Accrued expenses and other liabilities ................ 303,210 246,093 549,303
Management fee payable ................................ 35,208 142,522 177,730
Dividend payable ...................................... 73,909 -- 73,909
Distribution fee payable ............................. 11,166 48,040 59,206
Due to broker-variation margin ........................ 1,719 7,032 8,751
Withholding tax payable ............................... -- 4,675 4,675
------------------ ----------------- -----------------
Total liabilities ............................. 3,152,354 11,048,019 14,200,373
------------------ ----------------- -----------------
NET ASSETS ............................................ $ 55,878,915 $ 225,220,276 $ 281,099,191
================== ================= =================
Net assets were comprised of:
Common stock, at par .......................... $ 91,519 $ 317,355 (12,816)(a) $ 396,058
Paid in capital in excess of par .............. 58,361,462 260,775,157 12,816 (a) 319,149,435
------------------ ----------------- -----------------
58,452,981 261,092,512 319,545,493
Distributions in excess of net investment income....... (205,481) (489,642) (695,123)
Accumulated net realized loss on investments and
foreign currency transactions ....................... (1,984,754) (32,563,985) (34,548,739)
Net unrealized depreciation on investments and
foreign currency transactions ....................... (383,831) (2,818,609) (3,202,440)
------------------ ----------------- -----------------
Net assets, December 31, 2000 ......................... $ 55,878,915 $ 225,220,276 $ 281,099,191
================== ================= =================
Class A:
Net assets .................................... $ 51,239,374 $ 208,100,620 $ 259,339,994
Shares of common stock issued and outstanding . 8,394,573 29,325,699 (1,177,760)(b) 36,542,512
------------------ ----------------- -----------------
Net asset value and redemption price per
share outstanding .......................... $ 6.10 $ 7.10 $ 7.10
Maximum sales charge (4% of offering price) .. 0.25 0.30 0.30
------------------ ----------------- -----------------
Maximum offering price to public ............. $ 6.35 $ 7.40 $ 7.40
================== ================= =================
Class B:
Net assets .................................... $ 1,736,346 $ 6,145,247 $ 7,881,593
Shares of common stock issued and outstanding . 282,843 865,097 (38,287)(b) 1,109,653
------------------ ----------------- -----------------
Net asset value, offering price and redemption
price per share outstanding ................. $ 6.14 $ 7.10 $ 7.10
================== ================= =================
Class C:
Net assets .................................... $ 143,656 $ 423,909 $ 567,565
Shares of common stock issued and outstanding 23,401 59,679 (3,168)(b) 79,912
------------------ ----------------- -----------------
Net asset value and redemption price per share
outstanding ................................ $ 6.14 $ 7.10 $ 7.10
Sales charge (1% of offering price) .......... 0.06 0.07 0.07
------------------ ----------------- -----------------
Offering price to public ..................... $ 6.20 $ 7.17 $ 7.17
================== ================= =================
Class Z:
Net assets .................................... $ 2,759,539 $ 10,550,500 $ 13,310,039
Shares of common stock issued and outstanding 451,114 1,485,051 (62,447)(b) 1,873,718
------------------ ----------------- -----------------
Maximum offering price to public ............. $ 6.12 $ 7.10 $ 7.10
================== ================= =================
(a) Represents the difference between par value of additional shares to be
issued (see Note 2) and current par value of common stocks of Prudential
International Bond Fund.
(b) Represents the difference between total additional shares to be issued
(see Note 2) and current Prudential Global Total Return Fund shares
outstanding.
PRO-FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
(Unaudited)
PRO FORMA:
PRUDENTIAL PRUDENTIAL GLOBAL PRUDENTIAL GLOBAL
INTERNATIONAL BOND TOTAL RETURN BOND PRO FORMA TOTAL RETURN
FUND, INC. FUND, INC. ADJUSTMENTS FUND, INC.
-------------------- ------------------ ----------------- ------------------
Net Investment Income
Income
Interest (net of foreign withholding
taxes of ($2,743 & $12,984) $ 4,411,637 $ 17,967,141 $ - $22,378,778
-------------------- ------------------ ----------------- -------------------
Expenses
Management fee 453,807 1,832,651 - 2,286,458
Distribution Fee- Class A 138,976 564,786 - 703,762
Distribution Fee- Class B 10,156 51,154 2,991 (a) 64,301
Distribution Fee- Class C 1,038 3,617 257 (a) 4,912
Transfer agent's fees & expenses 188,000 775,000 (114,000)(b) 849,000
Custodian's fees & expenses 205,000 310,000 (55,000)(b) 460,000
Reports to shareholders 115,000 170,000 (40,000)(b) 245,000
Legal fees & expenses 40,000 98,000 (40,000)(b) 98,000
Registration fees 30,000 61,000 (22,000)(b) 69,000
Audit fees 36,000 72,000 (66,000)(b) 42,000
Directors' fees 11,000 15,000 (11,000)(b) 15,000
Miscellaneous 6,015 8,549 (6,015)(b) 8,549
-------------------- ------------------ ----------------- -------------------
Total Expenses 1,234,992 3,961,757 (350,767) 4,845,982
-------------------- ------------------ ----------------- -------------------
Net investment income 3,176,645 14,005,384 350,767 17,532,796
-------------------- ------------------ ----------------- -------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (1,403,990) (4,919,379) (6,323,369)
Foreign currency transactions (4,429,291) (17,974,168) (22,403,459)
Options written - (38,032) (38,032)
Financial futures contracts - (101,280) (101,280)
-------------------- ------------------ ----------------- -------------------
(5,833,281) (23,032,859) (28,866,140)
Net change in unrealized appreciation
/depreciation of:
Investments 4,202,704 18,223,871 22,426,575
Foreign currencies (1,976) (1,907,372) (1,909,348)
Financial futures contracts (15,984) (65,391) (81,375)
-------------------- ------------------ ----------------- -------------------
4,184,744 16,251,108 20,435,852
Net gain (loss) on investments and
foreign currency (1,648,537) (6,781,751) (8,430,288)
-------------------- ------------------ ----------------- -------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................. $1,528,108 $7,223,633 350,767 $9,102,508
==================== ================== ================= ===================
(a) Reflects adjustments to the plan of distribution fees based on surviving
Fund's fee schedule.
(b) Reflects the elimination of duplicate services or fees.
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
-----------------------------------------
NOTES TO PRO-FORMA FINANCIAL STATEMENTS
---------------------------------------
(Unaudited)
1. BASIS OF COMBINATION - The Pro-Forma Statement of Assets and Liabilities,
including the Schedule of Investments at December 31, 2000 and the related
Statement of Operations ("Pro Forma Statements") for the year ended
December 31, 2000, reflect the accounts of Prudential International Bond
Fund, Inc. and Prudential Global Total Return Fund, Inc., each a "Fund."
The Pro Forma Statements give effect to the proposed transfer of all assets
and liabilities of Prudential International Bond Fund, Inc. in exchange for
shares in Prudential Global Total Return Fund, Inc. The Pro Forma
Statements should be read in conjunction with the historical financial
statements of each Fund included in their respective Statement of
Additional Information.
2. SHARES OF COMMON STOCK - The pro-forma net asset value per share assumes
the issuance of additional Class A, B, C and Z shares of Prudential
Global Total Return Fund, Inc. which would have been issued on December
31, 2000 in connection with the proposed reorganization. Shareholders of
Prudential International Bond Fund, Inc. would become shareholders of
Prudential Global Total Return Fund, Inc., receiving shares of
Prudential Global Total Return Fund, Inc. equal to the value of their
holdings in Prudential International Bond Fund, Inc. The amount of
additional shares assumed to be issued has been calculated based on the
December 31, 2000 net assets of Prudential International Bond Fund, Inc.
and the net asset value per share of Prudential Global Total Return
Fund, Inc. as follows:
Net Asset Value
Prudential Global Total Return Fund, Inc. Net Assets Per Share
ADDITIONAL SHARES ISSUED 12/31/00 12/31/00
------------------------ -------- --------
Class A 7,216,813 $51,239,374 $7.10
Class B 244,556 $1,736,346 $7.10
Class C 20,233 $143,656 $7.10
Class Z 388,667 $2,759,539 $7.10
3. PRO FORMA OPERATIONS - The Pro Forma Statement of Operations assumes
similar rates of gross investment income for the investments of each
Fund. Accordingly, the combined gross investment income is equal to the
sum of each Fund's gross investment income. Certain expenses have been
adjusted to reflect the expected expenses of the combined entity. The
pro-forma investment management fees and plan of distribution fees of
the combined Fund are based on the fee schedule in effect for Prudential
Global Total Return Fund, Inc. at the combined level of average net
assets for the twelve months ended December 31, 2000. The Pro Forma
Statement of Operations does not include the effect of any realized
gains or losses, or transaction fees incurred in connection with the
realignment of the portfolio.
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
Statement of Additional Information
dated March 8, 2000
Prudential Global Total Return Fund, Inc. (the Fund) is an open-end,
non-diversified, management investment company. The Fund's investment objective
is to seek total return made up of current income and capital appreciation. The
Fund seeks to achieve this objective by investing at least 65% of its total
assets in income-producing debt securities of the U.S. and foreign governments,
supranational organizations, semi-governmental entities or governmental
agencies, authorities or instrumentalities and short-term bank debt securities
or bank deposits. We look primarily for investment-grade securities denominated
in U.S. dollars or in foreign currencies. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the Fund's Prospectus, dated March 8, 2000, a
copy of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
PAGE
----
Fund History................................................ B-2
Description of the Fund, Its Investments and Risks.......... B-2
Investment Restrictions..................................... B-22
Management of the Fund...................................... B-23
Control Persons and Principal Holders of Securities......... B-26
Investment Advisory and Other Services...................... B-27
Brokerage Allocation and Other Practices.................... B-33
Capital Shares, Other Securities and Organization........... B-34
Purchase, Redemption and Pricing of Fund Shares............. B-35
Shareholder Investment Account.............................. B-45
Net Asset Value............................................. B-49
Taxes, Dividends and Distributions.......................... B-50
Performance Information..................................... B-52
Financial Statements........................................ B-55
Report of Independent Accountants........................... B-68
Appendix A -- Description of Security Ratings............... A-1
Appendix I -- General Investment Information................ I-1
Appendix II -- Historical Performance Data.................. II-1
- --------------------------------------------------------------------------------
MF 169 B
FUND HISTORY
Prudential Global Total Return Fund, Inc. was incorporated under the laws
of Maryland on May 6, 1986 under the name "The Global Yield Fund, Inc." as a
closed-end, non-diversified, management investment company. In connection with a
change in the Fund's investment objective approved by shareholders in November,
1994, shareholders approved a change in the name of the Fund to "The Global
Total Return Fund, Inc." The Fund operated as a closed-end fund prior to January
15, 1996. On December 6, 1995, shareholders approved open-ending the Fund, and
since January 15, 1996, the Fund has operated as an open-end fund. In August
1999, the Fund's name was changed to "Prudential Global Total Return Fund, Inc."
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) Classification. The Fund is a "non-diversified" management investment
company and may invest more than 5% of its total assets in the securities of one
or more issuers. However, the Fund intends to limit its investments in the
securities of any one issuer, except for securities issued or guaranteed as to
payment of principal and interest by any one government, supranational issuer,
semi-government or government agency, authority or instrumentality, to 5% of its
total assets at the time of purchase. Except for securities issued or guaranteed
by the U.S. government, its agencies, authorities or instrumentalities, the Fund
will not invest 25% or more of its total assets at the time of purchase in the
securities of a central government or a supranational issuer and not more than
10% of its total assets in securities of a semi-government or government agency,
authority or instrumentality. Investment in a non-diversified investment company
involves greater risk than investment in a diversified investment company
because a loss resulting from the default of a single issuer may represent a
greater portion of the total assets of a non-diversified portfolio.
(b) and (c) Investment Strategies, Policies and Risks. The Fund's
investment objective is to seek total return, made up of current income and
capital appreciation. While the principal investment policies and strategies for
seeking to achieve this objective are described in the Fund's prospectus, the
Fund may from time to time also use the securities, instruments, policies and
principal and non-principal strategies described below in seeking to achieve its
objective. The Fund may not be successful in achieving its objective and you
could lose money.
FOREIGN SECURITIES
Foreign securities include securities of any foreign country the investment
adviser considers appropriate for investment by the Fund. Foreign securities may
also include securities of foreign issuers that are traded in U.S. dollars in
the United States although the underlying security is usually denominated in a
foreign currency. These securities include securities traded in the form of
American Depositary Receipts and American Depositary Shares. In many instances,
foreign securities may provide higher yields but may be subject to greater
fluctuations in price than securities of domestic issuers which have similar
maturities and quality. Under certain market conditions these investments may be
less liquid and more volatile than the securities of U.S. corporations and are
certainly less liquid than securities issued or guaranteed by the U.S.
government, its instrumentalities or agencies.
Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political, economic or
social instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to U.S. companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States, and, for certain foreign countries, there is a
possibility of expropriation, confiscatory taxation or diplomatic developments
which could affect investment in those countries and potential difficulties in
enforcing contractual obligations and extended settlement periods. Finally, in
the event of a default of any such foreign debt obligations, it may be more
difficult for the Fund to obtain, or to enforce a judgment against, the issuers
of such securities.
B-2
The costs attributable to foreign investing are higher than the costs of
domestic investing. For example, the cost of maintaining custody of foreign
securities generally exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing are frequently higher than
those attributable to domestic investing. Costs are incurred in connection with
conversions between various currencies. In addition, foreign brokerage
commissions are generally higher than in the U.S., and the foreign securities
markets may be less liquid and more volatile than in the U.S. Foreign investment
income may be subject to foreign withholding or other government taxes that
could reduce the return to the Fund on those securities. Tax treaties between
the United States and certain foreign countries may, however, reduce or
eliminate the amount of foreign tax to which the Fund would be subject.
The Fund invests in debt securities denominated in the currencies of
developed countries and developing or emerging market countries whose
governments are considered stable by the Fund's investment adviser. An issuer of
debt securities purchased by the Fund may be domiciled in a country other than
the country in whose currency the instrument is denominated. Companies in
emerging markets may have limited product lines, markets or financial resources
and may lack management depth. The securities of these companies may have
limited marketability and may be subject to more abrupt or erratic market
movements than securities of larger, more established companies or the market
averages in general. Investing in the fixed-income markets of emerging market
countries involves exposure to economies that are generally less diverse and
mature, and to political systems which can be expected to have less stability
than those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the markets of
developed countries. The risks associated with investments in foreign
securities, described above, may be greater with respect to investments in
developing countries.
The Fund may invest in debt securities issued by supranational
organizations such as the World Bank, the European Investment Bank, the European
Coal and Steel Community, and the Asian Development Bank. The Fund may invest in
debt securities issued by "semi-governmental entities" such as entities owned by
a national, state or equivalent government or are obligations of a political
unit that are not backed by the national government's "full faith and credit"
and general taxing powers. Examples of semi-governmental issuers include, among
others, the Province of Ontario and the City of Stockholm.
The Fund may also invest in mortgage-backed securities issued or guaranteed
by foreign government entities including semi-governmental entities, and Brady
Bonds, which are long-term bonds issued by government entities in developing
countries as part of a restructuring of their commercial loans.
The Fund may invest in component parts of debt securities of foreign
governments or semi-governmental entities, namely either the corpus (principal)
of such obligations or one or more of the interest payments scheduled to be paid
on such obligations. These securities may take the form of (1) obligations from
which the interest coupons have been stripped (principal only); (2) the interest
coupons that are stripped (interest only); (3) book-entries at a bank
representing ownership of obligation components; or (4) receipts evidencing the
component parts (corpus or coupons) of obligations that have not actually been
stripped. Such receipts evidence ownership of component parts of obligations
(corpus or coupons) purchased by a third party (typically an investment banking
firm) and held on behalf of the third party in physical or book-entry form by a
major commercial bank or trust company pursuant to a custody agreement with the
third party. The Fund may also invest in custodial receipts held by a third
party. Stripped securities are, in general, more sensitive to interest rate
changes than securities that have not been stripped. Combined with investments
in similar U.S. government securities, the Fund will not invest more than 10% of
its total assets in such securities.
A change in the value of a foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of the Fund's assets
denominated in that currency. These currency fluctuations can result in gains or
losses for the Fund. For example, if a foreign security increases in value as
measured in its currency, an increase in value of the U.S. dollar, relative to
the currency in which the foreign security is denominated can offset some or all
of such gains. These currency changes will also affect the Fund's return, income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency decreases after the Fund's income has been accrued and translated into
U.S. dollars, the Fund would experience a foreign currency loss and could be
required to liquidate portfolio securities to make such distributions.
Similarly, if an exchange rate for any such currency decreases between the time
the Fund incurs expenses in U.S. dollars and the time such expenses are paid,
the amount of such currency required to be converted into U.S. dollars in order
to pay such expenses in U.S. dollars will be greater than the
B-3
equivalent amount of such currency at the time such expenses were incurred.
Under the Internal Revenue Code of 1986, as amended (the Internal Revenue Code),
changes in an exchange rate which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities will result in foreign currency gains or
losses that increase or decrease distributable net investment income. Similarly,
dispositions of certain debt securities (by sale, at maturity or otherwise) at a
U.S. dollar amount that is higher or lower than the Fund's original U.S. dollar
cost may result in foreign exchange gains or losses, which will increase or
decrease distributable net investment income. The exchange rates between the
U.S. dollar and other currencies can be volatile and are determined by such
factors as supply and demand in the currency exchange markets, international
balances of payments, government intervention, speculation and other economic
and political conditions. Gains and losses on security and currency transactions
cannot be predicted. This fact coupled with the different tax and accounting
treatment of certain currency gains and losses increases the likelihood of
distributions in whole or in part constituting a return of capital to
shareholders.
The Fund's interest income from foreign government securities issued in
local markets may, in some cases, be subject to applicable withholding taxes
imposed by governments in such markets. The Fund may sell a foreign security it
owns prior to maturity in order to avoid foreign withholding taxes on dividend
and interest income and buy back the same security for a future settlement date.
Interest on foreign government securities is not generally subject to foreign
withholding taxes. See "Taxes, Dividends and Distributions."
Returns available from foreign currency denominated debt instruments can be
adversely affected by changes in exchange rates. The Fund's investment adviser
believes that the use of foreign currency hedging techniques, including
"cross-currency hedges" may assist, under certain conditions, in helping to
protect against declines in the U.S. dollar value of income available for
distribution to shareholders and declines in the net asset value of the Fund's
shares resulting from adverse changes in currency exchange rates. For example,
the return available from securities denominated in a particular foreign
currency would diminish in the event the value of the U.S. dollar increased
against such currency. Such a decline could be partially or completely offset by
an increase in value of cross-currency hedge involving a forward currency
contract to sell a different foreign currency, where such contract is available
on terms more advantageous to the Fund than a contract to sell the currency in
which the position being hedged is denominated. Cross-currency hedges can,
therefore, under certain conditions, provide protection of net asset value in
the event of a general rise in the U.S. dollar against foreign currencies.
However, there can be no assurance that the Fund will be able to engage in
cross-currency hedging or that foreign exchange rate relationships will be
sufficiently predictable to enable the investment adviser to employ
cross-currency hedging techniques successfully. A cross-currency hedge cannot
protect against exchange rate risks perfectly, and if the investment adviser is
incorrect in its judgment of future exchange rate relationships, the Fund could
be in a less advantageous position than if such a hedge had not been
established.
If a security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between currencies. The Fund may enter
into foreign currency forward contracts for the purchase or sale of foreign
currency for hedging purposes. See "Risk Management and Return Enhancement
Strategies" below.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES. On January 1, 1999, 11 of the 15 member states of the European
Monetary Union introduced the "euro" as a common currency. During a three-year
transitional period, the euro will coexist with each member state's national
currency. By July 1, 2002, the euro is expected to become the sole legal tender
of the member states. During the transition period, the Fund will treat the euro
as a separate currency from the national currency of any member state.
The adoption by the member states of the euro will eliminate the
substantial currency risk among member states and will likely affect the
investment process and considerations of the Fund's investment adviser. To the
extent the Fund holds non-U.S. dollar-denominated securities, including those
denominated in the euro, the Fund will still be subject to currency risk due to
fluctuations in those currencies as compared to the U.S. dollar.
The medium- to long-term impact of the introduction of the euro in member
states cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general long-term
B-4
ramifications can be expected, such as changes in economic environment and
changes in behavior of investors, all of which will impact the Fund's
investments.
FIXED-INCOME SECURITIES
The Fund may invest in medium-grade securities (i.e., rated Baa by Moody's
Investors Service, Inc. (Moody's), BBB by Standard & Poor's Ratings Group (S&P)
or comparably rated by another nationally recognized statistical rating
organization (NRSRO)) and up to 15% of its total assets in lower-rated
securities (i.e., rated lower than Baa by Moody's, lower than BBB by S&P or
comparably rated by another NRSRO) or, in either case, if unrated, deemed to be
of equivalent quality by the investment adviser. However, the Fund will not
purchase a security rated lower than B by Moody's or S&P or comparably rated by
another NRSRO or, if unrated, deemed to be of equivalent quality by the
investment adviser.
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, the market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower-rated (i.e., high yield or "junk"
bonds) securities are more likely to react to developments affecting market and
credit risk than are more highly-rated securities, which react primarily to
movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund.
Generally, lower-rated securities and unrated securities of comparable
quality (i.e., securities rated lower than Baa by Moody's or BBB by S&P or
comparably rated by another NRSRO), offer a higher current yield than is offered
by higher-rated securities, but also (1) will likely have some quality and
protective characteristics that, in the judgment of the rating organizations,
are outweighed by large uncertainties or major risk exposures to adverse
conditions and (2) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation. The market values of certain of these securities also tend to be
more sensitive to individual issuer developments and changes in economic
conditions than higher-quality bonds. In addition, medium and lower-rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium- and lower-rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. The investment
adviser, under the supervision of the Manager and the Board of Directors, in
evaluating the creditworthiness of an issuer, whether rated or unrated, takes
various factors into consideration which may include, as applicable, the
issuer's financial resources, its sensitivity to economic conditions and trends
and regulatory matters.
In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium- and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for the Fund to purchase and may also have the effect
of limiting the ability of the Fund to sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer. As a
result, the investment adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's net asset value.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by the Fund may decline proportionately
more than a portfolio consisting of higher-rated securities. If the Fund
experiences unexpected
B-5
net redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the Fund's portfolio and
increasing the exposure of the Fund to the risks of high yield securities.
Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicates. See Appendix A -- "Description of Security Ratings."
Subsequent to its purchase by the Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of these securities by the Fund, but
the investment adviser will consider this event in its determination of whether
the Fund should continue to hold the securities.
During the year ended December 31, 1999, the monthly dollar-weighted
average ratings of the debt obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:
PERCENTAGE OF
RATING TOTAL INVESTMENTS
------ -----------------
AAA/Aaa = 48.62%
AA/Aa = 13.76%
A/A = 10.31%
BBB/Baa = 6.03%
BB/Ba = 12.30%
B/B = 3.34%
Unrated/Other = 5.64%
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund may invest in U.S. Treasury securities,
including bills, notes, bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. government and,
as such, are backed by the "full faith and credit" of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances.
OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in debt securities issued or guaranteed
by agencies or instrumentalities of the U.S. government, including but not
limited to, Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
securities. Obligations of GNMA, the Farmers Home Administration and the
Export-Import Bank are backed by the "full faith and credit" of the United
States. In the case of securities not backed by the "full faith and credit" of
the United States, the Fund must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment. Such securities include
obligations issued by the Student Loan Marketing Association (SLMA), FNMA and
FHLMC, each of which may borrow from the U.S. Treasury to meet its obligations,
although the U.S. Treasury is under no obligation to lend to such entities.
Obligations issued or guaranteed as to principal and interest by the U.S.
government may be acquired by the Fund in the form of U.S. Treasury notes or
bonds. Such notes and bonds are held in custody by a bank on behalf of the
owners. These custodial receipts are commonly referred to as Treasury Strips.
The Fund may invest in component parts of U.S. government debt securities,
namely either the corpus (principal) of such obligations or one or more of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of (1) obligations from which the interest coupons have been
stripped; (2) the interest coupons that are stripped; (3) book-entries at a
Federal Reserve member bank representing ownership of obligation components; or
(4) receipts evidencing the component parts (corpus or coupons) of U.S.
government obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of U.S. government obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. The Fund may also invest in custodial receipts held by a third party that
are not U.S. government securities. Combined with
B-6
investments in similar foreign government and semi-governmental entity
securities, the Fund will not invest more than 10% of its total assets in such
securities.
SPECIAL CONSIDERATIONS. U.S. government securities are considered among
the most creditworthy of fixed-income investments. The yields available from
U.S. government securities are generally lower than the yields available from
corporate debt securities. The values of U.S. government securities (like those
of fixed-income securities generally) will change as interest rates fluctuate.
During periods of falling U.S. interest rates, the values of outstanding
long-term U.S. government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of those fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. government securities
will not affect investment income from those securities, they will affect the
net asset value of the Fund.
At a time when the Fund has written call options on a portion of its U.S.
government securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by the Fund. The termination of option
positions under these conditions would generally result in the realization of
capital losses, which would reduce the Fund's capital gains distributions.
Accordingly, the Fund would generally seek to realize capital gains to offset
realized losses by selling portfolio securities. In such circumstances, however,
it is likely that the proceeds of such sales would be reinvested in lower
yielding securities.
MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-backed securities and other derivative
mortgage products, including those representing an undivided ownership interest
in a pool of mortgages, e.g., GNMA, FNMA and FHLMC certificates where the U.S.
government or its agencies or instrumentalities guarantees the payment of
interest and principal of these securities. However, these guarantees do not
extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates nor do these guarantees extend to the yield
or value of the Fund's shares. These certificates are in most cases
"pass-through" instruments, through which the holder receives a share of all
interest and principal payments from the mortgages underlying the certificate,
net of certain fees.
In addition to GNMA, FNMA or FHLMC certificates through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, the Fund may also invest in certain mortgage
pass-through securities issued by the U.S. government or its agencies and
instrumentalities commonly referred to as mortgage-backed security strips or MBS
strips. MBS strips are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
The Fund will invest in both Adjustable Rate Mortgage Securities (ARMs),
which are pass-through mortgage securities collateralized by adjustable rate
mortgages, and Fixed-Rate Mortgage Securities (FRMs), which are collateralized
by fixed-rate mortgages. For purposes of the Fund's maturity limitation, the
maturity of a mortgage-backed security will be deemed to be equal to its
remaining maturity (i.e., the average maturity of the mortgages underlying such
security determined by the investment adviser on the basis of assumed prepayment
rates with respect to such mortgages).
FHLMC SECURITIES. FHLMC presently issues two types of mortgage
pass-through securities, mortgage participation certificates (PCs) and
guaranteed mortgage certificates (GMCs). The Fund does not intend to invest in
GMCs. PCs resemble GNMA certificates in that each PC represents a pro rata share
of all interest and
B-7
principal payments made and owed on the underlying pool. FHLMC guarantees timely
monthly payment of interest on PCs and the stated principal amount.
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, ARMs have a specified
maturity date and amortize principal over their life. In periods of declining
interest rates, there is a reasonable likelihood that ARMs will experience
increased rates of prepayment of principal. However, the major difference
between ARMs and FRMs is that the interest rate and the rate of amortization of
principal of ARMs can and do change in accordance with movements in a
particular, pre-specified, published interest rate index. Because the interest
rate on ARMs generally moves in the same direction as market interest rates, the
market value of ARMs tends to be more stable than that of long-term fixed-rate
securities.
FIXED-RATE MORTGAGE SECURITIES. The Fund anticipates investing in
high-coupon fixed-rate mortgage securities. Such securities are collateralized
by fixed-rate mortgages and tend to have high prepayment rates when the level of
prevailing interest rates declines significantly below the interest rates on the
mortgages. Thus, under those circumstances, the securities are generally less
sensitive to interest rate movements than lower coupon FRMs.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
(CMOs) are debt instruments collateralized by GNMA, FNMA or FHLMC certificates,
but also may be collateralized by whole loans or private mortgage pass-through
securities (such collateral collectively hereinafter referred to as Mortgage
Assets). Multi-class pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including depository institutions, mortgage banks, investment banks and
special-purpose subsidiaries of the foregoing. The issuer of a series of CMOs
may elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC).
All future references to CMOs include REMICs and multi-class pass-through
securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways.
SPECIAL CONSIDERATIONS OF MORTGAGE-BACKED SECURITIES. The underlying
mortgages which collateralize the ARMs, CMOs and REMICs in which the Fund
invests will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization. In
addition, because of the pass-through of prepayments of principal on the
underlying securities, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate.
The market value of mortgage securities, like other U.S. government
securities, will generally vary inversely with changes in market interest rates,
declining when interest rates rise and rising when interest rates decline.
However, mortgage securities, while having comparable risk of decline during
periods of rising rates, usually have less potential for capital appreciation
than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline. In addition, to
the extent such mortgage securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments generally will result in some
loss of the holders' principal to the extent of the premium paid. On the other
hand, if such mortgage securities are purchased at a discount, an unscheduled
prepayment of principal will increase current and total returns and will
accelerate the recognition of income which when distributed to shareholders will
be taxable as ordinary income.
Because the prepayment characteristics of the underlying mortgages vary, it
is not possible to predict accurately the average life of a particular issue of
pass-through certificates. Mortgage-backed securities are often subject to more
rapid prepayment than their stated maturity date would indicate as a result of
the pass-
B-8
through of prepayments on the underlying mortgage obligations. During periods of
declining interest rates, prepayments of mortgages underlying mortgage-backed
securities can be expected to accelerate. When mortgage obligations are prepaid,
the Fund reinvests the prepaid amounts in securities, the yields of which
reflect interest rates prevailing at that time. Therefore, the Fund's ability to
maintain a portfolio of high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium generally will result in capital losses. During periods of rising
interest rates, the rate of prepayment mortgages underlying mortgage-backed
securities can be expected to decline, extending the projected average maturity
of the mortgage-backed securities. This maturity extension risk may effectively
change a security which was considered short- or intermediate-term at the time
of purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short- or
intermediate-term securities.
CORPORATE AND OTHER NON-GOVERNMENT DEBT SECURITIES
The Fund may invest in corporate and other nongovernment debt obligations
of domestic and foreign issuers including convertible securities and (subject to
the Fund's maturity limitations) in intermediate-term and long-term bank debt
securities in the United States and in foreign countries denominated in U.S.
dollars or in foreign currencies. Issuers are not limited to the corporate form
of organization.
ZERO COUPON, PAY-IN-KIND OR DEFERRED PAYMENT SECURITIES
The Fund may also invest in zero coupon, pay-in-kind or deferred payment
securities. Zero coupon securities are securities that are sold at a discount to
par value and on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received annually "phantom income." These
investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of cash. These investments may experience greater
volatility in market value than securities that make regular payments of
interest. The Fund accrues income on these investments for tax and accounting
purposes, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Fund's distribution obligations, in which case the
Fund will forego the purchase of additional income producing assets with these
funds. Zero coupon securities include both corporate and U.S. and foreign
government securities. Pay-in-kind securities are securities that have interest
payable by delivery of additional securities. Upon maturity, the holder is
entitled to receive the aggregate par value of the securities. Deferred payment
securities are securities that remain a zero coupon security until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
deferred payment securities may be subject to greater fluctuation in value and
lesser liquidity in the event of adverse market conditions than comparably rated
securities paying cash interest at regular intervals.
CUSTODIAL RECEIPTS
Obligations issued or guaranteed as to principal and interest by the U.S.
government, foreign governments or semi-governmental entities may be acquired by
the Fund in the form of custodial receipts that evidence ownership of future
interest payments, principal payments or both on certain notes or bonds. Such
notes and bonds are held in custody by a bank on behalf of the owners. These
U.S. government custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investment Growth Receipts" (TIGRs) and
"Certificates of Accrual on Treasury Securities" (CATS). The Fund will not
invest more than 5% of its assets in such custodial receipts.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund also may engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to enhance
return but not for speculation. The Fund, and thus its investors, may lose money
through any unsuccessful use of these strategies. These strategies currently
include the use of options on securities and foreign currencies, foreign
currency forward contracts and futures contracts and options on such contracts
(including interest rate futures contracts and currency futures contracts and
options
B-9
thereon). The Fund's ability to use these strategies may be limited by various
factors, such as market conditions, regulatory limits and tax considerations,
and there can be no assurance that any of these strategies will succeed. If new
financial products and risk management techniques are developed, the Fund may
use them to the extent consistent with its investment objective and policies.
OPTIONS ON SECURITIES
The Fund may purchase and write (that is, sell) put and call options on
securities and currencies that are traded on U.S. and foreign securities
exchanges or in the over-the-counter market to seek to enhance return or to
protect against adverse price fluctuations in securities in the Fund's
portfolio. These options will be on debt securities, aggregates of debt
securities, indexes of prices thereof, other financial indexes (for example, the
S&P 500), U.S. government securities (listed on an exchange and
over-the-counter), foreign government securities and foreign currencies.
The Fund may write covered put and call options to generate additional
income through the receipt of premiums, purchase put options in an effort to
protect the value of a security that it owns against a decline in market value
and purchase call options in an effort to protect against an increase in the
price of securities (or currencies) it intends to purchase. The Fund may also
purchase put and call options to offset previously written put and call options
of the same series.
A call option gives the purchaser, in exchange for a premium paid, the
right for a specified period of time to purchase the securities or currency
subject to the option at a specified price (the exercise price or strike price).
The writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities or
currency in excess of the exercise price of the option during the period that
the option is open.
A put option gives the purchaser, in return for a premium, the right for a
specified period of time to sell the securities or currency subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Fund, as the writer of a put option, might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.
The Fund may wish to protect certain portfolio securities against a decline
in market value through purchase of put options on other securities or
currencies which The Prudential Investment Corporation, doing business as
Prudential Investments (Prudential Investments), and PRICOA Asset Management Ltd
(PRICOA, and collectively with Prudential Investments, the Subadviser or
investment adviser) believes may move in the same direction as those portfolio
securities. If the Subadviser's judgment is correct, changes in the value of the
put options should generally offset changes in the value of the portfolio
securities being hedged. If the Subadviser's judgment is not correct, the value
of the securities underlying the put option may decrease less than the value of
the Fund's investments and therefore the put option may not provide complete
protection against a decline in the value of the Fund's investments below the
level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire through purchase of call options on
other debt securities which the Subadviser believes may move in the same
direction as those portfolio securities. In such circumstances the Fund will be
subject to risks analogous to those summarized above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Fund is not as close as anticipated
and the value of the securities underlying the call options increases less than
the value of the securities to be acquired by the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, it may purchase a security and concurrently write a call option against
that security. If the call option is exercised, the Fund's maximum gain will be
the premium it received for writing the option, adjusted upwards or downwards by
the difference between the Fund's purchase price of the security and the
exercise price of the option. If the option
B-10
is not exercised and the price of the underlying security declines, the amount
of the decline will be offset in part, or entirely, by the premium received.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. Buy-and-write transactions using at-the-money call options may be used
when it is expected that the price of the underlying security will remain fixed
or advance moderately during the option period. A buy-and-write transaction
using an out-of-the-money call option may be used when it is expected that the
premium received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be greater
than the appreciation in the price of the underlying security alone. If the call
option is exercised in such a transaction, the Fund's maximum gain will be the
premium received by it for writing the option, adjusted upwards or downwards by
the difference between the Fund's purchase price of the security and the
exercise price of the option. If the option is not exercised and the price of
the underlying security declines, the amount of the decline will be offset in
part, or entirely, by the premium received.
The Fund may also buy and write straddles (i.e., a combination of a call
and a put written on the same security at the same strike price where the same
segregated collateral is considered "cover" for both the put and the call). In
such cases, the Fund will segregate with its Custodian cash or other liquid
assets equivalent to the amount, if any, by which the put is "in-the-money,"
i.e., the amount by which the exercise price of the put exceeds the current
market value of the underlying security. It is contemplated that the Fund's use
of straddles will be limited to 5% of the Fund's net assets (meaning that the
securities used for cover or segregated as described above will not exceed 5% of
the Fund's net assets at the time the straddle is written). The writing of a
call and a put on the same security at the same price where the call and put are
covered by different securities is not considered a straddle for the purposes of
this limit.
The Fund may write both American style options and European style options.
An American style option is an option which may be exercised by the holder at
any time prior to its expiration. A European style option may only be exercised
as of the expiration of the option.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an option may liquidate a position by effecting a
"closing sale transaction" by selling an option of the same series as the option
previously purchased. There is no guarantee that either a closing purchase or a
closing sale transaction can be effected.
Exchange-traded options in the U.S. are issued by a clearing organization
affiliated with the exchange on which the option is listed which, in effect,
gives its guarantee to the fulfillment of every exchange-traded option
transaction. In contrast, OTC options are contracts between the Fund and its
counterparty with no clearing organization guarantee. Thus, when the Fund
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while OTC
options may not. When the Fund writes an OTC option, it generally will be able
to close out the OTC option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally wrote
the OTC option. While the Fund will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
Until the Fund is able to effect a closing purchase transaction in a covered OTC
call option the Fund has written, it will not be able to liquidate securities
used as cover until the option expires or is exercised or different cover is
substituted. In the event of insolvency of the counterparty, the Fund may be
unable to liquidate an OTC option. With respect to options written by the Fund,
the inability to enter into a closing purchase transaction could result in
material losses to the Fund.
B-11
OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund may
repurchase any OTC options it writes for a maximum price to be calculated by a
formula set forth in the option agreement. The "cover" for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option.
The Fund will write only "covered" options. An option is covered if, as
long as the Fund is obligated under the option, it (1) owns an offsetting
position in the underlying security or (2) segregates cash or other liquid
assets in an amount equal to or greater than its obligation under the option.
Under the first circumstance, the Fund's losses are limited because it owns the
underlying security; under the second circumstance, in the case of a written
call option, the Fund's losses are potentially unlimited.
There is no limitation on the amount of covered call options the Fund may
write. The Fund may write covered put options to the extent that cover for such
options does not exceed 25% of the Fund's net assets.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury bonds
and notes tends to center on the most recently auctioned issues, the exchanges
will not indefinitely continue to introduce new series of options with
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each series of bonds or notes will thus be phased out as new options are
listed on the more recent issues, and a full range of expiration dates will not
ordinarily be available for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable Treasury bill changes from week
to week, writers of Treasury bill call options cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount corresponding to the option contract size, the
Fund may be hedged from a risk standpoint. In addition, the Fund will segregate
with its Custodian Treasury bills maturing no later than those which would be
deliverable in the event of an assignment of an exercise notice to ensure that
it can meet its open option obligations.
ON GNMA CERTIFICATES. The Fund may purchase and write options on GNMA
certificates in the over-the-counter market and, to the extent available, on any
exchange.
Since the remaining principal balance of GNMA certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call option holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered or substitute cover.
A GNMA certificate held by the Fund to cover a call option the Fund has
written in any but the nearest expiration month may cease to represent cover for
the option in the event of a decline in the GNMA coupon rate at which new pools
are originated under the FHA/VA loan ceiling in effect at any given time. Should
this occur, the Fund will no longer be covered, and the Fund will either enter
into a closing purchase transaction or replace the certificate with a
certificate which represents cover. When the Fund closes its option position or
replaces the certificate, it may realize an unanticipated loss and incur
transaction costs.
OPTIONS ON CURRENCIES
Instead of purchasing or selling futures or foreign currency forward
contracts, the Fund may attempt to accomplish similar objectives by purchasing
put or call options on currencies either on exchanges or in over-the-counter
markets or by writing put options or covered call options on currencies. A put
option gives the Fund the right to sell a currency at the exercise price until
the option expires. A call option gives the Fund the right to purchase a
currency at the exercise price until the option expires. Both options serve to
insure against adverse currency price movements in the underlying portfolio
assets designated in a given currency. Currency options may be subject to
position limits which may limit the ability of the Fund to fully hedge its
positions by
B-12
purchasing the options. The Fund's use of options on currencies will be subject
to the same limitations as its use of options on securities, described above.
The Fund will not purchase put or call options if, as a result thereof, the
value of the options would exceed 5% of the Fund's net assets.
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may enter into foreign currency forward contracts to protect the
value of its portfolio against future changes in the level of currency exchange
rates. The Fund may enter into such contracts on a spot, i.e., cash, basis at
the rate then prevailing in the currency exchange market or on a forward basis,
by entering into a forward contract to purchase or sell currency. A forward
contract on foreign currency is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days agreed upon by
the parties from the date of the contract at a price set on the date of the
contract. The risks involved in entering into a foreign currency forward
contract are generally the same as for a futures contract having similar terms.
The Fund's transactions in foreign currency forward contracts will be
limited to risk management involving either specific transactions or portfolio
positions. Transaction risk management is the forward purchase or sale of
currency with respect to specific receivables or payables of the Fund generally
arising in connection with the purchase or sale of its portfolio securities and
accruals of interest receivable and Fund expenses. Position risk management is
the forward sale of currency with respect to portfolio security positions
denominated or quoted in that currency or in a currency bearing a high degree of
positive correlation to the value of that currency. The Fund may also cross
hedge its currency exposure under circumstances where the investment adviser
believes that the currency in which a security is denominated may deteriorate
against the dollar and the possible loss in value can be hedged, return can be
enhanced and risks can be managed by entering into forward contracts to sell the
deteriorating currency and buy a currency that is expected to appreciate in
relation to the dollar.
Although there are no limits on the number of forward contracts that the
Fund may enter into, the Fund may not position "hedge" (including "cross
hedges") with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities being hedged. If the Fund enters into a position
hedging transaction, the transaction will be "covered" by the position being
hedged or the Fund's Custodian will segregate cash or other liquid assets of the
Fund (less the value of the "covering" positions, if any) in an amount equal to
the value of the Fund's total assets committed to the consummation of the given
forward contract. If the value of the assets segregated declines, additional
assets will be segregated so that the value of the account will, at all times,
equal the amount of the Fund's net commitment with respect to the forward
contract.
The use of foreign currency contracts does not eliminate fluctuations in
the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition, although forward
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result if the
value of the currency increases. The Fund is not required to enter into forward
contracts with regard to its foreign currency denominated securities.
The Fund will not enter into forward contracts to purchase or sell currency
if, as a result, the net market value of all such contracts exceeds 5% of the
Fund's net assets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may enter into futures contracts and options on futures contracts
to seek to reduce certain risks of its investments and to attempt to enhance
return. The Fund may enter into futures contracts for the purchase or sale of
debt securities, aggregates of debt securities or indexes of prices thereof,
other financial indexes, U.S. government securities, corporate debt securities
and certain foreign government debt securities (collectively, interest rate
futures contracts). It may also enter into futures contracts for the purchase or
sale of foreign currencies or composite foreign currencies in which securities
held or to be acquired by the Fund are denominated, or the value of which have a
high degree of positive correlation to the value of such currencies as to
constitute, in the investment adviser's judgment, an appropriate vehicle for
hedging. The Fund may enter into such futures contracts both on U.S. and foreign
exchanges.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return or for risk management purposes, if immediately
thereafter the sum of the amount of initial margin deposits on
B-13
the Fund's existing futures and options on futures and premiums paid for such
related options would exceed 5% of the market value of the Fund's total assets.
The Fund may purchase and sell futures contracts and related options without
limitation, for bona fide hedging purposes in accordance with regulations of the
Commodity Futures Trading Commission (CFTC) (i.e., to reduce certain risks of
its investments). The total contract value of all futures contracts sold will
not exceed the total market value of the Fund's investments.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator," subject to compliance with certain conditions. The
exemption is conditioned upon the Fund's purchasing and selling futures
contracts and options thereon for bona fide hedging transactions, except that
the Fund may purchase and sell futures contracts and options thereon for any
other purpose to the extent that the aggregate initial margin and option
premiums on such non-hedging transactions do not exceed 5% of the liquidation
value of the Fund's total assets. Although there are no other limits applicable
to futures contracts, the value of all futures contracts sold will not exceed
the total market value of the Fund's investments.
The ordinary spreads between values in the cash and futures markets, due to
differences in the character of those markets, are subject to distortions. In
addition, futures contracts entail risks. For example, all participants in the
futures market are subject to initial and variation margin requirements. Rather
than meeting additional variation margin requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Also, the liquidity of the
futures market depends on participants entering into offsetting transactions
rather than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced, thus
producing price distortions. In addition, from the point of view of speculators,
the margin deposit requirements in the futures market are less onerous than
margin requirements in the securities market. Increased participation by
speculators in the futures market may cause temporary price distortions. Due to
the possibility of distortion, a correct forecast of general interest rate
trends by the investment adviser may still not result in a successful
transaction.
The Fund may only write "covered" put and call options on futures
contracts. The Fund will be considered "covered" with respect to a call option
it writes on a futures contract if the Fund owns the assets which are
deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
"covered" option and having an expiration date not earlier than the expiration
date of the "covered" option, or if it segregates with the Fund's Custodian for
the term of the option cash or other liquid assets equal to the fluctuating
value of the optioned future. The Fund will be considered "covered" with respect
to a put option it writes on a futures contract if it owns an option to sell
that futures contract having a strike price equal to or greater than the strike
price of the "covered" option or if it segregates with the Custodian for the
term of the option cash or other liquid assets at all times equal in value to
the exercise price of the put (less any initial margin deposited by the Fund
with the Custodian with respect to such put option). There is no limitation on
the amount of the Fund's assets which can be segregated.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON
The Fund will purchase or sell interest rate futures contracts to take
advantage of or to protect the Fund against fluctuations in interest rates
affecting the value of debt securities which the Fund holds or intends to
acquire. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
a high degree of positive correlation to the values of the Fund's portfolio
securities. Such a sale would have an effect similar to selling an equivalent
value of the Fund's portfolio securities. If interest rates increase, the value
of the Fund's portfolio securities will decline, but the value of the futures
contracts to the Fund will increase at approximately an equivalent rate thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling debt securities
with longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a risk
management technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it is
expected that interest rates may decline. The purchase of futures contracts for
this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in
B-14
the value of appropriately selected futures contracts should approximate that of
the debt securities that will be purchased, the Fund can take advantage of the
anticipated rise in the cost of the debt securities without actually buying
them. Subsequently, the Fund can make the intended purchase of the debt
securities in the cash market and currently liquidate its futures position. To
the extent the Fund enters into futures contracts for this purpose, it will
segregate with the Fund's Custodian cash or other liquid assets from its
portfolio in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the initial margin
deposited by the Fund with its Custodian with respect to such futures contracts
sufficient to cover the Fund's obligations with respect to such futures
contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of debt securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
In addition, futures contracts entail risks. Although the Fund believes
that use of such contracts will benefit the Fund, if the investment adviser's
investment judgment about the general direction of interest rates is incorrect,
the Fund's overall performance would be poorer than if it had not entered into
any such contracts. For example, if the Fund has hedged against the possibility
of an increase in interest rates which would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, particularly in such situations, if the Fund has insufficient cash, it
may have to sell bonds from its portfolio to meet daily variation margin
requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
CURRENCY FUTURES AND OPTIONS THEREON
Generally, foreign currency futures contracts and options thereon are
similar to the interest rate futures contracts and options thereon discussed
previously. By entering into currency futures and options thereon on U.S. and
foreign exchanges, the Fund will seek to establish the rate at which it will be
entitled to exchange U.S. dollars for another currency at a future time. By
selling currency futures, the Fund will seek to establish the number of dollars
it will receive at delivery for a certain amount of a foreign currency. In this
way, whenever the Fund anticipates a decline in the value of a foreign currency
against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to
B-15
pay for a specified amount of a foreign currency in a future month. Thus if the
Fund intends to buy securities in the future and the investment adviser expects
the U.S. dollar to decline against the relevant foreign currency during the
period before the purchase is effected, the Fund can attempt to "lock in" the
price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the
price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell (in
the case of a put option) a futures contract at a specified price at any time
during the period before the option expires. If the investment adviser, in
purchasing an option, has been correct in its judgment concerning the direction
in which the price of a foreign currency would move as against the U.S. dollar,
the Fund may exercise the option and thereby take a futures position to hedge
against the risk it had correctly anticipated or close out the option position
at a gain that will offset, to some extent, currency exchange losses otherwise
suffered by the Fund. If exchange rates move in a way the investment adviser did
not anticipate, however, the Fund will have incurred the expense of the option
without obtaining the expected benefit; any such movement in exchange rates may
also thereby reduce rather than enhance the Fund's profits on its underlying
securities transactions. The Fund's use of options on currencies will be subject
to the same limitations as its use of options on securities described above.
Currency options may be subject to position limits which may limit the ability
of the Fund to fully hedge its positions by purchasing the options.
As in the case of interest rate futures contracts and options thereon, the
Fund may hedge against the risk of a decrease or increase in the U.S. dollar
value of a foreign currency denominated debt security which the Fund owns or
intends to acquire by purchasing or selling options contracts, futures contracts
or options thereon with respect to a foreign currency other than the foreign
currency in which such debt security is denominated, where the values of such
different currencies (vis-a-vis the U.S. dollar) historically have a high degree
of positive correlation.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Participation in the options, futures and currency markets involves
investment risks and transaction costs to which the Fund would not be subject
absent the use of these strategies. The Fund, and thus its investors, may lose
money through any unsuccessful use of these strategies. If the Subadviser's
predictions of movements in the direction of the securities, foreign currency or
interest rate markets are inaccurate, the adverse consequences to the Fund may
leave the Fund in a worse position than if such strategies were not used. Risks
inherent in the use of these strategies include: (1) dependence on the
Subadviser's ability to predict correctly movements in the direction of interest
rates, securities prices and currency markets; (2) imperfect correlation between
the price of options and futures contracts and options thereon and movements in
the prices of the securities or currencies being hedged; (3) the fact that the
skills needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; (5) the risk that the counterparty may be
unable to complete the transaction; and (6) the possible inability of the Fund
to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, due to the need for the Fund to maintain
"cover" or to segregate assets in connection with hedging transactions.
The Fund will generally purchase or sell options and futures on an exchange
only if there appears to be a liquid secondary market for such options or
futures; the Fund will generally purchase or sell OTC options only if the
investment adviser believes that the other party to the options will continue to
make a market for such options.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES AND CURRENCIES, FUTURES CONTRACTS AND
OPTIONS ON FUTURES CONTRACTS
Certain of the options, futures contracts and options thereon purchased or
sold by the Fund may be traded on foreign exchanges. Such transactions may not
be regulated as effectively as similar transactions in the U.S., may not involve
a clearing mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, the instrument
being traded. The value of such positions also could be adversely affected by
(1) other complex foreign political, legal and economic factors, (2) lesser
availability than in the U.S. of data on which to make trading decisions, (3)
delays in the Fund's ability to act upon
B-16
economic events occurring in the foreign markets during non-business hours in
the U.S., (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S. and (5) lesser trading
volume.
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.
If so,this could limit the ability of the Fund fully to protect against these
risks. In addition, the hours of trading of financial futures contracts and
options thereon may not conform to the hours during which the Fund may trade the
underlying securities. To the extent the futures markets close before the
securities markets, significant price and rate movements can take place in the
securities markets that cannot be reflected in the futures markets.
An exchange-traded option position may be closed out only where there
exists a secondary market for an option of the same series. If a secondary
market does not exist, it might not be possible to effect closing transactions
in particular options the Fund has purchased with the result that the Fund would
have to exercise the options in order to realize any profit. If the Fund is
unable to effect a closing purchase transaction in a secondary market in an
option the Fund has written, it will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise or
it otherwise covers its position. Reasons for the absence of a liquid secondary
market include the following: (1) there may be insufficient trading interest in
certain options; (2) restrictions may be imposed by a securities exchange on
opening transactions or closing transactions or both; (3) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; (4) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (5) the facilities
of an exchange or clearing organization may not at all times be adequate to
handle current trading volume; or (6) one or more exchanges could, for economic
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or a particular class or series of options)
would cease to exist, although outstanding options would continue to be
exercisable in accordance with their terms.
SPECIAL RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS
At or before the maturity of a forward sale contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between the
Fund's entering into a forward contract for the sale of a currency and the date
it enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
purchase is less than the price of the currency it has agreed to sell. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Closing out forward purchase contracts involves similar
offsetting transactions.
SPECIAL RISK CONSIDERATIONS RELATING TO FUTURES AND OPTIONS THEREON
Certain risks are inherent in the Fund's use of futures contracts and
options on futures. One such risk arises because the correlation between
movements in the price of futures contracts or options on futures and movements
in the price of the securities hedged or used for cover will not be perfect.
Another risk is that the price of futures contracts or options on futures may
not move inversely with changes in interest rates. If the Fund has sold futures
contracts to hedge securities held by the Fund and the value of the futures
position declines more than the price of such securities increases, the Fund
will realize a loss on the futures contracts which is not completely offset by
the appreciation in the price of the hedged securities. Similarly, if the Fund
has written a call on a futures contract and the value of the call increases by
more than the increase in the value of the securities held as cover, the Fund
may realize a loss on the call which is not completely offset by the
appreciation in the price of the securities held as cover and the premium
received for writing the call.
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
B-17
will purchase or sell only those futures contracts and options thereon for which
there appears to be a liquid market, there is no assurance that a liquid market
on an exchange will exist for any particular futures contract or option thereon
at any particular time. In the event no liquid market exists for a particular
futures contract or option thereon in which the Fund maintains a position, it
will not be possible to effect a closing transaction in that contract or to do
so at a satisfactory price and the Fund would have to either make or take
delivery under the futures contract or, in the case of a written option, wait to
sell the underlying securities until the option expires or is exercised or, in
the case of a purchased option, exercise the option. In the case of a futures
contract or an option on a futures contract which the Fund has written and which
the Fund is unable to close, the Fund would be required to maintain margin
deposits on the futures contract or option and to make variation margin payments
until the contract is closed.
Futures exchanges may establish daily limits in the amount that the price
of a futures contract or related options contract may vary either up or down
from the previous day's settlement price. Once the daily limit has been reached
in a particular contract, no trades may be made that day at a price beyond the
limit. The daily limit governs only price movements during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. Futures or options contract prices
could move to the daily limit for several consecutive trading days with little
or no trading and thereby prevent prompt liquidation of positions and subject
some traders to substantial losses. In such event, it may not be possible for
the Fund to close out a position, and in the event of adverse price movements,
the Fund would have to make daily cash payments of variation margin (except in
the case of purchased options).
Successful use of futures contracts and options thereon and forward
contracts by the Fund depends significantly on the ability of the investment
adviser to forecast movements in the direction of the market and interest and
foreign currency rates and requires skills and techniques different from those
used in selecting portfolio securities. The correlation between movements in the
price of a futures contract and movements in the price of the securities being
hedged is imperfect and the risk from imperfect correlation increases as the
composition of the Fund's portfolio diverges from the composition of the
relevant index. There is also a risk that the value of the securities being
hedged may increase or decrease at a greater rate than the related futures
contracts, resulting in losses to the Fund. If the investment adviser's
expectations are not met, the Fund would be in a worse position than if a
hedging strategy had not been pursued. In addition, in such situations, if the
Fund has insufficient cash to meet daily variation margin requirements, it may
have to sell securities to meet the requirements. These sales may, but will not
necessarily, be at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it is disadvantageous to do so.
Pursuant to the requirements of the Commodity Exchange Act, as amended, all
U.S. futures contracts and options thereon must be traded on an exchange. Since
a clearing corporation effectively acts as the counterparty on every futures
contract and option thereon, the counterparty risk depends on the strength of
the clearing or settlement corporation associated with the exchange.
Additionally, although the exchanges provide a means of closing out a position
previously established, there can be no assurance that a liquid market will
exist for a particular contract at a particular time. In the case of options on
futures, if such a market does not exist, the Fund, as the holder of an option
on futures contracts, would have to exercise the option and comply with the
margin requirements for the underlying futures contract to realize any profit,
and if the Fund were the writer of the option, its obligation would not
terminate until the option expired or the Fund was assigned an exercise notice.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS, OPTIONS ON FUTURES
CONTRACTS AND FOREIGN CURRENCY FORWARD CONTRACTS
The Fund will engage in transactions in futures contracts and options
thereon only to seek to reduce certain risks of its investments and to attempt
to enhance return in each case in accordance with the rules and regulations of
the CFTC, and not for speculation.
In accordance with CFTC regulations, the Fund may not purchase or sell
futures contracts or options thereon if the initial margin and premiums therefor
exceed 5% of the liquidation value of the Fund's total assets after taking into
account unrealized profits and unrealized losses on any such contracts;
provided, however, that in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating the
5% limitation. The above restriction does not apply to the purchase and sale of
futures contracts and options thereon for bona fide hedging purposes within the
meaning of CFTC regulations.
B-18
In instances involving the purchase of futures contracts or call options thereon
or the writing of put options thereon by the Fund, an amount of cash or other
liquid assets equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be deposited in a segregated
account with the Custodian to cover the position, or alternative cover will be
employed, thereby insuring that the use of such instruments is unleveraged.
CFTC regulations may impose limitations on the Fund's ability to engage in
certain return enhancement and risk management strategies. There are no
limitations on the Fund's use of futures contracts and options on futures
contracts beyond the restrictions set forth above.
When the investment adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract for a fixed amount of dollars to sell the
amount of foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date on which the forward contract is entered into
and the date it matures. The projection of short-term currency market movement
is extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. The Fund does not intend to enter into such
forward contracts to protect the value of its portfolio securities on a regular
or continuous basis. The Fund will also not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the long-term
investment decisions made with regard to overall diversification strategies.
However, the Fund believes that it is important to have the flexibility to enter
into such forward contracts when it determines that the best interest of the
Fund will thereby be served. If the Fund enters into a position hedging
transaction the transaction will be "covered" by the position being hedged or
the Fund's Custodian or sub-custodian will segregate cash or other liquid assets
of the Fund (less the value of the "covering" positions, if any) in an amount
equal to the value of the Fund's total assets committed to the consummation of
the given forward contract.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities. If
the Fund were to exceed this limit, the investment adviser would take prompt
action to reduce the Fund's holdings in illiquid securities to no more than 15%
of its net assets, as required by applicable law. Illiquid securities include
repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
B-19
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the 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. The investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Directors. In reaching liquidity decisions, the investment adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act, to be considered liquid (a) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (b) it must not be "traded
flat" (that is, without accrued interest) or in default as to principal or
interest.
The staff of the Securities and Exchange Commission (Commission) has taken
the position that purchased over-the-counter options and the assets used as
"cover" for written over-the-counter options are illiquid securities unless the
Fund and the counterparty have provided for the Fund, at the Fund's election, to
unwind the over-the-counter option. The exercise of such an option ordinarily
would involve the payment by the Fund of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the Fund
to treat the assets used as "cover" as "liquid." The Fund will also treat
non-U.S. government interest-only and principal-only mortgage backed security
strips as illiquid so long as the staff of the Commission maintains its position
that such securities are illiquid.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and
B-20
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Fund at the time of entering into the
transaction. The Fund's Custodian will segregate cash or other liquid assets
having a value equal to or greater than the Fund's purchase commitments. The
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during the period between purchase and settlement. At
the time of delivery of the securities the value may be more or less than the
purchase price and an increase in the percentage of the Fund's assets committed
to the purchase of securities on a when-issued or delayed delivery basis may
increase the volatility of the Fund's net asset value. Subject to the
segregation requirement, the Fund may purchase such securities without limit.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The Fund does not currently intend to invest in repurchase agreements
whose maturities exceed one year. The resale price is in excess of the purchase
price, reflecting an agreed-upon rate of return effective for the period of time
the Fund's money is invested in the repurchase agreement. The Fund's repurchase
agreements will at all times be fully collateralized by U.S. government
obligations in an amount at least equal to the resale price. The instruments
held as collateral are valued daily, and if the value of instruments declines,
the Fund will require additional collateral. If the seller defaults and the
value of the collateral securing the repurchase agreement declines, the Fund may
incur a loss.
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's investment adviser. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (the Manager)
pursuant to an order of the Commission. On a daily basis, any uninvested cash
balances of the Fund may be aggregated with those of such investment companies
and invested in one or more repurchase agreements. Each fund participates in the
income earned or accrued in the joint account based on the percentage of its
investment.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes, or for the clearance of transactions and to take advantage of
investment opportunities. The Fund may pledge up to 20% of its total assets to
secure these borrowings. If the Fund borrows to invest in securities, any
investment gains made on the securities in excess of interest paid on the
borrowing will cause the net asset value of the shares to rise faster than would
otherwise be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to the Fund, the net asset value of the
Fund's shares will decrease faster than would otherwise be the case. This is the
speculative factor known as "leverage." If the Fund's asset coverage of
borrowings falls below 300%, the Fund will take prompt action (within 3 days) to
reduce its borrowings. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. The Fund will not purchase portfolio securities when borrowings
exceed 5% of the value of its total assets.
SEGREGATED ASSETS
The Fund will segregate with its Custodian, State Street Bank and Trust
Company (State Street), cash, U.S. government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets, equal in value to its obligations in respect of potentially leveraged
transactions. These include forward contracts, when-issued and delayed delivery
securities, futures contracts, written options and options on futures contracts
(unless otherwise covered). If collateralized or otherwise covered, in
accordance with Commission guidelines, these will not be deemed to be senior
securities. The assets segregated will be marked-to-market daily.
B-21
(d) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may temporarily
invest without limit in U.S. Treasury or other U.S. dollar-denominated
securities or high quality money market instruments, including commercial paper
of domestic and foreign corporations, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and short-term obligations issued or guaranteed by the U.S.
government and its agencies denominated in either U.S. dollars or foreign
currencies. Such investments may be subject to certain risks, including future
political and economic developments, the possible imposition of withholding
taxes on interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions.
(e) PORTFOLIO TURNOVER
The portfolio turnover rate is generally the percentage computed by
dividing the lesser of portfolio purchases or sales (excluding all securities,
including options, whose maturities or expiration date at acquisition were one
year or less) by the monthly average value of the long-term portfolio. High
portfolio turnover (100% or more) involves correspondingly greater brokerage
commissions and other transaction costs, which are borne directly by the Fund.
In addition, high portfolio turnover may also mean that a proportionately
greater amount of distributions to shareholders will be taxed as ordinary income
rather than long-term capital gains compared to investment companies with lower
portfolio turnover. See "Brokerage Allocation and Other Practices" and "Taxes,
Dividends and Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (1) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (2) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of transactions; provided that the
deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow from banks up to 20% of the value of its total
assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes, for the clearance of transactions or for investment
purposes. The Fund may pledge up to 20% of the value of its total assets to
secure such borrowings. For purposes of this restriction, the purchase or
sale of securities on a when-issued or delayed delivery basis, foreign
currency forward contracts and collateral arrangements relating thereto,
and collateral arrangements with respect to interest rate swap
transactions, reverse repurchase agreements, dollar roll transactions,
options, futures contracts and options thereon and obligations of the Fund
to Directors pursuant to deferred compensation arrangements are not deemed
to be pledge of assets or the issuance of a senior security.
4. Buy or sell commodities, commodity contracts, real estate or
interests in real estate. Transactions in foreign currencies, financial
futures contracts and forward contracts and any related options thereon are
not considered by the Fund to be transactions in commodities or commodity
contracts.
5. Make loans, except through (i) repurchase agreements and (ii) the
purchase of debt obligations and bank deposits.
6. Make investments for the purpose of exercising control or
management.
7. Act as an underwriter (except to the extent the Fund may be deemed
to be an underwriter in connection with the sale of securities in the
Fund's investment portfolio).
B-22
8. Except for securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, invest 25% or more of its total assets
at the time of purchase in any one industry or in the securities of any
central government or supranational issuer.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
MANAGEMENT OF THE FUND
NAME AND ADDRESS** POSITION PRINCIPAL OCCUPATIONS
(AGE) WITH FUND DURING PAST FIVE YEARS
------------------ ------------------- ----------------------
Delayne Dedrick Gold (61) Director Marketing and Management Consultant.
*Robert F. Gunia (53) Vice President and Executive Vice President and Chief Administrative
Director Officer (since June 1999) of Prudential
Investments; Corporate Vice President (since
September 1997) of The Prudential Insurance Company
of America (Prudential); Executive Vice President
and Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM); President
(since April 1999) of Prudential Investment
Management Services LLC (PIMS); formerly Senior
Vice President (March 1987-May 1999) of Prudential
Securities Incorporated (Prudential Securities) and
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.
Douglas H. McCorkindale (60) Director President (since September 1997) and Vice Chairman
(since March 1984) of Gannett Co. Inc. (publishing
and media); Director of Continental Airlines, Inc.,
Gannett Co. Inc. and Global Crossing Ltd.
Thomas T. Mooney (58) Director President of the Greater Rochester Metro Chamber of
Commerce; formerly Rochester City Manager; formerly
Deputy Monroe County Executive; Trustee of Center
for Governmental Research, Inc.; Director of Blue
Cross of Rochester, Executive Service Corps of
Rochester and Monroe County Water Authority.
Stephen P. Munn (57) 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).
*David R. Odenath, Jr. (42) Vice President and Officer in Charge, President, Chief Executive Officer
Director and Chief Operating Officer (since June 1999),
PIFM; Senior Vice President (since June 1999),
Prudential; formerly Senior Vice President (August
1993-May 1999), PaineWebber Group, Inc.
B-23
NAME AND ADDRESS** POSITION PRINCIPAL OCCUPATIONS
(AGE) WITH FUND DURING PAST FIVE YEARS
------------------ ------------------- ----------------------
Richard A. Redeker (56) Director Formerly President, Chief Executive Officer and
Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc.; Executive
Vice President, Director and Member of the
Operating Committee (October 1993-September 1996)
of Prudential Securities; Director (October
1993-September 1996) of Prudential Securities
Group, Inc.; Executive Vice President (July
1994-September 1996) of The Prudential Investment
Corporation; Director (January 1994-September 1996)
of Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services, Inc.; and Senior
Executive Vice President and Director (September
1978-September 1993) of Kemper Financial Services,
Inc.
Robin B. Smith (60) Director Chairman and Chief Executive Officer (since August
1996), formerly President and Chief Executive
Officer (January 1989-August 1996) and President
and Chief Operating Officer (September
1981-December 1988) of Publishers Clearing House;
and Director of BellSouth Corporation, Texaco Inc.,
Spring Industries Inc. and Kmart Corporation.
*John R. Strangfeld, Jr. (45) President and Chief Executive Officer, Chairman, President and
Director Director (since January 1990), The Prudential
Investment Corporation, Executive Vice President
(since February 1998), Prudential Global Asset
Management Group of Prudential, and Chairman (since
August 1989), Pricoa Capital Group; formerly
various positions to Chief Executive Officer
(November 1994-December 1998), Private Asset
Management Group of Prudential and Senior Vice
President (January 1986-August 1989), Prudential
Capital Group, a unit of Prudential.
Louis A. Weil, III (58) Director Chairman (since January 1999), President and Chief
Executive Officer (since January 1996) and Director
(since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996),
Publisher and Chief Executive Officer (August 1991-
December 1995) of Phoenix Newspapers, Inc.;
formerly Publisher (May 1989-March 1991) of Time
Magazine, President, Publisher and Chief Executive
Officer (February 1986-August 1989) of The Detroit
News and member of the Advisory Board, Chase
Manhattan Bank-Westchester.
Clay T. Whitehead (61) Director President (since May 1983) of National Exchange Inc.
(new business development firm).
Grace C. Torres (40) Treasurer and First Vice President (since December 1996) of PIFM;
Principal First Vice President (since March 1993) of
Financial and Prudential Securities; and formerly First Vice
Accounting President (March 1994-September 1996) of Prudential
Officer Mutual Fund Management, Inc.
B-24
NAME AND ADDRESS** POSITION PRINCIPAL OCCUPATIONS
(AGE) WITH FUND DURING PAST FIVE YEARS
------------------ ------------------- ----------------------
Marguerite E. H. Morrison (43) Secretary Vice President and Associate General Counsel (since
December 1996) of PIFM, Vice President and
Associate General Counsel (since September 1987) of
Prudential Securities; formerly Vice President and
Associate General Counsel (June 1991-September
1996) of Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (46) Assistant Treasurer Tax Director (since March 1996) of Prudential
Investments; formerly First Vice President
(February 1993-September 1996) of Prudential Mutual
Fund Management, Inc.
- ---------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
affiliation with Prudential Securities, Prudential or the Manager.
** The address of the Directors and officers is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077.
The Fund has Directors who, in addition to overseeing the actions of the
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Fund's officers, who
conduct and supervise the daily business operations of the Fund.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 75.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund currently pays each of its Directors who is not an affiliated person of
PIFM or the investment adviser annual compensation of $1,675, in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Director may change as a result of the introduction of additional funds on the
boards of which the Directors will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Directors' fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at
the beginning of each calendar quarter or, pursuant to a Commission exemptive
order, at the daily rate of return of a Prudential mutual fund. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Director. The Fund's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Fund.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1999 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, 1999.
B-25
TOTAL 1999
COMPENSATION
AGGREGATE FROM FUND
COMPENSATION COMPLEX PAID
NAME OF DIRECTOR FROM FUND TO DIRECTORS
- ---------------- ------------ -----------------
Edward D. Beach++........................................... $1,675 $142,500(43/70)**
Delayne Dedrick Gold........................................ $1,675 $144,500(43/70)**
Robert F. Gunia+............................................ -- None
Douglas H. McCorkindale*.................................... $1,675 $ 80,000(24/49)**
Thomas T. Mooney*........................................... $1,675 $129,500(35/75)**
Stephen P. Munn............................................. $1,675 $ 61,675(29/53)**
David R. Odenath, Jr.+...................................... -- None
Richard A. Redeker.......................................... $1,675 $ 95,000(29/53)**
Robin B. Smith*............................................. $1,675 $ 96,000(32/44)**
John R. Strangfeld, Jr.+.................................... -- None
Louis A. Weil, III.......................................... $1,675 $ 96,000(29/53)**
Clay T. Whitehead........................................... $1,700 $ 77,000(38/66)**
- ---------------
+ Directors who are "interested" do not receive compensation from the Fund or
any fund in the Fund Complex.
++ Mr. Beach retired on December 31, 1999.
* Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1999 includes amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest, total compensation amounted to approximately $97,916, $135,102 and
$156,478 for Messrs. McCorkindale and Mooney and Ms. Smith, respectively.
** Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or contingent deferred
sales charge to a limited group of investors.
As of February 4, 2000, 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 4, 2000, Prudential Securities was record holder of
14,342,972 Class A shares (41.3%), 658,595 Class B shares (63.3%), 30,652 Class
C shares (38.8%) and 772,220 Class Z shares (45.7%) of the Fund. In the event of
any meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy materials to the beneficial owners for which it is the
record holder.
As of February 4, 2000, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of shares of the Fund were:
NUMBER OF SHARES
NAME ADDRESS CLASS OF SHARES (% OF CLASS)
- ---- --------------------------- --------------- -----------------
Smith Barney Inc. 333 West 34th St. Class B 66,619(6.4%)
New York, NY 10001-2483
Ms. Pamela B. Thayer 2938 Cherry Lane Class C 4,870(6.1%)
Pamela B. Thayer Trust Northbrook, IL 60062
Prudential Defined Contrib. 30 Scranton Office Park Class Z 104,741(6.2%)
Serv. Moosic, PA 18507
Attn: John Surdy
B-26
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (the
Manager or PIFM), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. The Manager serves as manager to all of the other investment
companies that, together with the Fund, comprise the Prudential mutual funds.
See "How the Fund is Managed -- Manager" in the Prospectus. As of January 31,
2000, the Manager managed and/or administered open-end and closed-end management
investment companies with assets of approximately $74.9 billion. According to
the Investment Company Institute, as of September 30, 1999, the Prudential
mutual funds were the 20th largest family of mutual funds in the United States.
The Manager is a subsidiary of Prudential Securities and The Prudential
Insurance Company of America (Prudential). Prudential Mutual Fund Services LLC
(PMFS or the Transfer Agent), a wholly-owned subsidiary of the Manager, serves
as the transfer agent and dividend distribution agent for the Prudential Mutual
Funds and, in addition, provides customer service, recordkeeping and management
and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), the Manager, subject to the supervision of the Fund's Board 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, the Manager is obligated to keep certain
books and records of the Fund. The Manager also administers the Fund's corporate
affairs and, in connection therewith, furnishes the Fund with office facilities,
together with those ordinary clerical and bookkeeping services which are not
being furnished by State Street Bank and Trust Company, the Fund's custodian
(the Custodian) and the Fund's Transfer Agent. The management services of the
Manager for the Fund are not exclusive under the terms of the Management
Agreement and the Manager is free to, and does, render management services to
others.
For its services, the Manager receives, pursuant to the Management
Agreement, a fee at an annual rate of .75 of 1% of the Fund's average daily net
assets up to $500 million, .70 of 1% of such assets between $500 million and $1
billion and .65 of 1% of such assets in excess of $1 billion. The fee is
computed daily and payable monthly. The Management Agreement also provides that,
in the event the expenses of the Fund (including the fees of the Manager, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to the Manager
will be reduced by the amount of such excess. No jurisdiction currently limits
the Fund's expenses.
In connection with its management of the business affairs of the Fund, the
Manager bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel
except the fees and expenses of Directors who are not affiliated persons of
the Manager or the Fund's investment adviser;
(b) all expenses incurred by the Manager or by the Fund in connection
with managing the ordinary course of the Fund's business, other than those
assumed by the Fund as described below; and
(c) the costs and expenses payable to Prudential Investments (PI)
pursuant to the subadvisory agreement between the Manager and PI (the PI
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
B-27
may be a member, (h) the cost of stock certificates representing shares of the
Fund, (i) the cost of fidelity and liability insurance, (j) certain organization
expenses of the Fund and the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Commission and
the states, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Fund in connection with
the matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.
For the fiscal years ended December 31, 1999, 1998 and 1997, the Manager
received management fees of $1,324,048, $1,323,490 and $1,549,812, respectively,
from the Fund.
The Manager has entered into a Subadvisory Agreement with PI, a
wholly-owned subsidiary of Prudential. The PI Subadvisory Agreement provides
that the Subadviser will furnish investment advisory services in connection with
the management of the Fund. In connection therewith, the Subadviser is obligated
to keep certain books and records of the Fund. The Subadviser has entered into
an agreement with PRICOA Asset Management Ltd. (PRICOA or, together with PI, the
investment adviser) under which PRICOA provides investment advisory services to
the Fund. The Manager continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises the
investment adviser's performance of such services. The Subadviser was reimbursed
by the Manager for the reasonable costs and expenses incurred by the Subadviser
in furnishing those services and PRICOA is reimbursed for its reasonable costs
and expenses incurred in furnishing advisory services. Effective January 1,
2000, PI is paid by PIFM at an annual rate of .375 of 1% of the Fund's average
daily net assets up to $500 million, .333 of 1% of average daily net assets from
$500 million to $1 billion and .293 of 1% of average daily net assets over $1
billion.
The PI Subadvisory Agreement provides that it will terminate in the event
of its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The PI Subadvisory Agreement may be
terminated by the Fund, the Manager or the Subadviser upon not more than 60
days', nor less than 30 days', written notice. The PI Subadvisory Agreement
provides that it will continue in effect for a period of more than two years
from its execution only so long as such continuance is specifically approved at
least annually in accordance with the requirements of the Investment Company
Act. The PRICOA Subadvisory Agreement provides that PRICOA can terminate it on
60 days' written notice and that PI can terminate it any time and the
termination would take effect immediately. The PRICOA Subadvisory Agreement also
provides that it will terminate automatically in the event of its assignment (as
defined in the Investment Company Act).
Prudential Investments' Fixed Income Group includes the following sector
teams which may contribute towards security selection in addition to the sector
team described in the prospectus:
U.S. LIQUIDITY
ASSETS UNDER MANAGEMENT: $22.6 billion as of December 31, 1999.
TEAM LEADER: Michael Lillard. GENERAL INVESTMENT EXPERIENCE: 12 years.
PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which
includes team members with significant mutual fund experience.
SECTOR: U.S. Treasuries, agencies and mortgages.
INVESTMENT STRATEGY: Focus is on high quality, liquidity and controlled risk.
B-28
CORPORATE
ASSETS UNDER MANAGEMENT: $47.3 billion as of December 31, 1999.
TEAM LEADER: Steven Kellner. GENERAL INVESTMENT EXPERIENCE: 13 years.
PORTFOLIO MANAGERS: 8. AVERAGE GENERAL INVESTMENT EXPERIENCE: 13 years, which
includes team members with mutual fund experience.
SECTOR: U.S. investment-grade corporate securities.
INVESTMENT STRATEGY: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the market.
Ultimately, they seek the highest expected return with the least risk.
HIGH YIELD
ASSETS UNDER MANAGEMENT: $9.4 billion as of December 31, 1999.
TEAM LEADER: Casey Walsh. GENERAL INVESTMENT EXPERIENCE: 17 years.
PORTFOLIO MANAGERS: 7. AVERAGE GENERAL INVESTMENT EXPERIENCE: 17 years, which
includes team members with significant mutual fund experience.
SECTOR: Below-investment-grade corporate securities.
INVESTMENT STRATEGY: Focus is generally on bonds with high total return
potential, given existing risk parameters. They also seek securities with high
current income, as appropriate. The Team uses a relative value approach.
EMERGING MARKETS
ASSETS UNDER MANAGEMENT: $1.9 billion as of December 31, 1999.
TEAM LEADER: David Bessey. GENERAL INVESTMENT EXPERIENCE: 10 years.
PORTFOLIO MANAGERS: 3. AVERAGE GENERAL INVESTMENT EXPERIENCE: 9 years, which
includes team members with mutual fund experience.
SECTOR: Government and corporate securities issued by developing markets and
countries.
INVESTMENT STRATEGY: Focus is on a fundamental investment approach that uses a
strong technical and value overlay to make country selections.
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $36 billion as of December 31, 1999.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years.
PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which
includes team members with significant mutual fund experience.
SECTOR: High-quality short-term securities, including both taxable and
tax-exempt instruments.
INVESTMENT STRATEGY: Focus is on safety of principal, liquidity and controlled
risk.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (the Distributor), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts as the
distributor of the shares of the Fund. The Distributor is a subsidiary of
Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the
B-29
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 are reimbursed or paid for by the Fund.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of brokers or financial institutions which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of .30 of 1% of the average daily net assets of the Class A shares. The
Class A Plan provides that (1) .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (2) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. The Distributor
contractually limited its distribution-related fees payable under the Class A
Plan for the fiscal year ended December 31, 1999 to .25 of 1% of the average
daily net assets of the Class A shares and has contractually limited its
distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending
December 31, 2000.
For the fiscal year ended December 31, 1999, the Distributor received
payments of $417,350 under the Class A Plan. These amounts were primarily
expended for payments of account servicing fees to financial advisers and other
persons who sell Class A shares. For the fiscal year ended December 31, 1999,
the Distributor also received approximately $17,100 in initial sales charges
attributable to Class A shares.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
may pay the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of 1% of the average daily net
assets of each of the Class B and Class C shares. The Class B and Class C Plans
provides that (1) .25 of 1% of the average daily net assets of the shares may be
paid as a service fee and (2) .75 of 1% (not including the service fee) of the
average daily net assets of the shares (asset based sales charge) may be paid
for distribution-related expenses with respect to the Class B shares. The
service fee (.25 of 1% of average daily net assets) is used to pay for personal
service and/or the maintenance of shareholder accounts. The Distributor
contractually limited its distribution-related fees payable under both the Class
B and Class C Plans to .75 of 1% of the average daily net assets of each class
for the fiscal year ended December 31, 1999 and has contractually limited its
distribution-related fees payable under both the Class B and Class C Plan to .75
of 1% of the average daily net assets of the shares of each class for the fiscal
year ending December 31, 2000. The Distributor also receives contingent deferred
sales charges from certain redeeming shareholders and, with respect to Class C
shares, initial sales charges.
CLASS B PLAN. For the fiscal year ended December 31, 1999, the Distributor
received $34,812 from the Fund under the Class B Plan and spent approximately
$80,270 in distributing the Fund's Class B shares. It is estimated that of the
latter amount, 23.1% ($18,523) was spent on printing and mailing of prospectuses
to other than current shareholders; 23.2% ($18,668) was spent on compensation to
broker-dealers for commissions to their representatives and other expenses,
including an allocation of overhead and other branch office distribution-related
expenses, incurred for distribution of Fund shares; and 53.7% ($43,079) in the
aggregate for (1) payments of commissions and account servicing fees to
financial advisers (17.6% ($14,127)) and (2) an allocation of overhead and other
branch office distribution-related expenses for payments of related expenses
(36.1% ($28,952)). The term "overhead and other branch office
distribution-related expenses"
B-30
represents (a) the expenses of operating Prudential Securities' and Pruco
Securities Corporation's (Prusec's) branch offices in connection with the sale
of Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs and
the costs of stationery and supplies, (b) the costs of client sales seminars,
(c) expenses of mutual fund sales coordinators to promote the sale of Fund
shares and (d) other incidental expenses relating to branch promotion of Fund
sales.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. For the
fiscal year ended December 31, 1999, the Distributor received approximately
$13,500 in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1999, the Distributor
received $2,655 under the Class C Plan and spent approximately $4,238 in
distributing Class C shares. It is estimated that of the latter amount, 26.3%
($1,113) was spent on printing and mailing of prospectuses to other than current
shareholders; 4.5% ($190) on compensation to broker-dealers for commissions to
representatives and other expenses, including an allocation of overhead and
other branch office distribution related expenses incurred for distribution of
Fund shares and 69.2% ($2,935) in the aggregate of (1) payments of commissions
and account servicing fees to financial advisers (52.0% ($2,205)) and (2) an
allocation of overhead and other branch office distribution-related expenses
(17.2% ($730)).
The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. For the fiscal year ended December 31, 1999, the Distributor
received approximately $400 in contingent deferred sales charges attributable to
Class C shares. For the fiscal year ended December 31, 1999, the Distributor
received approximately $800 in initial sales charges attributable to Class C
shares.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a vote of the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the Class A, Class B or Class C Plan or in any agreement related to
the Plans (Rule 12b-1 Directors), cast in person at a meeting called for the
purpose of voting on such continuance. A Plan may be terminated at any time,
without penalty, by the vote of a majority of the Rule 12b-1 Directors or by the
vote of the holders of a majority of the outstanding shares of the applicable
class of the Fund on not more than 30 days' written notice to any other party to
the Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders of
the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), and all
material amendments are required to be approved by the Directors in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons
which distribute shares of the Fund (including Class Z shares). Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
B-31
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for the Class A, Class B and Class C shares as described above. Fee waivers
and subsidies will increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
on unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to each class of the
Fund rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class, all sales charges on shares of
that class would be suspended.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash, and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
The Transfer Agent, Raritan Plaza One, Edison, New Jersey 08837, serves as
the transfer and dividend disbursing agent of the Fund. The Transfer Agent is a
wholly-owned subsidiary of the Manager. The Transfer Agent provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, the Transfer Agent receives an annual fee
of $13.00 per shareholder account, a new account set-up fee of $2.00 for each
manually-established account and a monthly inactive zero balance account fee of
$.20 per shareholder account. The Transfer Agent is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications expenses and other costs.
PricewaterhouseCoopers 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.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Although the Fund has not experienced any material problems with the services
provided by the Manager, Distributor, Transfer Agent or Custodian as a result of
the change from 1999 to 2000, there remains a possibility that computer software
systems in use might be impaired or unavailable because of the way dates are
encoded and calculated. Such an 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 future adverse impact on the Fund, the Manager, the Distributor, the Transfer
Agent and the Custodian have advised the Fund that they have completed necessary
changes to their computer systems in connection with the year 2000. The Fund's
service providers (or other securities market participants) may experience
future material problems in connection with the year 2000. The Fund and its
Board have instructed the Fund's principal service providers to monitor and
report year 2000 problems.
Additionally, issuers of securities generally, as well as those purchased
by the Fund, may confront year 2000 compliance issues at some later time which,
if material and not resolved, could have an adverse impact on securities markets
and/or a specific issuer's performance and could result in a decline in the
value of the securities held by the Fund.
B-32
CODES OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics. In
addition, the Manager, Subadviser and Distributor have each adopted a Code of
Ethics (the Codes). The Codes permit personnel subject to the Codes to invest in
securities, including securities that may be purchased or held by the Fund.
However, the protective provisions of the Codes prohibit certain investments and
limit such personnel from making investments during periods when the Fund is
making such investments. The Codes are on public file with, and are available
from, the Commission.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund, the
selection of brokers, dealers and futures commission merchants to effect the
transactions and the negotiation of brokerage commissions, if any. (For purposes
of this section, the term "Manager" includes the investment adviser.) On a
national securities exchange, broker-dealers may receive negotiated brokerage
commissions on Fund portfolio transactions, including options, futures, and
options on futures transactions and the purchase and sale of underlying
securities upon the exercise of options. On a foreign securities exchange,
commissions may be fixed. Orders may be directed to any broker or futures
commission merchant including, to the extent and in the manner permitted by
applicable law, Prudential Securities and its affiliates.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments and U.S. government agency securities may be purchased
directly from the issuer, in which case no commissions or discounts are paid.
The Fund will not deal with Prudential Securities or any affiliate in any
transaction in which Prudential Securities or any affiliate acts as principal
except in accordance with the rules of the Commission. Thus, it will not deal in
the over-the-counter market with Prudential Securities acting as market maker,
and it will not execute a negotiated trade with Prudential Securities if
execution involves Prudential Securities' acting as principal with respect to
any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of favorable
price and efficient execution. The Manager seeks to effect such transaction at a
price and commission that provides the most favorable total cost of proceeds
reasonably attainable in the circumstances. The factors that the Manager may
consider in selecting a particular broker, dealer of futures commission merchant
(firms) are the Manager's knowledge of negotiated commission rates currently
available and other current transaction costs; the nature of the portfolio
transaction; the size of the transaction; the desired timing of the trade; the
activity existing and expected in the market for the particular transaction;
confidentiality; the execution, clearance and settlement capabilities of the
firms; the availability of research and research related services provided
through such firms; the Manager's knowledge of the financial stability of the
firms; the Manager's knowledge of actual or apparent operational problems of
firms; and the amount of capital, if any, that would be contributed by firms
executing the transaction. Given these factors, the Fund may pay transactions
costs in excess of that which another firm might have charged for effecting the
same transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or services,
such as research reports, research compilations, statistical and economic data,
computer data bases, quotation equipment and services, research oriented
computer software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultations. Such services are used
in connection with some or all of the Manager's investment activities; some of
such services, obtained in connection with the execution of transactions for one
investment account, may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor
B-33
to direct sufficient commissions to them to ensure the continued receipt of
those services that the Manager believes provides a benefit to the Fund and its
other clients. The Manager makes a good faith determination that the research
and/or service is reasonable in light of the type of service provided and the
price and execution of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to its clients. The allocation of orders among firms and the commission rates
paid are reviewed periodically by the Fund's Board of Directors. Portfolio
securities may not be purchased from any underwriting or selling syndicate of
which Prudential Securities or any affiliate, during the existence of the
syndicate, is a principal underwriter (as defined in the Investment Company
Act), except in accordance with rules of the Commission. This limitation, in the
opinion of the Fund, will not significantly affect the Fund's ability to pursue
its present investment objective. However, in the future in other circumstances,
the Fund may be at a disadvantage because of this limitation in comparison to
other funds with similar objectives but not subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities or any affiliate to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities or
any affiliate must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other firms in connection with comparable
transactions involving similar securities or futures being purchased or sold on
an exchange or board of trade during a comparable period of time. This standard
would allow Prudential Securities or any affiliate to receive no more than the
remuneration which would be expected to be received by an unaffiliated firm in a
commensurate arm's-length transaction. Furthermore, the Directors of the Fund,
including a majority of the non-interested Directors, have adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities or any affiliate are consistent with
the foregoing standard. In accordance with Section 11(a) of the Securities
Exchange Act of 1934, as amended, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage transactions with Prudential Securities or any
affiliate are also subject to such fiduciary standards as may be imposed upon
Prudential Securities or such affiliates by applicable law.
The Fund paid no brokerage commissions, including none to Prudential
Securities or any affiliate, for the fiscal years ended December 31, 1999, 1998
and 1997.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at December 31, 1999. As of December 31, 1999, the Fund held
securities of Bear, Stearns & Co. Inc. in the aggregate amount of $3,904,000;
Salomon Smith Barney, Inc. in the aggregate amount of $2,045,000; Lehman
Brothers, Inc. in the aggregate amount of $1,859,000; and Morgan (J.P.)
Securities in the aggregate amount of $3,696,000.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 2 billion shares of common stock, $.01 per
share divided equally into four classes, designated Class A, Class B, Class C
and Class Z shares, initially all of one series. Each class of common stock
represents an interest in the same assets of the Fund and is identical in all
respects except that (1) each class is subject to different sales charges and
distribution and/or service fees (except for Class Z shares, which are not
subject to any sales charges and distribution and/or service fees), which may
affect performance, (2) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature and (5) Class Z shares are offered exclusively for sale to a
limited group of investors. In accordance with the Fund's Articles of
Incorporation, the Board of
B-34
Directors may authorize the creation of additional series and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board of Directors may determine. The voting rights of
the shareholders of a series or class can be modified only by the majority vote
of shareholders of that series or class.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share
class is equal as to earnings, assets and voting privileges, except as noted
above, and each class of shares (with the exception of Class Z shares, which are
not subject to any distribution or service fees) bears the expenses related to
the distribution of its shares. Except for the conversion feature applicable to
the Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of the Fund is entitled to its
portion of all of the Fund's assets after all debt and expenses of the Fund have
been paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon the vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business.
Under the Articles of Incorporation, the Board of Directors may authorize
the creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. All consideration received by
the Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Under the Investment Company Act, shareholders of any
additional series of shares would normally have to approve the adoption of any
advisory contract relating to such series and of any changes in the fundamental
investment policies related thereto.
The Board of Directors has the power to alter the number and the terms of
office of the Directors and they may at any time lengthen their own terms or
make their terms of unlimited duration and appoint their own successors,
provided that always at least a majority of the Directors have been elected by
the shareholders of the Fund. The voting rights of shareholders are not
cumulative, so that holders of more than 50 percent of the shares voting can, if
they choose, elect all Directors being selected, while the holders of the
remaining shares would be unable to elect any Directors.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) and/or (2) on a deferred basis (Class B or Class C shares).
Class Z shares of the Fund are offered to a limited group of investors at NAV
without any sales charge. See "How to Buy, Sell and Exchange Shares of the Fund"
in the Prospectus.
PURCHASE BY WIRE
For an initial purchase of shares of the Fund by wire, you must complete an
application and telephone the Transfer Agent at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, fund and class election, dividend
distribution election, amount being wired and wiring bank. You should then give
instructions to your bank to transfer funds by wire to the Fund's Custodian,
State Street Bank and Trust Company, Boston, Massachusetts, Custody and
Shareholder Services Division, Attention: Prudential Global Total Return Fund,
Inc., specifying on the wire the account number assigned by the Transfer Agent
and your name and identifying the class in which you are eligible to invest
(Class A, Class B, Class C or Class Z shares).
B-35
If you arrange for receipt by the Custodian of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire the
Custodian directly and should be sure that the wire specifies Prudential Global
Total Return Fund, Inc. Class A, Class B, Class C or Class Z shares and your
name and individual account number. It is not necessary to call the Transfer
Agent to make subsequent purchase orders utilizing federal funds. The minimum
amount which may be invested by wire is $1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations,(2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A* shares of the Fund are sold at a maximum sales charge of
4%, Class C* shares are sold with a 1% sales charge and Class B* and Class Z
shares are sold at NAV. Using the Fund's NAV at December 31, 1999, the maximum
offering price of the Fund's shares is as follows:
CLASS A
Net asset value and redemption price per Class A share.... $7.26
Maximum sales charge (4% of offering price)............... .30
-----
Maximum offering price to public.......................... $7.56
=====
CLASS B
Net asset value, offering price and redemption price per
Class B share*......................................... $7.26
=====
CLASS C
Net asset value and redemption price per Class C share*... $7.26
Sales charge (1% of offering price)....................... .07
-----
Offering price to public.................................. $7.33
=====
CLASS Z
Net asset value, redemption price and offering price per
Class Z share.......................................... $7.27
=====
- ---------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist investors in determining which method
of purchase best suits their individual circumstances and is based on current
fees and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, the
sales charges and cumulative annual distribution-related fees would be
approximately the same for Class A, Class B and Class C shares. However, you
should consider purchasing Class B shares over Class A shares or Class C shares
because all of your money would be invested initially in the case of Class B
shares.
B-36
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B and Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus cumulative annual distribution-related
fees on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES -- CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV,
through the Distributor or the Transfer Agent, by:
- Officers of the Prudential mutual funds (including the Fund)
- Employees of the Distributor, Prudential Securities, the Manager and
their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the
Transfer Agent
- Employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer
- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries
- Members of the Board of Directors of Prudential
- Real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent
- Registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer
- Investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase
- Investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such Individual Retirement Account or with
the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential provides administrative or recordkeeping services and
further provided that such purchase is made within 60 days of receipt of
the Benefit Plan distribution
B-37
- Orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services (for
example, mutual fund "wrap" or asset allocation programs)
- Orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment
adviser or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services
(for example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
For you to obtain any reduction or waiver of the initial sales charges at
the time of the sale, either you must notify the Transfer Agent directly or the
Distributor must be notified by the broker facilitating the transaction that the
sale qualifies for the reduced or waived sales charge. The reduction or waiver
will be granted subject to confirmation of your entitlement. No initial sales
charges are imposed upon Class A shares acquired upon the reinvestment of
dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential mutual funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the Fund -- How
to Buy Shares -- Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- An individual
- The individual's spouse, their children and their parents
- The individual's and spouse's Individual Retirement Account (IRA)
- Any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners)
- A trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
- A Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
- One or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges also are available to investors
(or an eligible group of related investors) 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 no longer qualify to purchase Class A shares
at NAV by entering into a 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)
B-38
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 or its affiliates and through your broker will not be
aggregated to determine the reduced sales charge.
An Investment Letter of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales charge applicable to the amount represented by the goal, as if it
were a single investment. Escrowed Class A shares totaling 5% of the dollar
amount of the Letter of Intent will be held by the Transfer Agent in the name of
the purchaser. The effective date of an Investment Letter of Intent may be
back-dated up to 90 days, in order that any investments made during this 90-day
period, valued at the purchaser's cost, can be applied to the fulfillment of the
Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser 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. 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 be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of
Shares -- Contingent Deferred Sales Charge," below.
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE -- CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT
COMPANIES. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (1)
investors purchasing shares through an account at Prudential Securities; (2)
investors purchasing shares through an ADVANTAGE Account or an Investor Account
with Prusec; and (3) investors purchasing shares through other brokers. This
waiver is not available to investors who purchase shares directly from the
Transfer Agent. You must notify the Transfer Agent directly or through you
broker if you are entitled to this waiver and provide the Transfer Agent with
such supporting documents as it may deem appropriate.
B-39
CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares
if they meet the required minimum for amount of assets, average account balance
or number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and financial planners
who have agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase
by the following categories of investors:
- 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
- Current and former Director/Trustees of the Prudential mutual funds
(including the Fund)
- Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finder's fee from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
RIGHTS OF ACCUMULATION
Reduced sales charges are also available through Rights of Accumulation,
under which an investor or an eligible group of related investors, as described
above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate
the value of their existing holdings of shares of the Fund and shares of other
Prudential mutual funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) to determine the reduced sales charge.
Rights of accumulation may be applied across the classes of the Prudential
mutual funds. However, the value of shares held directly with the Transfer Agent
and through your broker will not be aggregated to determine the reduced sales
charge. The value of existing holdings for purposes of determining the reduced
sales charge is calculated using the maximum offering price (NAV plus maximum
sales charge) as of the previous business day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charge 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.
SALE OF 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 (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive the sell order before the Fund computes its NAV for that day (that is,
4:15 P.M., New York time)
B-40
in order to receive that day's NAV. Your broker will be responsible for
furnishing all necessary documentation to the Distributor and may charge you for
its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem the 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 must be received by the Transfer Agent,
the Distributor or your broker in order for the redemption request to be
processed. If redemption is requested by a corporation, partnership, trust or
fiduciary, written evidence of authority acceptable to the Transfer Agent must
be submitted before such request will be accepted. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services LLC, Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010, the Distributor,
or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed
$100,000, (2) are to be paid to a person other than the record owner, (3) are to
be sent to an address other than the address on the Transfer Agent's records, or
(4) are to be paid to a corporation, partnership, trust or fiduciary, and your
shares are held directly with the Transfer Agent, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker-dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices. In the case of redemptions from a PruArray Plan, if the proceeds of the
redemption are invested in another investment option of the plan in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
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 account at your broker, unless you indicate
otherwise. Such payment may be postponed or the right of redemption suspended at
times (1) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (2) when trading on such Exchange is restricted, (3) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (4) during any
other period when the Commission, by order, so permits; provided that applicable
rules and regulations of the Commission shall govern as to whether the
conditions prescribed in (2), (3) or (4) exist.
REDEMPTION IN KIND. If the 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 and will be valued in the
same manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the 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 same 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
B-41
account. (If less than a full repurchase is made, the credit will be on a pro
rata basis.) You must notify the Transfer Agent, either directly or through the
Distributor or your broker, at the time the repurchase privilege is exercised to
adjust your account for the CDSC you previously paid. Thereafter, any
redemptions will be subject to the CDSC applicable at the time of the
redemption. See "Contingent Deferred Sales Charge" below. Exercise of the
repurchase privilege will generally not affect federal tax treatment of any gain
realized upon redemption. However, if the redemption was made within a 30 day
period of the repurchase and if the redemption resulted in a loss, some or all
of the loss, depending on the amount reinvested, may not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (one year for Class C shares
purchased before November 2, 1998) will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to the
shareholder. The CDSC will be imposed on any redemption by a shareholder which
reduces the current value of your Class B or Class C shares to an amount which
is lower than the amount of all payments by the shareholders for shares during
the preceding six years, in the case of Class B shares, and 18 months, in the
case of Class C shares (one year for Class C shares purchased before November 2,
1998). A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of shares
or shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any CDSC will be paid to and retained by the
Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS
YEARS SINCE PURCHASE PAYMENTS MADE INVESTED OR REDEMPTION PROCEEDS
---------------------------------- --------------------------------
First.................................................... 5.0%
Second................................................... 4.0%
Third.................................................... 3.0%
Fourth................................................... 2.0%
Fifth.................................................... 1.0%
Sixth.................................................... 1.0%
Seventh and thereafter................................... None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payment for the purchase of Fund shares made during the preceding six years for
Class B shares and 18 months for Class C shares (one year for Class C shares
bought before November 2, 1998); then of amounts representing the cost of shares
held beyond the applicable CDSC period; and finally, of amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500
B-42
minus $260) would be charged at a rate of 4% (the applicable rate in the second
year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder in, or the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy, 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. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential mutual funds, The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account or units of The
Stable Value Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on
certain redemptions from a Systematic Withdrawal Plan. On an annual basis, up to
12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase or, for shares
purchased prior to March 1, 1997, on March 1 of the current year. The CDSC will
be waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.
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 considered A copy of the Social Security Administration award
disabled if he or she is unable to engage in any letter or a letter from a physician on the
substantial gainful activity by reason of any physician's letterhead stating that the
medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor (a copy of the trust agreement identifying
death or to be of long-continued and indefinite the grantor will be required as well)) is
duration. permanently disabled. The letter must also
indicate the date of disability.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the custodial
Account firm indicating (i) the date of birth of the
shareholder and (ii) that the shareholder is over
age 59 1/2 and is taking a normal distribution --
signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the
plan administrator/trustee on company letterhead
indicating the amount of the excess and whether or
not taxes have been paid.
B-43
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE -- CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
CONVERSION FEATURE -- CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (1)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (2) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.60%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
B-44
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value per share. An investor may direct the Transfer Agent in writing not less
than five (5) full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. In the case
of recently purchased shares for which registration instructions have not been
received on the record date, cash payment will be made directly to the broker.
Any shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividend or distribution at NAV by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
reinvestment will be made at the NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Shares purchased with reinvested
dividends and/or distributions will not be subject to any CDSC upon redemption.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential mutual funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
mutual funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. For retirement and group plans having a limited menu of Prudential
mutual funds, the exchange privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone
exchanges 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, telephone calls 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 must be returned in order for
the shares to be exchanged.
You may also exchange shares by mail by writing to the Fund's Transfer
Agent, Prudential Mutual Fund Services LLC, Attention: Exchange Processing, P.O.
Box 15010, New Brunswick, New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange
of shares may be difficult to implement and you should make exchanges by mail by
writing to the Transfer Agent, at the address noted above.
CLASS A. Shareholders of the Fund will be able to exchange their Class A
shares for Class A shares of certain other Prudential mutual funds, shares of
Prudential Government Securities Trust (Short-Intermediate Term Series) and
shares of the money market funds specified below. No fee or sales load will be
imposed upon the exchange. Shareholders of money market funds who acquired such
shares upon exchange of
B-45
Class A shares may use the exchange privilege only to acquire Class A shares, of
the Prudential mutual funds participating in the Class A exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc. No CDSC may be payable upon such exchange, but a CDSC may be
payable upon the redemption of Class B and Class C shares acquired as a result
of the exchange. The applicable sales charge will be that imposed by the Fund in
which shares were initially purchased and the purchase date will be deemed to be
the first day of the month after the initial purchase, rather than the date of
the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money market
fund. In order to minimize the period of time in which shares are subject to a
CDSC, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held in
a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of the month), the entire month will
be included in the CDSC holding period. Conversely, if shares are exchanged into
a money market fund prior to the last day of the month (and are held in the
money market fund on the last day of the month), the entire month will be
excluded from the CDSC holding period. For purposes of calculating the seven
year holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares, respectively of other funds without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C Shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts
B-46
representing Class B or Class C shares acquired pursuant to the automatic
reinvestment of dividends and distributions, (2) amounts representing the
increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities, Prusec or another broker that they are eligible for this
special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
Additional details about the exchange privilege and prospectuses for each
of the Prudential mutual funds are available from the Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
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.................................................... $ 105 $ 158 $ 210 $ 263
20 Years.................................................... 170 255 340 424
15 Years.................................................... 289 433 578 722
10 Years.................................................... 547 820 1,093 1,366
5 Years..................................................... 1,361 2,041 2,721 3,402
See "Automatic Investment Plan."
- ---------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-94 academic years.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, you may arrange to have a fixed amount automatically invested in
shares of the Fund monthly by authorizing your bank account or brokerage account
(including a Prudential Securities Command Account) to be debited to invest
specified dollar amounts in shares of the Fund. Your bank must be a member of
the Automatic Clearing House System. Share certificates are not issued to AIP
participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
B-47
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or an investor's broker. The withdrawal plan
provides for monthly, quarterly, semi-annual or annual redemption checks in any
amount, except as provided below, up to the value of the shares in the
shareholder's account. Withdrawals of Class B or Class C shares may be subject
to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan.
The Transfer Agent, the Distributor or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic 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 systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the applicable sales charges to (1) the purchase of Class
A and Class C shares and (2) the redemption of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly used in connection with a retirement
plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, and 8% rate of return and a 39.6% federal income tax
bracket and shows how much more retirement income can accumulate within an IRA
as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ------------- -------- --------
10 years.................................................. $ 26,165 $ 31,291
15 years.................................................. 44,675 58,649
20 years.................................................. 68,109 98,846
25 years.................................................. 97,780 157,909
30 years.................................................. 135,346 244,692
- ---------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account will be subject
B-48
to tax when withdrawn from the account. Distributions from a Roth IRA which
meet the conditions required under the Internal Revenue Code will not be
subject to tax upon withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential mutual funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial adviser
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting
its liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
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. The Fund will compute its NAV
at 4:15 P.M., New York time, on each day the New York Stock Exchange is open for
trading except days on which no orders to purchase, sell or redeem Fund shares
have been received or on days on which changes in the value of the Fund's
portfolio investments do not affect NAV. In the event the New York Stock
Exchange closes early on any business day, the NAV of the Fund's shares will be
determined at a time between such closing and 4:15 P.M., New York time. The New
York Stock Exchange is closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indexes) are valued at the
last sale price of such exchange system on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices on such day,
or at the bid price on such day in the absence of an asked price. Corporate
bonds (other than convertible debt securities) and U.S. government securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued on the basis
of valuations provided by an independent pricing agent or principal market maker
which uses information with respect to transactions in bonds, quotations from
bond dealers, agency ratings, market transactions in comparable securities and
various relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indexes traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of trading on the applicable commodities exchange or
board of trade or, if there was no sale on the applicable commodities exchange
or board of trade on such day, at the mean between the most recently quoted bid
and asked prices on such exchange or board of trade. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
current rate obtained from a recognized bank or dealer, and foreign currency
forward contracts are valued at the current cost of covering or offsetting such
contracts. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
B-49
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser,
including its portfolio manager, traders, and its research and credit analysts,
on the basis of the following factors: cost of the security, transactions in
comparable securities, relationships among various securities and such other
factors as may be determined by the Manager, Subadviser, Board of Directors or
Valuation Committee to materially affect the value of the security. Short-term
debt securities are valued at cost, with interest accrued or discount amortized
to the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Directors not to represent fair value. Short-term
securities with remaining maturities of more than 60 days, for which market
quotations are readily available, are valued at their current market quotations
as supplied by an independent pricing agent or principal market maker.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of Class A, Class B
or Class C shares as a result of the fact that the Class Z shares are not
subject to any distribution or service fee. It is expected, however, that the
NAV of the four classes will tend to converge immediately after the recording of
dividends, if any, which will differ by approximately the amount of the
distribution and/or service fee expense accrual differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund is qualified as, intends to remain qualified as, and has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code. This relieves the Fund (but not its shareholders) from
paying federal income tax on income and capital gains which are distributed to
shareholders, and permits net capital gains of the Fund (that is, the excess of
net long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long shareholders
have held their shares in the Fund. Net capital gains of the Fund which are
available for distribution to shareholders will be computed by taking into
account any capital loss carryforward of the Fund.
Qualification of the Fund as a regulated investment company under the
Internal Revenue Code requires, among other things, that (a) the Fund derive at
least 90% of its annual gross income (without reduction for losses from the sale
or other disposition of securities or foreign currencies) from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or options thereon or foreign currencies, or
other income (including but not limited to, gains from options, futures or
forward contracts) derived with respect to its business of investing in such
securities or currencies; (b) the Fund diversify its holdings so that, at the
end of each quarter of the taxable year, (i) at least 50% of the value of the
Fund's assets is represented by cash, U.S. government securities and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the value of the Fund's assets and 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities of any one issuer (other than U.S. government
securities); and (c) the Fund distribute to its shareholders at least 90% of its
net investment income and net short-term capital gains (that is, the excess of
net short-term capital gains over net long-term capital losses) in each year.
Gains or losses on sales of securities by the Fund will generally be
treated as long-term capital gains or losses if the securities have been held by
it for more than one year, except in certain cases where the Fund acquires a put
or writes a call thereon or otherwise holds on offsetting position with respect
to the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Fund on securities lapses or
is terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize short-term capital
gain or loss. If securities are sold by the Fund pursuant to the exercise of a
call option written by it, the Fund will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. Certain of the Fund's transactions may be subject to wash
sale, short sale,
B-50
constructive sale, anti-conversion and straddle provisions of the Internal
Revenue Code which may, among other things, require the Fund to defer
recognition of losses. In addition, debt securities acquired by the Fund may be
subject to original issue discount and market discount rules which,
respectively, may cause the Fund to accrue income in advance of the receipt of
cash with respect to interest or cause gains to be treated as ordinary income.
Certain futures contracts and certain listed options (referred to as
Section 1256 contracts) held by the Fund will be required to be "marked to
market" for federal income tax purposes at the end of the Fund's taxable year;
that is, treated as having been sold at their fair market value on the last day
of the Fund's taxable year. Except with respect to certain foreign currency
forward contracts, sixty percent of any gain or loss recognized on such deemed
sales and on actual dispositions will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock
and on narrowly-based stock indexes will be capital gain or loss and will be
long-term or short-term depending on the holding period of the option. In
addition, positions which are part of a "straddle" will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a straddle, the Fund may be required to defer the
recognition of losses on positions it holds to the extent of any unrecognized
gain on offsetting positions held by the Fund.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on foreign currency
forward contracts or dispositions of debt securities denominated in a foreign
currency attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to under
the Internal Revenue Code as "Section 988" gains or losses, increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary dividend, thereby reducing
each shareholder's basis in his or her Fund shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share of the Fund on the reinvestment
date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. In addition, dividends and capital gains
distributions also may be subject to state and local income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends or capital gains distributions which are expected to be
or have been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period beginning 30 days before the disposition of shares. Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Net capital gain distributions paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to
B-51
pay U.S. income tax on any dividends and capital gain distributions which are
effectively connected with a U.S. trade or business of the foreign shareholder.
Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of investment in the Fund.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts (described above) and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are not eligible for the dividends-received deduction.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares and lower
on Class A shares in relation to Class Z shares. The per share distributions of
net capital gains, if any, will be paid in the same amount for Class A, Class B,
Class C and Class Z shares. See "Net Asset Value."
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
twelve months ending on October 31 of such calendar year. In addition, the Fund
must distribute during the calendar year all undistributed ordinary income and
undistributed capital gain net income from the prior year or the twelve-month
period ending on October 31 of such prior calendar year, respectively. To the
extent it does not meet these distribution requirements, the Fund will be
subject to a non-deductible 4% excise tax on the undistributed amount. For
purposes of this excise tax, income on which the Fund pays income tax is treated
as distributed.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A 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, as ordinary
income with respect to PFIC stock. No loss will be recognized on PFIC stock,
except to the extent of gains recognized in prior years. Alternatively, 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.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary. The Fund does not expect
to pass through to its shareholders any foreign income taxes paid.
Shareholders are advised to consult their own tax advisers with respect to
the federal, state and local tax consequences resulting from their investment in
the Fund.
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.
B-52
Average annual total return is computed according to the following formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
Below are the average annual total returns for the Fund's share classes for
the periods ended December 31, 1999.
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
------ ------- -------- ---------
Class A........................................... (7.79)% 8.31% 7.75% 8.95% (7-7-86)
Class B........................................... (9.35) N/A N/A 4.37 (1-15-96)
Class C........................................... (6.31) N/A N/A 4.54 (1-15-96)
Class Z........................................... (3.74) N/A N/A 3.75 (3-17-97)
Before January 15, 1996, the Fund was a closed-end investment company.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for the Class A, Class
B, Class C and Class Z shares.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV-P
-----------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value at the end of the one, five, or ten year
periods of a hypothetical $1,000 payment made at the beginning of
the 1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
Below are the aggregate total returns for the Fund's share classes for the
periods ended December 31, 1999.
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
------ ------- -------- ---------
Class A......................................... (3.95)% 55.26% 119.79% 230.83% (7-7-86)
Class B......................................... (4.35) N/A N/A 20.44 (1-15-96)
Class C......................................... (4.35) N/A N/A 20.44 (1-15-96)
Class Z......................................... (3.74) N/A N/A 10.82 (3-17-97)
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)(6) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
B-53
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund's 30-day yields for the 30 days ended December 31, 1999, were
3.31%, 2.95%, 2.97% and 3.66% for the Class A, Class B, Class C and Class Z
shares, respectively.
ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Fund shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indexes. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed-income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
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 Bar Chart
PERFORMANCE COMPARISON OF DIFFERENT TYPES
OF INVESTMENTS OVER THE LONG TERM
(12/31/1925 - 12/31/1999)
-----------------------------------------
Common Stocks 11.4%
Long Term Govt. Bonds 5.1%
Inflation 3.1%
- ---------------
(1) Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Composite Stock
Price Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only, and is not
intended to represent the performance of any particular investment or fund.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-54
Portfolio of Investments as of December 31, 1999
- ----------------------------------------------------------------------
Principal
Amount US$
(000) Description Value (Note 1)
- ----------------------------------------------------------------------
LONG-TERM INVESTMENTS--84.2%
- ----------------------------------------------------------------------
Australia--4.9%
A$ 6,530 Commonwealth of Australia,
9.75%, 3/15/02 $ 4,570,960
4,000 Queensland Treasury
Corporation,
8.00%, 5/14/03 2,712,312
10,070 New South Wales Treasury
Corporation,
6.50%, 5/1/06 6,350,631
------------
13,633,903
- ----------------------------------------------------------------------
Canada--3.9%
C$ 2,000 British Columbia Municipal Fin.
Auth.,
6.75%, 4/24/07 1,388,130
5,000 British Columbia Provincial
Bond,
6.00%, 6/9/08 3,310,800
8,900 Province of Quebec,
6.50%, 10/1/07 6,073,129
------------
10,772,059
- ----------------------------------------------------------------------
Denmark--4.6%
Danish Government Bonds,
DKr 60,000 7.00%, 12/15/04 8,719,366
27,575 8.00%, 3/15/06 4,222,078
------------
12,941,444
- ----------------------------------------------------------------------
Euro--20.2%
EURO 3,000 Bank Of Scotland Treasury
Services PLC (United
Kingdom),
5.50%, 7/27/09 2,838,061
480 Esat Telecom Group PLC
(United Kingdom),
11.875%, 11/1/09 550,083
Federal Republic of Germany,
3,670 4.50%, 7/4/09 3,466,342
665 5.375%, 1/4/10 671,357
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
Principal
Amount US$
(000) Description Value (Note 1)
EURO 1,850 Global Telesystems Group, Inc.
(Netherlands),
10.50%, 12/1/06 $ 1,893,806
2,965 Italian Government Bond,
6.50%, 11/1/27 3,095,014
Kingdom of Spain,
2,832 3.00%, 1/31/03 2,711,976
9,354 3.25%, 1/31/05 8,646,244
500 Municipality Of Sophia
(France),
9.75%, 6/3/02 494,442
Republic of Italy,
2,000 3.00%, 6/15/02 1,945,897
6,920 4.50%, 5/1/09 6,476,669
1,500 Staples Incorporated
(United Kingdom),
5.875%, 11/15/04 1,487,562
2,784 Treuhandanstalt (Gemany),
6.875%, 6/11/03 2,991,716
German Government Bonds,
7,338 6.00%, 1/5/06 7,744,868
10,980 6.25%, 1/4/24 11,467,007
------------
56,481,044
- ----------------------------------------------------------------------
Germany--1.8%
DM 2,000 Cesp Cia Energetic,
9.25%, 5/10/01 1,040,609
7,000 Tokyo Gas Co. Ltd.,
7.00%, 7/27/05 3,878,565
------------
4,919,174
- ----------------------------------------------------------------------
Hungary--0.7%
HUF 480,000 Hungarian Government Bond,
15.00%, 7/24/01 1,976,851
- ----------------------------------------------------------------------
Japan--2.1%
Y 530,100 Japanese Government Bond,
4.20%, 3/20/03 $ 5,774,085
- ----------------------------------------------------------------------
See Notes to Financial Statements. B-55
Portfolio of Investments as of December 31, 1999
- ----------------------------------------------------------------------
Principal
Amount US$
(000) Description Value (Note 1)
- ----------------------------------------------------------------------
New Zealand--2.8%
NZ$ 14,900 Federal National Mortgage
Association,
7.25%, 6/20/02 7,744,638
- ----------------------------------------------------------------------
Russia
RUB 18,900 European Bank of Reconstruction
Development,
Zero Coupon, 5/28/02 168,076
- ----------------------------------------------------------------------
South Africa--1.0%
R 17,550 Republic of South Africa,
13.00%, 8/31/10 2,741,452
- ----------------------------------------------------------------------
Sweden--4.0%
SEK 27,100 Kingdom of Sweden,
5.00%, 1/15/04 3,148,209
66,000 Swedish Government Bond,
6.00%, 2/9/05 7,950,936
------------
11,099,145
- ----------------------------------------------------------------------
United Kingdom--4.8%
BP 6,850 United Kingdom,
5.00%, 6/7/04 10,595,015
395 Banco Central del Uruguay, FRN,
6.25%, 2/19/07 580,233
1,300 Powergen PLC,
8.875%, 3/26/03 2,179,686
------------
13,354,934
- ----------------------------------------------------------------------
United States--33.4%
Corporate Bonds--4.0%
US$ 750 Banco del Estado Chile,
8.39%, 8/1/01 $ 762,495
1,000 Central Bank Tunisia,
7.50%, 9/19/07 933,750
1,300 Chonhung Bank,
11.0725%, 1/7/05 1,322,750
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
Principal
Amount US$
(000) Description Value (Note 1)
US$ 4,200 General Motors Acceptance
Corp.,
5.75%, 11/10/03 3,999,072
3,000 Household Finance Corporation,
6.40%, 6/17/08 2,773,380
1,300 Philippine Long Dist.
Telephone,
10.50%, 4/15/09 1,313,000
------------
11,104,447
- ----------------------------------------------------------------------
Sovereign Bonds--14.0%
1,600 Embotelladora Andina S.A.,
7.875%, 10/1/97 1,230,248
500 Jamaican Government Bonds,
9.625%, 7/2/02 477,500
1,350 Kingdom Of Jordan,
6.00%, 12/23/23 898,911
4,300 Ministry Of Finance (Russia),
10.00%, 6/26/07 2,735,875
2,000 Nuevo Grupo Isuacell S.A. del
C.V.,
14.25%, 12/1/06 2,085,000
2,250 Oman Sultanate (India),
7.125%, 3/20/02 2,223,281
3,100 Province of Ontario (Canada),
6.00%, 2/21/06 2,946,550
1,980 Republic of Argentina, FRN,
6.8125%, 3/31/05 1,801,800
6,594 Republic of Brazil,
5.00%, 4/15/14 4,954,313
1,015 Republic of Brazil, FRN,
6.50%, 1/1/01 1,004,602
2,750 Republic of Bulgaria,
2.75%, 7/28/12 $ 1,980,000
3,300 Republic of Colombia,
7.25%, 2/23/04 2,970,000
4,431 Republic of Croatia, FRN,
6.45625%, 7/31/06 4,104,265
1,000 Republic of Italy,
7.00%, 9/18/01 1,004,000
1,700 Republic of Lithuania,
7.125%, 7/22/02 1,623,500
2,600 Republic of Panama,
7.875%, 2/13/02 2,502,500
- ----------------------------------------------------------------------
See Notes to Financial Statements. B-56
Portfolio of Investments as of December 31, 1999
- ----------------------------------------------------------------------
Principal
Amount US$
(000) Description Value (Note 1)
- ----------------------------------------------------------------------
Sovereign Bonds (cont'd.)
US$ 2,500 Republic of Peru,
4.50%, 3/7/17 1,731,250
3,619 Republic of Venezuela,
7.00%, 12/18/07 2,840,935
------------
39,114,530
- ----------------------------------------------------------------------
Supranational Bonds--.2%
Corporacion Andina de Fomento,
500 6.93375%, 4/3/01 490,000
- ----------------------------------------------------------------------
U.S. Government Obligations--15.2%
3,200 United States Treasury Bond,
6.625%, 2/15/27 3,171,488
United States Treasury Notes,
6,000 5.75%, 8/15/03 5,877,180
4,000 12.375%, 5/15/04 4,875,000
13,450 6.25%, 2/15/07 13,233,590
4,175 6.125%, 8/15/07 4,070,625
11,615 6.00%, 8/15/09 11,252,031
------------
42,479,914
------------
93,188,891
Total long-term investments
(cost US$250,562,019) 234,795,696
------------
SHORT-TERM INVESTMENTS--13.6%
Germany--2.6%
DM 1,600 Union Bank Of Estonia,
4.25563%, 6/16/00 820,850
12,000 Republic of Colombia,
7.25%, 12/21/00 6,249,843
------------
7,070,693
- ----------------------------------------------------------------------
Hungary--2.0%
HUF 480,000 Hungarian Government Bond,
16.00%, 4/12/00 1,914,809
935,000 Republic of Hungary,
15.50%, 7/24/00 3,748,889
------------
5,663,698
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
Principal
Amount US$
(000) Description Value (Note 1)
- ----------------------------------------------------------------------
Poland--1.4%
Poland Treasury Bills,
PLZ 6,500 16.375%(a), 3/22/00 1,513,967
10,400 16.325%(a), 6/14/00 2,324,836
------------
3,838,803
- ----------------------------------------------------------------------
Russia--0.1%
RUB 11,600 European Bank of Reconstruction
Development,
31.00%, 5/5/00 345,263
- ----------------------------------------------------------------------
United States--7.5%
Sovereign Bonds--0.6%
US$ 1,515 Trinidad & Tobago Republic,
9.75%, 11/3/00 1,511,970
- ----------------------------------------------------------------------
Supranational Bonds--2.2%
6,150 Corporacion Andina de Formento,
7.375%, 7/21/00 6,163,469
- ----------------------------------------------------------------------
Repurchase Agreement--4.7%
US$ 13,177 Joint Repurchase Agreement
Account,
2.83%, 1/03/99 (Note 5) $ 13,177,000
------------
20,852,439
Total short-term Investments
(cost US$41,613,776) 37,770,896
------------
- ----------------------------------------------------------------------
Total Investments--97.8%
(cost $292,175,795) 272,566,592
Other assets in excess of
liabilities--2.2% 6,200,308
------------
Net Assets--100% $278,766,900
=============
- ---------------
Portfolio securities are classified according to the security's
currency denomination.
(a) Percentages quoted represent yield-to-maturity as of purchase date.
FRN--Floating Rate Note.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
Statement of Assets and Liabilities PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
Assets December 31, 1999
Investments, at value (cost $292,175,795)............................................................... $ 272,566,592
Foreign currency, at value (cost $734,886).............................................................. 743,685
Cash.................................................................................................... 29,321
Interest receivable..................................................................................... 5,965,797
Forward currency contracts--amount receivable from counterparties....................................... 2,013,198
Receivable for Fund shares sold......................................................................... 21,094
Other assets............................................................................................ 11,731
-----------------
Total assets......................................................................................... 281,351,418
-----------------
Liabilities
Forward currency contracts-amount payable to counterparties............................................. 1,245,523
Payable for Fund shares reacquired...................................................................... 971,823
Management fee payable.................................................................................. 181,849
Accrued expenses and other liabilities.................................................................. 123,775
Distribution fee payable................................................................................ 61,548
-----------------
Total liabilities.................................................................................... 2,584,518
-----------------
Net Assets.............................................................................................. $ 278,766,900
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 384,022
Paid-in capital in excess of par..................................................................... 335,270,180
-----------------
335,654,202
Distributions in excess of net investment income..................................................... (18,244)
Accumulated net realized loss on investment and foreign currency transactions........................ (37,799,341)
Net unrealized appreciation on investments and foreign currencies.................................... (19,069,717)
-----------------
Net assets, December 31, 1999........................................................................... $ 278,766,900
=============
Class A:
Net asset value and redemption price per share
($257,548,412 / 35,482,085 shares of common stock issued and outstanding)......................... $7.26
Maximum sales charge (4% of offering price).......................................................... .30
-----------------
Maximum offering price to public..................................................................... $7.56
================
Class B:
Net asset value, offering price and redemption price per share
($7,809,982 / 1,075,086 shares of common stock issued and outstanding)............................ $7.26
===============
Class C:
Net asset value and redemption price per share
($561,246 / 77,256 shares of common stock issued and outstanding)................................. $7.26
Sales charge (1.00% of offering price)............................................................... $.07
-----------------
-----------------
Offering price to public............................................................................. $7.33
=================
Class Z:
Net asset value, offering price and redemption price per share
($12,847,260 / 1,767,809 shares of common stock issued and outstanding)........................... $7.27
================
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
Statement of Operations
- ------------------------------------------------------------
Year Ended
Net Investment Income December 31, 1999
Income
Interest and discount earned (net of
foreign withholding taxes of
$25,566)........................... $ 13,684,469
-----------------
Expenses
Management fee........................ 1,324,048
Distribution fee--Class A............. 417,350
Distribution fee--Class B............. 34,812
Distribution fee--Class C............. 2,655
Transfer agent's fees and expenses.... 461,000
Custodian's fees and expense.......... 311,000
Reports to shareholders............... 259,000
Legal fees and expenses............... 178,000
Registration fees..................... 47,000
Audit fee and expenses................ 36,000
Directors' fees....................... 23,000
Insurance............................. 2,000
Miscellaneous......................... 10,289
-----------------
Total expenses..................... 3,106,154
-----------------
Net investment income.................... 10,578,315
-----------------
Realized and Unrealized Gain
(Loss) on Investments and Foreign
Currency Transactions
Net realized gain (loss) on:
Investment transactions............... (7,815,368)
Foreign currency transactions......... (146,835)
-----------------
(7,962,203)
-----------------
Net change in unrealized appreciation/depreciation on:
Investments........................... (20,014,740)
Foreign currencies.................... 272,157
-----------------
(19,742,583)
-----------------
Net loss on investments and foreign
currencies............................ (27,704,786)
-----------------
Net Decrease in Net Assets
Resulting from Operations................ $ (17,126,471)
=============
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
Increase (Decrease) Year Ended December 31,
in Net Assets 1999 1998
Operations:
Net investment income.......... $ 10,578,315 $ 11,321,302
Net realized gain (loss) on
investment and foreign
currency transactions....... (7,962,203) 1,570,888
Net change in unrealized
appreciation (depreciation)
on investments and foreign
currencies.................. (19,742,583) 1,857,462
------------ ------------
Net decrease in net assets
resulting from operations... (17,126,471) 14,749,652
------------ ------------
Dividends and distributions (Note
1)
Dividends from net investment income
Class A..................... (7,213,780) (7,425,915)
Class B..................... (178,555) (127,509)
Class C..................... (13,365) (8,896)
Class Z..................... (224,615) (83,453)
------------ ------------
(7,630,315) (7,645,773)
------------ ------------
Distributions in excess of net
investment income
Class A..................... -- (432,992)
Class B..................... -- (7,435)
Class C..................... -- (519)
Class Z..................... -- (4,866)
------------ ------------
-- (445,812)
------------ ------------
Distributions from net realized
gains
Class A..................... -- (3,221,486)
Class B..................... -- (55,316)
Class C..................... -- (3,859)
Class Z..................... -- (36,203)
------------ ------------
-- (3,316,864)
------------ ------------
Tax return of capital
distributions
Class A..................... (2,951,146) --
Class B..................... (82,514) --
Class C..................... (6,196) --
Class Z..................... (86,864) --
------------ ------------
(3,126,720) --
------------ ------------
Fund share transactions (net of
share conversions) (Note 6 and
7)
Net proceeds from shares
sold........................ 181,565,604 8,184,792
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 3,609,392 2,953,974
Cost of shares reacquired...... (43,791,864) (35,442,667)
------------ ------------
Increase in net assets from
Fund share transactions..... 141,383,132 (24,303,901)
------------ ------------
Total increase (decrease)......... 113,499,626 (20,962,698)
------------ ------------
Net Assets
Beginning of year................. 165,267,274 186,229,972
------------ ------------
End of year....................... $278,766,900 $165,267,274
============ ============
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
Notes to Financial Statements PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
Prudential Global Total Return Fund, Inc., (the "Fund"), formerly known as The
Global Total Return Fund, Inc., is an open-end, nondiversified management
investment company whose investment objective is to seek total return, the
components of which are current income and capital appreciation. The Fund
invests primarily in governmental (including supranational), semi-governmental
or governmental agency debt securities or in short-term bank debt securities or
deposits in the United States and in foreign countries denominated in U.S.
dollars or in foreign currencies, including debt securities issued or guaranteed
by the U.S. Government and foreign governments, their agencies, authorities or
instrumentalities (U.S. Government Securities and Foreign Government Securities,
respectively). The remainder is generally invested in corporate debt securities
or longer term bank debt securities. The bonds are primarily of investment
grade, i.e., bonds rated within the four highest quality grades as determined by
Moody's Investors Service or Standard & Poor's Rating's Group, or in unrated
securities of equivalent quality. In addition the Fund is permitted to invest up
to 15% of the Fund's total assets in bonds rated below investment grade with a
minimum rating of B, or in unrated securities of equivalent quality. The ability
of the issuers of debt securities held by the Fund to meet their obligations may
be affected by economic and political developments in a specific country or
region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current currency value. Portfolio securities that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by an independent pricing agent or principal market makers. Any
security for which the primary market is on an exchange or NASDAQ National
Market System Securities are valued at the last sale price on such exchange on
the day of valuation or, if there was no sale on such day, at 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. Forward currency exchange contracts are valued at the
current cost of covering or offsetting the contract on the day of valuation.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians under triparty repurchase agreements as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in United States dollars. Foreign currency amounts are translated into United
States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period-end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term debt securities sold
during the period. Accordingly, such realized foreign currency gains and losses
are included in the reported net realized gains on investment transactions.
Net realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from sales and maturities of short-term
securities and forward currency contracts, disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest,
discount and foreign taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net currency gains and losses from
valuing foreign currency denominated assets (excluding investments) and
liabilities at period-end exchange rates are
- --------------------------------------------------------------------------------
B-60
Notes to Financial Statements PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
reflected as a component of net unrealized appreciation or depreciation on
investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments and foreign currencies. Gain or loss is realized on
the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currency
transactions. Risks may arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
Security Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income, which is comprised of three elements: stated coupon, original
issue discount and market discount, is recorded on the accrual basis. Expenses
are recorded on the accrual basis, which may require the use of certain
estimates by management.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income or excise tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Dividends and Distributions: Dividends are declared quarterly. Distributions of
capital gains, if any, will be declared at least annually. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with federal income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease distributions in excess of net investment income
by $160,476 and decrease accumulated net realized loss on investments by
$64,968,790 and decrease paid in capital in excess of par by $65,129,266 due to
a tax return of capital and for foreign currency losses realized and recognized
during the year ended December 31, 1999 and for capital loss carryforward which
expired during the year ended December 31, 1999. Net investment income, net
realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC, through an agreement with PRICOA Asset
Management Ltd. ("PRICOA"), furnishes investment advisory services in connection
with the management of the Fund. PIFM pays for the cost of the subadviser's
services, compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .75 of 1% of the Fund's average daily net assets up to $500 million, .70
of 1% of such assets between $500 million and $1 billion, and .65 of 1% of such
assets in excess of $1 billion.
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ("PIMS"), which acts as the distributor of the Class A, B, C and Z
shares of the Fund. The Fund compensates PIMS for distributing and servicing the
Fund's Class A, Class B and Class C shares, pursuant to plans of distribution
(the "Class A, B and C Plans"), regardless of expenses actually incurred by
them. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B, and C shares, respectively.
Such expenses under the Plans were .25 of 1%, .75 of 1%
- --------------------------------------------------------------------------------
B-61
Notes to Financial Statements
- --------------------------------------------------------------------------------
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, 1999.
PIMS has advised the Fund that it has received approximately $17,100 and $800 in
front-end sales charges resulting from sales of Class A and Class C shares,
respectively, during the year ended December 31, 1999. From these fees, PIMS
paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended December 31, 1999, it received
approximately $13,500 and $400 in contingent deferred sales charges imposed upon
certain redemptions by Class B and Class C shareholders, respectively.
PIFM, PIC, PIMS and PRICOA are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the "Funds"), entered into a syndicated credit agreement
("SCA") with an unaffiliated lender. The maximum commitment under the SCA is
$1 billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on
the unused portion of the credit facility, which is accrued and paid quarterly
on a pro rata basis by the Funds. Interest on any such borrowings outstanding
will be at market rates. The SCA expires on March 9, 2000. Prior to March 11,
1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was .055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the year ended December 31, 1999. The purpose of the agreements
is to serve as an alternative source of funding for capital share redemptions.
- ------------------------------------------------------------
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, 1999,
the Fund incurred fees of approximately $371,576 for the services of PMFS. As of
December 31, 1999, approximately $54,157 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments
for the year ended December 31, 1999, aggregated $346,136,912 and $218,311,593,
respectively.
At December 31, 1999, the Fund had outstanding forward currency contracts to
purchase and sell foreign currencies as follows:
Value at
Foreign Currency Current Settlement Date Appreciation/
Purchase Contracts Value Payable (Depreciation)
- ---------------------- ----------- ---------------- --------------
Australian Dollars,
expiring 1/18/00..... $ 4,641,818 $ 4,573,929 $ 67,889
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
Value at
Foreign Currency Current Settlement Date Appreciation/
Purchase Contracts Value Payable (Depreciation)
- ---------------------- ----------- ---------------- --------------
Euros,
expiring 1/18/00..... $10,369,306 $ 10,409,482 $ (40,176)
Japanese Yen,
expiring 1/18/00..... 5,898,134 5,870,575 27,559
New Zealand Dollars,
expiring 1/25/00..... 3,995,042 3,878,411 116,631
Norwegian Krone,
expiring 2/8/00...... 6,236,860 6,273,409 (36,549)
Swiss Franc,
expiring 1/12/00..... 8,937,405 9,735,563 (798,158)
----------- ---------------- --------------
$40,078,565 $ 40,741,369 $ (662,804)
----------- ---------------- --------------
----------- ---------------- --------------
Value at
Foreign Currency Current Settlement Date Appreciation/
Sale Contracts Value Receivable (Depreciation)
- ---------------------- ----------- ---------------- --------------
Canadian Dollars,
expiring 1/13/00..... $ 3,237,387 $ 3,174,588 $ (62,799)
Danish Krone,
expiring 1/12/00..... 2,054,165 2,190,626 136,461
Euros,
expiring 1/18/00 -
1/19/00.............. 27,893,715 28,217,690 323,975
Japanese Yen,
expiring 1/18/00..... 8,813,844 8,746,604 (67,240)
New Zealand Dollars
expiring 1/25/00..... 13,232,912 13,028,021 (204,891)
Pound Sterling,
expiring 1/21/00..... 4,227,048 4,191,338 (35,710)
Swedish Krona,
expiring 1/13/00..... 2,648,163 2,674,468 26,305
Swiss Franc,
expiring 1/12/00..... 17,874,811 19,189,189 1,314,378
----------- ---------------- --------------
$79,982,045 $ 81,412,524 $1,430,479
=========== ============ ==========
The United States federal income tax basis of the Fund's investments at December
31, 1999 was $292,188,283 and, accordingly, net unrealized depreciation for
United States federal income tax purposes was $19,621,691 (gross unrealized
appreciation--$1,116,608; gross unrealized depreciation--$20,738,299.
For federal income tax purposes, the Portfolio had a capital loss carryforward
as of December 31, 1999, of approximately $33,487,304 of which $9,504,418
expires in 2000, $19,534,654 expires in 2001, $1,565,575 expires in 2002,
$326,238 expires in 2003, $1,656,524 expires in 2005 and $899,895 expires in
2006. Accordingly, no capital gains distributions are expected to be paid to
shareholders until future net gains have been realized in excess of such
carryforward.
The Fund has elected to treat approximately $3,475,442 of net foreign currency
losses and approximately $264,364 of net capital losses incurred in the two
month period ended December 31, 1999 as having occurred in the following fiscal
year.
- --------------------------------------------------------------------------------
B-62
Notes to Financial Statements
- --------------------------------------------------------------------------------
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, 1999, the
Fund had a 1.86% undivided interest in the joint account. The undivided interest
for the Fund represents $13,177,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:
ABN AMRO Incorporated, 2.75%, in the principal amount of $90,000,000, repurchase
price $90,020,625, due 1/3/2000. The value of the collateral including accrued
interest was $91,800,968.
Bear, Stearns & Co. Inc., 2.75%, in the principal amount of $210,000,000,
repurchase price $210,048,125, due 1/3/2000. The value of the collateral
including accrued interest was $221,923,528.
Lehman Brothers, Inc., 2.50%, in the principal amount of $100,000,000,
repurchase price $100,020,883, due 1/3/2000. The value of the collateral
including accrued interest was $101,979,049.
Morgan (J.P.) Securities, Inc., 3.00%, in the principal amount of $120,000,000,
repurchase price $120,030,000, due 1/3/2000. The value of the collateral
including accrued interest was $122,400,783.
Morgan (J.P.) Securities, Inc., 4.50%, in the principal amount of $78,685,000,
repurchase price $78,714,507, due 1/3/2000. The value of the collateral
including accrued interest was $80,259,686.
Salomon Smith Barney, Inc., 2.00%, in the principal amount of $110,000,000,
repurchase price $110,018,333, due 1/3/2000. The value of the collateral
including accrued interest was $112,231,078.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Prior to November 2, 1998, Class C shares were sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. Class
Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
There are 2 billion authorized shares of common stock at $.01 par value per
share, divided equally into Class A, B, C and Z shares. As of December 31, 1999
Prudential owned 24 Class A shares, 12 Class B shares, 12 Class C shares and 12
Class Z shares.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- ------------------------------------ ---------- ------------
Year ended December 31, 1999:
Shares sold......................... 256,447 $ 1,936,647
Shares issued in connection with
reorganization (Note 7)........... 20,010,669 159,581,878
Shares issued in reinvestment of
dividends and distributions....... 414,519 3,075,349
Shares reacquired................... (5,023,661) (37,816,441)
---------- ------------
Net increase in shares outstanding
before conversion................. 15,657,974 126,777,433
Shares issued upon conversion from
Class B........................... 23,127 173,394
---------- ------------
Net increase in shares
outstanding....................... 15,681,101 $126,950,827
========== ============
Year ended December 31, 1998:
Shares sold......................... 339,598 $ 2,730,063
Shares issued in reinvestment of
dividends and distributions....... 333,052 2,661,857
Shares reacquired................... (4,101,283) (32,833,746)
---------- ------------
Net decrease in shares outstanding
before conversion................. (3,428,633) (27,441,826)
Shares issued upon conversion from
Class B........................... 3,881 31,322
---------- ------------
Net decrease in shares
outstanding....................... (3,424,752) $(27,410,504)
========== ============
Class B
- ------------------------------------
Year ended December 31, 1999:
Shares sold......................... 217,107 $ 976,369
Shares issued in connection with
reorganization (Note 7)........... 648,159 5,241,518
Shares issued in reinvestment of
dividends and distributions....... 28,530 212,311
Shares reacquired................... (247,247) (3,255,251)
---------- ------------
Net increase in shares outstanding
before conversion................. 646,549 3,174,947
Shares reacquired upon conversion
into Class A...................... (23,127) (173,394)
---------- ------------
Net increase in shares
outstanding....................... 623,422 $ 3,001,553
========== ============
Year ended December 31, 1998:
Shares sold......................... 237,833 $ 1,906,388
Shares issued in reinvestment of
dividends and distributions....... 20,064 160,430
Shares reacquired................... (94,011) (752,207)
---------- ------------
Net increase in shares outstanding
before conversion................. 163,886 1,314,611
Shares reacquired upon conversion
into Class A...................... (3,884) (31,322)
---------- ------------
Net increase in shares
outstanding....................... 160,002 $ 1,283,289
======= ============
- --------------------------------------------------------------------------------
B-63
Notes to Financial Statements
- --------------------------------------------------------------------------------
Class C Shares Amount
- ------------------------------------ ---------- ------------
Year ended December 31, 1999:
Shares sold......................... 17,923 $ 145,005
Shares issued in connection with
reorganization (Note 7)........... 49,309 386,351
Shares issued in reinvestment of
dividends and distributions....... 2,370 17,612
Shares reacquired................... (26,555) (198,104)
---------- ------------
Net increase in shares
outstanding....................... 43,047 $ 350,864
========== ============
Year ended December 31, 1998:
Shares sold......................... 11,948 $ 95,300
Shares issued in reinvestment of
dividends and distributions....... 1,404 11,227
Shares reacquired................... (3,185) (25,475)
---------- ------------
Net increase in shares
outstanding....................... 10,167 $ 81,052
========== ============
Class Z
- ------------------------------------
Year ended December 31, 1999:
Shares sold......................... 278,304 $ 2,122,619
Shares issued in connection with
reorganization (Note 7)........... 1,481,032 11,175,217
Shares issued in reinvestment of
dividends and distributions....... 41,217 304,120
Shares reacquired................... (335,941) (2,522,068)
---------- ------------
Net increase in shares
outstanding....................... 1,464,612 $ 11,079,888
=========================
Year ended December 31, 1998:
Shares sold......................... 429,296 $ 3,453,041
Shares issued in reinvestment of
dividends and distributions....... 15,060 120,460
Shares reacquired................... (228,142) (1,831,239)
---------- ------------
Net increase in shares
outstanding....................... 216,214 $ 1,742,262
======= ============
- ------------------------------------------------------------
Note 7. Reorganization
On May 26, 1999, the Board of Directors of the Fund approved an Agreement and
Plan of Reorganization (the "Plan") which provided for the transfer of all of
the assets of the Class A, B, C and Z shares of the Prudential Global Limited
Maturity Fund, Inc. and the Prudential Intermediate Global Income Fund, Inc. in
exchange for like shares of the Fund and the Fund's assumption of the
liabilities of the Global Limited Maturity Fund, Inc. and Intermediate Global
Income Fund, Inc.
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
The Plan was approved by the shareholders of the Global Limited Maturity Fund,
Inc. and the Intermediate Global Income Fund, Inc. at a shareholder meeting held
on October 19, 1999. The reorganization took place on October 22, 1999. The
Global Limited Maturity Fund, Inc. and the Intermediate Global Income Fund, Inc.
and the Fund incurred their pro rata share of the costs of reorganization,
including the costs of proxy solicitation.
The acquisition was accomplished by a tax-free exchange of the following shares:
Prudential Global
Global Limited Maturity Total Return
Fund, Inc.: Fund, Inc. Value
Class A 6,701,965 Class A 6,692,871 $49,296,112
B 92,971 B 93,350 688,151
C 4,375 C 4,393 32,384
Z 6,521 Z 6,530 48,187
Intermediate Global
Income Fund, Inc.:
Class A 13,210,252 A 13,317,798 $ 98,167,564
B 550,329 B 554,809 4,091,534
C 44,554 C 44,916 331,237
Z 1,464,579 Z 1,474,502 10,880,345
The aggregate net assets and unrealized appreciation of the funds immediately
before the acquisition were:
Unrealized
Net Assets Depreciation
------------ --------------
Global Limited Maturity Fund,
Inc. $ 50,064,833 $ (3,937,015)
Intermediate Global Income
Fund, Inc. 113,470,681 (6,836,162)
The aggregate net assets of the Prudential Global Total Return Fund, Inc.
immediately before the acquisition was $134,835,274.
The future utilization of the acquired capital loss carryforwards from Global
Limited Maturity Fund, Inc. and Intermediate Global Income Fund, Inc. in the
amounts of $19,106,058 and $13,554,306, respectively, will be limited by Section
382 of the Internal Revenue Code of 1986, as amended. For each fund, the annual
limitation is $2,728,533 and $6,184,152, respectively.
- --------------------------------------------------------------------------------
B-64
Financial Highlights PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
Class A (b)
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1999(c) 1998(c) 1997(c) 1996 1995
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 8.03 $ 7.88 $ 8.38 $ 8.44 $ 7.46
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .44 .52 .55 .62 .54
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... (.75) .16 (.18) .32 1.25
-------- -------- -------- -------- --------
Total from investment operations........... (.31) .68 .37 .94 1.79
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.33) (.35) (.68) (.62) (.54)
Distributions in excess of net investment
income..................................... (.02) (.19) (.50) (.27)
Distributions from net realized capital
gains...................................... -- (.16) -- -- --
Tax return of capital distributions........... (.13) -- -- -- --
-------- -------- -------- -------- --------
Total distributions........................ (.46) (.53) (.87) (1.12) (.81)
-------- -------- -------- -------- --------
Redemption fee retained by Fund............... -- -- -- .12 --
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 7.26 $ 8.03 $ 7.88 $ 8.38 $ 8.44
======== ======== ======== ======== ========
Per share market price, end of year........... N/A N/A N/A $ 8.25
========
TOTAL INVESTMENT RETURN BASED ON (a):
Market price............................... N/A N/A N/A N/A 49.23%
Net asset value............................ (3.95)% 8.92% 4.55% 13.15% 25.45%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $257,548 $158,932 $183,054 $229,770 $559,071
Average net assets (000)...................... $166,940 $171,427 $204,795 $299,026 $549,407
Ratios to average net assets:
Expenses, including distribution fees...... 1.75% 1.33% 1.39% 1.33% 1.02%
Expenses, excluding distribution fees...... 1.50% 1.18% 1.24% 1.18% 1.02%
Net investment income...................... 6.00% 6.42% 6.73% 7.01% 6.50%
For Class A, B, C, and Z shares:
Portfolio turnover rate.................... 132% 46% 43% 32% 256%
- ---------------
(a) Total investment return based on net asset value is calculated assuming
a purchase of shares on the first day and a sale on the last day of
each period reported and includes reinvestment of dividends and
distributions. Total return does not consider the effect of sales load.
Prior to January 15, 1996 the Fund operated as a closed-end investment
company and total investment return was calculated based on market
value assuming a purchase of common stock at the current market value
on the first day and a sale at the current market value on the last day
of each period reported. Dividends and distributions are assumed for
purposes of this calculation to be reinvested at prices obtained under
the dividend reinvestment plan. This calculation does not reflect
brokerage commissions.
(b) Prior to January 15, 1996 the Fund operated as a closed-end investment
company.
(c) Calculated based upon weighted average shares outstanding during the
period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-65
Financial Highlights PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
Class B
------------------------------------------------------
January 15,
Year Ended 1996(c)
December 31, Through
------------------------------------- December 31,
1999(d) 1998(d) 1997(d) 1996
--------- --------- --------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.03 $ 7.89 $ 8.39 $ 8.51
--------- --------- --------- ------
Income from investment operations
Net investment income......................... .40 .46 .49 .57
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... (.76) .16 (.16) .26
--------- --------- --------- ------
Total from investment operations........... (.36) .62 .33 .83
--------- --------- --------- ------
Less distributions
Dividends from net investment income.......... (.28) (.30) (.64) (.57)
Distributions in excess of net investment
income..................................... -- (.02) (.19) (.50)
Distributions from net realized capital
gains...................................... -- (.16) -- --
Tax return of capital distributions (.13) -- -- --
--------- --------- --------- ------
Total distributions........................ (.41) (.48) (.83) (1.07)
--------- --------- --------- ------
Redemption fee retained by Fund............... -- -- -- .12
--------- --------- --------- ------
Net asset value, end of period................ $ 7.26 $ 8.03 $ 7.89 $ 8.39
========= ========= ========= ========
TOTAL INVESTMENT RETURN(a):................... (4.35)% 8.13% 3.98% 11.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 7,810 $ 3,625 $ 2,300 $ 175
Average net assets (000)...................... $ 4,642 $ 3,048 $ 1,246 $ 52
Ratios to average net assets:
Expenses, including distribution fees...... 2.25% 1.93% 1.99% 1.93%(b)
Expenses, excluding distribution fees...... 1.50% 1.18% 1.24% 1.18%(b)
Net investment income...................... 5.49% 5.86% 6.13% 6.41%(b)
- ---------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than a full year are not annualized.
(b) Annualized.
(c) Commencement of offering of Class B shares.
(d) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-66
Financial Highlights PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
Class C Class Z
------------------------------------------------ -------------------
January 15,
1996(d) Year Ended December
Year Ended December 31, Through 31,
------------------------------- December 31, -------------------
1999(f) 1998(f) 1997(f) 1996 1999 1998(f)
------- ------- ------- ------------ ------- -------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.03 $ 7.89 $ 8.39 $ 8.51 $ 8.03 $ 7.88
------- ------- ------- ----- ------- -------
Income from investment operations
Net investment income......................... .40 .46 .49 .57 .42 .52
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... (.76 ) .16 (.16 ) .26 (.71) .17
------- ------- ------- ----- ------- -------
Total from investment operations........... (.36 ) .62 .33 .83 (.29) .69
------- ------- ------- ----- ------- -------
Less distributions
Dividends from net investment income.......... (.28 ) (.30 ) (.64 ) (.57) (.34) (.36)
Distributions in excess of net investment
income..................................... -- (.02 ) (.19 ) (.50) -- (.02)
Distributions from net realized capital
gains...................................... -- (.16 ) -- -- -- (.16)
Tax return of capital distributions (.13 ) -- -- -- (.13) --
------- ------- ------- ----- ------- -------
Total distributions........................ (.41 ) (.48 ) (.83 ) (1.07) (.47) (.54)
------- ------- ------- ----- ------- -------
Redemption fee retained by Fund............... -- -- -- .12 -- --
------- ------- ------- ----- ------- -------
Net asset value, end of period................ $ 7.26 $ 8.03 $ 7.89 $ 8.39 $ 7.27 $ 8.03
====== ====== ====== ====== ======= ======
TOTAL INVESTMENT RETURN(a):................... (4.35 )% 8.13 % 3.98 % 11.99% (3.74)% 9.07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 561 $ 275 $ 190 $ 210(b) $12,847 $2,435
Average net assets (000)...................... $ 354 $ 220 $ 397 $ 204(b) $ 4,604 $1,771
Ratios to average net assets:
Expenses, including distribution fees...... 2.25 % 1.93 % 1.99 % 1.93%(c) 1.50% 1.18%
Expenses, excluding distribution fees...... 1.50 % 1.18 % 1.24 % 1.18%(c) 1.50% 1.18%
Net investment income...................... 5.51 % 5.84 % 6.05 % 6.41%(c) 6.11% 6.65%
March 17,
1997(e)
through
December 31,
1997(f)
------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.32
-----
Income from investment operations
Net investment income......................... .39
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .05
-----
Total from investment operations........... .44
-----
Less distributions
Dividends from net investment income.......... (.69)
Distributions in excess of net investment
income..................................... (.19)
Distributions from net realized capital
gains...................................... --
Tax return of capital distributions --
-----
Total distributions........................ (.88)
-----
Redemption fee retained by Fund............... --
-----
Net asset value, end of period................ $ 7.88
======
TOTAL INVESTMENT RETURN(a):................... 5.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 686
Average net assets (000)...................... $ 257
Ratios to average net assets:
Expenses, including distribution fees...... 1.24%(c)
Expenses, excluding distribution fees...... 1.24%(c)
Net investment income...................... 5.41%(c)
- ---------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than a full year are not annualized.
(b) Figure is actual and not rounded to nearest thousand.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
(f) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-67
Report of Independent Accountants PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
The Global Total Return Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Global Total Return
Fund, Inc. (the "Fund") at December 31, 1999, 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 three years
in the period then ended, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards
generally accepted in the United States 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, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying financial highlights for
each of the two periods in the period ended December 31, 1996 were audited by
other independent accountants, whose opinion dated February 14, 1997 was
unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 16, 2000
- --------------------------------------------------------------------------------
B-68
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE, INC.
DEBT RATINGS
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally will
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
A-1
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B: Obligations rated BB or B are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation. While
such obligations will likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major exposures to adverse
conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
LONG-TERM DEBT AND PREFERRED STOCK RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
SHORT-TERM DEBT RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
A-2
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
FITCH IBCA, INC.
LONG-TERM RATINGS
AAA
HIGHEST CREDIT QUALITY. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
VERY HIGH CREDIT QUALITY. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
HIGH CREDIT QUALITY. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB
GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
BB
SPECULATIVE. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B
HIGHLY SPECULATIVE. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
A-3
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
APPENDIX II -- HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
[Line Graph]
Value of $1.00 invested on 1/1/1926 through 12/31/1999
Small Stocks - $6,640.79
Common Stocks - $2,845.63
Long-Term Bonds - $40.22
Treasury Bills - $15.64
Inflation - $ 9.40
- ---------------
Source: Ibbotson Associates. Used with permission. This chart is for
illustrative purposes only and is not indicative of the past, present or future
performance of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the
Standard & Poor's 500 Composite Stock Price 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
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 1989
through 1999. The total returns of the indexes include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary -- Fees and Expenses" in the prospectus.
The net effect of the deduction of the operating expenses of a mutual fund on
these historical total returns, including the compounded effect over time, could
be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
YEAR
-------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
U.S. Government Treasury
Bonds(1)................ 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)%
U.S. Government Mortgage
Securities(2)........... 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.88%
U.S. Investment Grade
Corporate Bonds(3)...... 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.5% (1.96)%
U.S. High Yield
Bonds(4)................ 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6% 2.39%
World Government
Bonds(5)................ (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (5.07)%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
Difference between highest
and lowest returns
percent................. 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4 7.46
- ---------------
(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.
Source: Lipper Inc.
(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 SMITH BARNEY BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes
over 800 bonds issued by various foreign governments or agencies, excluding
those in the U.S., but including those in Japan, Germany, France, the U.K.,
Canada, Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden,
and Austria. All bonds in the index have maturities of at least one year.
II-2
This chart illustrates the performance of major world stock markets for the
period from 12/31/85 through 12/31/99. It does not represent the performance of
any Prudential mutual fund.
Average Annual Total Returns of Major World Stock Markets
(12/31/1985 - 12/31/1999) (in U.S. dollars)
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
U.K. 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
- ---------------
Source: Morgan Stanley Capital International (MCSI) and Lipper Inc. As of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
II-3
This chart shows the growth of a hypothetical $10,000 investment made in
the stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
Capital Appreciation and Reinvesting Dividends - $474,094
Capital Appreciation Only - $159,597
1969 - 1999
- ---------------
Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential mutual fund. Common stock total
return is based on the Standard & Poor's 500 Composite Stock Price Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indexes.
II-4
World Stock Market Capitalization by Region
World Total: $20.7 Trillion
CANADA U.S. EUROPE PACIFIC BASIN
- ------ ---- ------ -------------
2.1% 49.0% 32.5% 16.4%
- ---------------
Source: Morgan Stanley Capital International December 31, 1999. Used with
permission. This chart represents the capitalization of major stock markets as
measured by the Morgan Stanley Capital International (MSCI) World Index. The
total market capitalization is based on the value of approximately 1577
companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential mutual fund.
II-5
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
Long Term U.S. Treasury Bond Yield in Percent (1926-1999)
[Plot points not represented]
- ---------------
Source: Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson
and Rex A. Sinquefield). Used with permission. All rights reserved. The chart
illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1999. 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-6
ANNUAL REPORT DECEMBER 31, 2000
Prudential
Global Total Return Fund, Inc.
Fund Type Global debt
Objective Total return, made up of current income and
capital appreciation
This report is not authorized for distribution to
prospective investors unless preceded or accompanied by a
current prospectus.
(GRAPHIC)
The views expressed in this report and information about the
Fund's portfolio holdings are for the period covered by this
report and are subject to change thereafter.
(LOGO)
Build on the Rock
Investment Goals and Style
The Prudential Global Total Return Fund seeks total return
made up of current income and capital appreciation. The Fund
invests primarily in intermediate-term, investment-grade
debt securities issued around the world. The Fund invests at
least 65% of its total assets in income-producing debt
securities of the United States and foreign governments,
including developing countries. The Fund can invest up to
35% of total assets in corporate debt securities. The Fund
may also invest up to 15% of total assets in bonds rated
below investment grade, with a minimum rating of "B" by
Moody's or Standard & Poor's, or of comparable quality in
our view. Lower-rated securities carry a greater risk of
loss of principal and interest than higher-rated securities.
There are special risks associated with foreign investing,
including social, political, and currency risks, as well as
potential illiquidity. There can be no assurance that the
Fund will achieve its investment objective.
Ten Largest Issuers
Expressed as a percentage of
net assets as of 12/31/00
16.2% Government of Japan
12.9 United States Treasury Notes
7.5 Government of Austria
6.5 Swedish Government Bonds
4.7 German Government Bonds
3.9 Canadian Government Bonds
3.3 Italian Government Bonds
3.2 Osprey Trust
3.0 Federal National Mortgage
Association
2.6 Korea Electric Power
Holdings are subject to change.
www.prudential.com (800) 225-1852
Performance at a Glance
Cumulative Total Returns1 As of 12/31/00
One Five Ten Since
Year Years Years Inception2
Class A 3.49% 28.08% 94.88% 242.37%
Class B 2.82 N/A N/A 23.83
Class C 2.82 N/A N/A 23.83
Class Z 3.78 N/A N/A 15.01
Lipper Global Income Fund Avg.3 3.63 23.03 81.97 ***
Average Annual Total Returns1 As of 12/31/00
One Five Ten Since
Year Years Years Inception2
Class A -0.65% 4.22% 6.46% 8.56%
Class B -2.18 N/A N/A 4.23
Class C 0.79 N/A N/A 4.19
Class Z 3.78 N/A N/A 3.76
Distributions and Yields As of 12/31/00
Total Distributions 30-Day
Paid for 12 Months SEC Yield
Class A $0.40 4.17%
Class B $0.36 3.86
Class C $0.36 3.82
Class Z $0.42 4.60
Past performance is not indicative of future results.
Principal and investment return will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less
than their original cost. Past performance numbers, with the
exception of one-year returns, do not fully reflect the
higher operating expenses incurred since the Fund commenced
operations as an open-end mutual fund on January 15, 1996.
If these expenses had been applied since the Fund's
inception, past performance returns would have been lower.
Prior to January 15, 1996, the Fund operated as a closed-end
fund with shares being traded on the New York Stock
Exchange.
1 Source: Prudential Investments Fund Management LLC and
Lipper Inc. The cumulative total returns do not take into
account sales charges. The average annual total returns do
take into account applicable sales charges. The Fund charges
a maximum front-end sales charge of 4% for Class A shares.
Class B shares are subject to a declining contingent
deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1%
for six years. Class B shares will automatically convert to
Class A shares, on a quarterly basis, approximately seven
years after purchase. Class C shares are subject to a front-
end sales charge of 1% and a CDSC of 1% for 18 months. Class
Z shares are not subject to a sales charge or distribution
and service (12b-1) fees.
2 Inception dates: Class A, 7/7/86; Class B and Class C,
1/15/96; and Class Z, 3/17/97.
3 Lipper average returns are for all funds in each share
class for the one-, five-, and ten-year periods in the
Global Income Fund category. The Lipper average is
unmanaged. Funds in the Global Income category invest
primarily in U.S. dollar debt securities of issuers located
in at least three countries, one of which may be the United
States.
***Lipper Since Inception returns are 183.80% for Class A,
21.25% for Class B and Class C, and 13.34% for Class Z,
based on all funds in each share class.
1
(LOGO) February 15, 2001
DEAR SHAREHOLDER,
Prices in many global bond markets finished 2000 solidly
higher, with much of their gains posted later in the year. A
more favorable outlook for monetary policy in several
regions around the world contributed heavily to the
improvement in global bond markets.
Initially, the Federal Reserve (the Fed) and the European
Central Bank (the ECB) had repeatedly increased short-term
rates to cool off their respective economies and prevent
higher inflation. This trend, particularly in the first half
of the year, often exerted downward pressure on bond prices,
which move in the opposite direction of interest rates.
Late in the year, U.S. and European economic growth slowed
to the point that there was talk of the Fed and the ECB
cutting short-term rates to bolster economic growth in their
respective domains. Expectation of lower rates led many
investors to accept lower bond yields, which boosted bond
prices.
The Prudential Global Total Return Fund benefited from the
rally in global bond prices. However, its emphasis on low-
volatility corporate bonds and certain currency exposure
detracted from its returns. Consequently, the Fund's Class A
shares returned 3.49% in 2000, which is -0.65% for those
subject to the initial sales charge. By comparison, the
Lipper Global Income Fund Average, which is not subject to
sales charges, returned 3.63% for the year.
We discuss developments in the global bond markets and
explain the Fund's investments on the following pages.
Sincerely,
David R. Odenath, Jr., President
Prudential Global Total Return Fund, Inc.
2
Prudential Global Total Return Fund, Inc.
Annual Report December 31, 2000
INVESTMENT ADVISER'S REPORT
Global bond markets ended 2000 on a strong note after
battling back from a challenging first half of the year. A
change in the outlook for monetary
policy in the United States and Europe, among others, was a
primary catalyst behind solid gains in global bond prices
later in the year.
The first half of the year proved difficult for global bonds
as economies in the United States and abroad expanded more
rapidly than expected. To curb economic growth and check
inflation, some central banks increased short-term interest
rates. Raising rates can slow economic momentum by
encouraging higher borrowing costs for consumers and
businesses.
The Fed increased the federal funds rate (the rate U.S.
banks charge each other for overnight loans) in February,
March, and May 2000 by a total of one percentage point. The
ECB raised its key interest rate by a total of 1.75
percentage points over the course of the year, while the
Bank of Japan (BOJ) hiked its key rate by a quarter
percentage point in August 2000. In anticipation of these
moves, investors sought higher yields in many bond markets,
sending bond prices lower.
However, reports released in June indicated that repeated
short-term rate hikes were beginning to rein in U.S.
economic growth. This data, and the Fed's decision to leave
rates unchanged in June, boosted bond prices in the United
States and overseas--especially in emerging markets.
A STRATEGY FOR THE LONG HAUL
Because the Fund's goal is to achieve stable, attractive
returns, the majority of its holdings are in intermediate-
term bonds, whose prices tend to be less volatile than the
prices of longer-term bonds. The Prudential Global Sector
team seeks to add value to the Fund by carefully selecting
intermediate-term corporate bonds that will deliver higher
returns than government bonds without incurring significant
volatility. In 2000, however, government bonds unexpectedly
outperformed corporate bonds, which were hurt by tighter
liquidity conditions and rising default rates. Our
preference for low-volatility
3
Prudential Global Total Return Fund, Inc.
Annual Report December 31, 2000
securities also meant the Fund did not benefit as fully from
the solid global bond market rally that occurred later in
the year. While our portfolio positioning detracted
marginally from the Fund's performance relative to its
benchmark Lipper Average, we believe our strategy will aid
the Fund in the long run.
In the second half of the year, the repeated short-term rate
hikes, higher energy prices, and weakness in the stock market
took their toll on economic growth in the United States. As
the U.S. economy rapidly lost steam late in the year, many
investors believed the Fed would soon cut short-term rates
to keep the economic expansion on track. Short-term rates
were also expected to decline in many European countries
and in Australia.
Anticipation of lower short-term rates led investors to
accept sharply lower yields in many global bond markets,
which boosted bond prices. By December 29, 2000, the yield
on five-year U.S. Treasuries stood at 4.97%, down 137 basis
points from the end of 1999. (A basis point is one-hundredth
of a percent.) The yield on five-year German government
bonds stood at 4.51%, down 29 basis points.
WEAK EURO DETRACTED FROM FUND RETURNS
On the currency front, most of the Fund's holdings remained
hedged into U.S. dollars. However, the Fund had a partially
unhedged exposure to the euro that hurt the Fund's relative
performance. The single European currency finished the year
2000 down roughly 6.50% versus the U.S. dollar, despite
gains made in the final three months of the year. The euro
strengthened in the fourth quarter as some analysts expect
economic growth in the euro zone to exceed that of the
United States in 2001. Meanwhile, we eliminated the Fund's
exposure to the Japanese yen in the fourth quarter of 2000
as that currency lost approximately 12% against the U.S.
dollar during the year.
4
www.prudential.com (800) 225-1852
LOOKING AHEAD
We believe the euro still has considerable room to
appreciate against the U.S. dollar. We therefore plan to
maintain a significant exposure to the euro if this trend
continues.
In contrast, we expect the Japanese yen to weaken further in
2001, hurt by investment flows out of Japan, low investment
returns, and a lingering financial crisis in Japan. Given
the deflationary economic conditions in Japan, we believe
the BOJ will not increase short-term rates in the near
future. With this in mind, we recently increased the Fund's
Japanese government bond position, which is hedged back into
U.S. dollars.
The Fed engineered two half-percentage-point reductions in
the federal funds rate that lowered it to 5.50% from 6.50%
in January 2001. The Fed cut the key rate in an effort to
revitalize the sagging economy. But because the economy
continues to "flirt" with recession and inflation remains
under control, the central bank is widely expected to
continue easing monetary policy aggressively.
Until the Fed has finished reducing rates, government bond
yields could decline further. However, we believe U.S.
economic growth will stabilize, and government bond yields
will rise moderately by the end of the year. In this market
environment, corporate bonds and emerging market bonds
should perform well relative to government bonds.
Prudential Global Total Return Fund Management Team
PROPOSED REORGANIZATION
A proposal to merge the Prudential International Bond Fund's
assets with those of the Prudential Global Total Return Fund
will be put to a shareholder vote at a special meeting of
Prudential International Bond Fund's shareholders in April
2001. If approved, the merger is scheduled to take place
during the second quarter of 2001.
5
Prudential Global Total Return Fund, Inc.
Annual Report December 31, 2000
Financial
Statements
Prudential Global Total Return Fund, Inc.
Portfolio of Investments as of December 31, 2000
Principal
Amount US$
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 93.1%
- -------------------------------------------------------------------------------------
Canada 3.9%
Canadian Government Bonds,
C$ 4,557 6.00%, 9/1/05 $ 3,122,143
8,325 5.75%, 9/1/06 5,667,639
---------------
8,789,782
- -------------------------------------------------------------------------------------
Denmark 1.3%
DKr 24,180 Danish Government Bonds,
5.00%, 8/15/05 3,018,090
- -------------------------------------------------------------------------------------
Eurobonds 26.3%
Austrian Government Bonds,
EURO 15,350 3.40%, 10/20/04 13,658,263
3,830 4.00%, 7/15/09 3,285,304
5,410 Belgium Government Bonds,
5.50%, 3/28/28 4,866,614
1,490 Callahan Nordrhein Westfalen,
14.00%, 7/15/10 1,220,006
2,889 Depfa Bank AG,
5.50%, 2/12/08 2,731,079
480 Esat Telecom Group PLC,
11.875%, 11/1/09 559,220
1,473 Flag Telecom Holdings Ltd.,
11.625%, 3/30/10 1,249,259
2,540 French Government Bonds,
8.50%, 4/25/23 3,276,774
10,200 German Government Bonds,
6.25%, 1/4/24 10,525,062
Italian Government Bonds,
2,425 6.75%, 7/1/07 2,469,339
1,761 6.00%, 5/1/31 1,695,870
2,840 Level 3 Communications,
10.75%, 3/15/08 2,219,681
500 Municipality of Sophia,
9.75%, 6/3/02 468,947
See Notes to Financial Statements 7
Prudential Global Total Return Fund, Inc.
Portfolio of Investments as of December 31, 2000 Cont'd.
Principal
Amount US$
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
EURO 1,017 Neste Chemicals International Oy,
12.25%, 8/15/10 $ 807,639
1,960 Netia Holdings BV,
13.75%, 6/15/10 1,573,837
7,762 Osprey Trust,
6.375%, 1/15/03 7,313,512
1,304 Spanish Government Bonds,
5.40%, 7/30/11 1,196,927
---------------
59,117,333
- -------------------------------------------------------------------------------------
Greece 0.6%
GRD 425,000 Greek Government Bonds,
6.50%, 10/22/19 1,225,247
- -------------------------------------------------------------------------------------
Japan 17.3%
Y 300,000 Banque Cent de Tunisie,
3.30%, 8/2/10 2,561,533
Japanese Government Bonds,
1,795,000 0.60%, 11/20/02 15,664,317
541,500 1.20%, 12/20/05 4,768,880
1,252,000 1.80%, 6/20/08 11,263,146
541,500 1.80%, 6/21/10 4,780,344
---------------
39,038,220
- -------------------------------------------------------------------------------------
New Zealand 5.1%
NZ$ 14,900 Federal National Mortgage Association,
7.25%, 6/20/02 6,648,363
10,000 New Zealand Government Bonds,
8.00%, 11/15/06 4,837,689
---------------
11,486,052
- -------------------------------------------------------------------------------------
Russia 0.2%
RUB 18,900 European Bank for Reconstruction Development,
Zero Coupon, 5/28/02 502,572
- -------------------------------------------------------------------------------------
Sweden 6.5%
SEK 132,300 Swedish Government Bonds,
6.00%, 2/9/05 14,704,950
8 See Notes to Financial Statements
Prudential Global Total Return Fund, Inc.
Portfolio of Investments as of December 31, 2000 Cont'd.
Principal
Amount US$
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
United Kingdom 2.6%
BP 2,000 Abbey National Treasury Service,
8.00%, 4/2/03 $ 3,108,321
342 Banco Central del Uruguay, FRN,
7.25%, 2/19/07 474,994
1,300 Powergen PLC,
8.875%, 3/26/03 2,041,758
300(c) United Kingdom Bonds,
5.00%, 6/7/04 445
---------------
5,625,518
- -------------------------------------------------------------------------------------
United States 29.3%
Corporate Bonds 10.0%
US$ 1,000 Central Bank Tunisia,
7.50%, 9/19/07 942,500
1,300 Chonhung Bank,
11.90375%, 1/7/05 1,254,500
3,807 Fideicomiso Petalco,
10.16%, 12/23/09 3,730,860
670 Hanvit Bank,
12.75%, 3/1/10 670,000
2,030 Industrial Bank of Korea,
8.375%, 9/30/02 2,074,660
3,930 Korea Development Bank,
6.625%, 11/21/03 3,865,155
Korea Electric Power Co.,
6.375%, 12/1/03 5,020,070
5,170
875 7.00%, 10/1/02 872,016
2,210 Partner Communications Co. Ltd.,
13.00%, 8/15/10 1,900,600
1,300 Philippine Long Distance Telephone,
10.50%, 4/15/09 1,092,000
1,300 Sakura Cap Funding Cayman,
7.4775%, 9/29/49 1,247,323
---------------
22,669,684
See Notes to Financial Statements 9
Prudential Global Total Return Fund, Inc.
Portfolio of Investments as of December 31, 2000 Cont'd.
Principal
Amount US$
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
Sovereign Bonds 6.4%
US$ 2,750 Bulgarian Government Bonds,
2.75%, 7/28/12 $ 2,035,000
3,300 Colombian Government Bonds,
7.25%, 2/23/04 2,844,600
4,028 Croatian Government Bonds, FRN,
7.75%, 7/31/06 3,836,891
1,600 Embotelladora Andina SA,
7.875%, 10/1/97 1,210,152
500 Jamaican Government Bonds,
9.625%, 7/2/02 485,000
1,700 Lithuanian Government Bonds,
7.125%, 7/22/02 1,687,250
2,250 Oman Sultanate,
7.125%, 3/20/02 2,244,375
---------------
14,343,268
- -------------------------------------------------------------------------------------
U.S. Government Obligations 12.9%
United States Treasury Notes,
13,030 5.625%, 5/15/08 13,372,037
14,170(b) 6.50%, 2/15/10 15,502,830
150 5.75%, 8/15/10 157,196
---------------
29,032,063
---------------
Total United States investments 66,045,015
---------------
Total long-term investments (cost
US$210,446,585) 209,552,779
---------------
SHORT-TERM INVESTMENTS 3.9%
- -------------------------------------------------------------------------------------
Eurobonds 1.8%
EURO 2,000 Cesp Cia Energetic,
9.25%, 5/10/01 957,647
3,400 Italian Government Bonds,
4.50%, 7/1/01 3,158,468
---------------
4,116,115
- -------------------------------------------------------------------------------------
Hungary 0.8%
HUF 480,000 Hungarian Government Bonds,
15.00%, 7/24/01 1,721,013
- -------------------------------------------------------------------------------------
United States 1.3%
Corporate Bonds 0.3%
US$ 750 Banco del Estado Chile,
8.39%, 8/1/01 755,198
10 See Notes to Financial Statements
Prudential Global Total Return Fund, Inc.
Portfolio of Investments as of December 31, 2000 Cont'd.
Principal
Amount US$
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
Sovereign Bonds 0.6%
US$ 338 Brazilian Government Bonds, FRN,
7.875%, 1/1/01 338,250
1,000 Italian Government Bonds,
7.00%, 9/18/01 1,003,500
---------------
1,341,750
- -------------------------------------------------------------------------------------
Supranational Bonds 0.2%
500 Corporacion Andina de Fomento,
7.63%, 4/3/01 497,500
- -------------------------------------------------------------------------------------
U.S. Government Obligations
80(b) United States Treasury Bills,
6.60%(a), 4/12/01 77,592
- -------------------------------------------------------------------------------------
Repurchase Agreement 0.2%
301 Joint Repurchase Agreement Account,
5.921%, 1/02/01 (Note 5) 301,000
---------------
Total United States investments 2,973,040
---------------
Total short-term investments (cost
US$9,301,694) 8,810,168
---------------
Total Investments 97.0%
(cost $219,748,279; Note 4) 218,362,947
Other assets in excess of liabilities 3.0% 6,857,329
---------------
Net Assets 100% $ 225,220,276
---------------
---------------
- ------------------------------
Portfolio securities are classified according to the security's currency
denomination.
AG--Aktiengesellschaft (German Company).
BV--Beloten Vennootschap (Dutch Company).
PLC--Public Liability Company (British Company).
Oy--Osakeyhtio (Finnish Company).
FRN--Floating Rate Note, rate shown as of December 31, 2000.
C$--Canadian Dollar.
DKr--Danish Krone.
EURO--Euro.
GRD--Greek Drachma.
HUF--Hungarian Forint.
Y--Japanese Yen.
NZ$--New Zealand Dollar.
BP--Pound Sterling.
RUB--Russian Ruble.
SEK--Swedish Krona.
See Notes to Financial Statements 11
Prudential Global Total Return Fund, Inc.
Portfolio of Investments as of December 31, 2000 Cont'd.
The industry classification of portfolio holdings and other assets shown as a
percentage of net assets as of December 31, 2000 was as follows:
Foreign Government Securities.......................................... 62.6%
U.S. Government Securities............................................. 12.9
Banks.................................................................. 7.5
Financial Services..................................................... 5.2
Utilities.............................................................. 3.9
Telecommunications..................................................... 3.8
Cable.................................................................. 0.5
Chemicals.............................................................. 0.4
Other assets in excess of liabilities
(including Joint Repurchase Agreement)............................... 3.2
-----
100.0%
-----
-----
- ------------------------------
(a) Rate quoted represents yield-to-maturity as of purchase date.
(b) Partial principal amount pledged as collateral for financial futures
contracts.
(c) Figure is actual and not rounded to nearest thousand.
12 See Notes to Financial Statements
Prudential Global Total Return Fund, Inc.
Statement of Assets and Liabilities
December 31, 2000
- ---------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $219,748,279) $ 218,362,947
Foreign currency, at value (cost $240,268) 240,784
Unrealized appreciation on forward currency contracts 8,308,551
Receivable for investments sold 4,673,874
Interest receivable 4,647,064
Receivable for Fund shares sold 25,807
Other assets 9,268
-----------------
Total assets 236,268,295
-----------------
LIABILITIES
Payable to custodian 98,792
Unrealized depreciation on forward currency contracts 9,805,398
Payable for Fund shares reacquired 695,467
Accrued expenses and other liabilities 246,093
Management fee payable 142,522
Distribution fee payable 48,040
Due to broker - variation margin 7,032
Withholding tax payable 4,675
-----------------
Total liabilities 11,048,019
-----------------
NET ASSETS $ 225,220,276
-----------------
-----------------
Net assets were comprised of:
Common stock, at par $ 317,355
Paid-in capital in excess of par 260,775,157
-----------------
261,092,512
Distributions in excess of net investment income (489,642)
Accumulated net realized loss on investment and
foreign currency transactions (32,563,985)
Net unrealized depreciation on investments and foreign
currencies (2,818,609)
-----------------
Net assets, December 31, 2000 $ 225,220,276
-----------------
-----------------
See Notes to Financial Statements 13
Prudential Global Total Return Fund, Inc.
Statement of Assets and Liabilities Cont'd.
December 31, 2000
- ---------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($208,100,620 / 29,325,699 shares of common stock
issued and outstanding) $7.10
Maximum sales charge (4% of offering price) .30
-----------------
Maximum offering price to public $7.40
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per
share ($6,145,247 / 865,097 shares of common stock
issued and outstanding) $7.10
-----------------
-----------------
Class C:
Net asset value and redemption price per share ($423,909 /
59,679 shares of common stock issued and outstanding) $7.10
Sales charge (1% of offering price) .07
-----------------
Offering price to public $7.17
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per
share ($10,550,500 / 1,485,051 shares of common stock
issued and outstanding) $7.10
-----------------
-----------------
14 See Notes to Financial Statements
Prudential Global Total Return Fund, Inc.
Statement of Operations
Year
Ended
December 31, 2000
- ---------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of foreign withholding taxes of $12,984) $ 17,967,141
-----------------
Expenses
Management fee 1,832,651
Distribution fee--Class A 564,786
Distribution fee--Class B 51,154
Distribution fee--Class C 3,617
Transfer agent's fees and expenses 775,000
Custodian's fees and expenses 310,000
Reports to shareholders 170,000
Legal fees and expenses 98,000
Audit fees 72,000
Registration fees 61,000
Directors' fees 15,000
Miscellaneous 8,549
-----------------
Total expenses 3,961,757
-----------------
Net investment income 14,005,384
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Net realized loss on:
Investment transactions (4,919,379)
Foreign currency transactions (17,974,168)
Financial futures contracts transactions (101,280)
Options written (38,032)
-----------------
(23,032,859)
-----------------
Net change in unrealized appreciation/depreciation on:
Investments 18,223,871
Foreign currencies (1,907,372)
Financial futures contracts (65,391)
-----------------
16,251,108
-----------------
Net loss on investments and foreign currencies (6,781,751)
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,223,633
-----------------
-----------------
See Notes to Financial Statements 15
Prudential Global Total Return Fund, Inc.
Statement of Changes in Net Assets
Year Ended December 31,
--------------------------------------
2000 1999
- -----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 14,005,384 $ 10,578,315
Net realized loss on investment and
foreign currency transactions (23,032,859) (7,962,203)
Net change in unrealized appreciation
(depreciation) on investment and
foreign currency transactions 16,251,108 (19,742,583)
----------------- -----------------
Net increase (decrease) in net assets
resulting from operations 7,223,633 (17,126,471)
----------------- -----------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A -- (7,213,780)
Class B -- (178,555)
Class C -- (13,365)
Class Z -- (224,615)
----------------- -----------------
-- (7,630,315)
----------------- -----------------
Tax return of capital distributions
Class A (12,476,703) (2,951,146)
Class B (338,030) (82,514)
Class C (21,336) (6,196)
Class Z (644,921) (86,864)
----------------- -----------------
(13,480,990) (3,126,720)
----------------- -----------------
Fund share transactions (Net of share
conversions) (Note 6 and 7)
Net proceeds from shares sold 10,743,153 181,565,604
Net asset value of shares issued in
reinvestment of dividends and
distributions 5,948,995 3,609,392
Cost of shares reacquired (63,981,415) (43,791,864)
----------------- -----------------
Increase (decrease) in net assets from
Fund share transactions (47,289,267) 141,383,132
----------------- -----------------
Total increase (decrease) (53,546,624) 113,499,626
----------------- -----------------
NET ASSETS
Beginning of year 278,766,900 165,267,274
----------------- -----------------
End of year $ 225,220,276 $ 278,766,900
----------------- -----------------
----------------- -----------------
16 See Notes to Financial Statements
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements
Prudential Global Total Return Fund, Inc. (the 'Fund') is an open-end,
non-diversified management investment company. The Fund's investment objective
is to seek total return made up of current income and capital appreciation. The
Fund seeks to achieve this objective by investing at least 65% of its total
assets in income-producing debt securities issued by the U.S. and foreign
governments, supranational organizations, semi-government entities or
governmental agencies, authorities or instrumentalities and short-term bank debt
securities or bank deposits. The Fund looks primarily for investment-grade
securities denominated in U.S. dollars and in foreign currencies.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: In valuing the Fund's assets, quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the then current currency value. Portfolio securities that are
actively traded in the over-the-counter market, including listed securities for
which the primary market is believed to be over-the-counter, are valued on the
basis of valuations provided by an independent pricing agent or principal market
makers. Any security for which the primary market is on an exchange or NASDAQ
National Market System Securities are valued at the last sale price on such
exchange on the day of valuation or, if there was no sale on such day, at the
mean between the last bid and asked prices on such day or at the last bid price
on such day in the absence of an asked price. Forward currency exchange
contracts are valued at the current cost of covering or offsetting the contract
on the day of valuation. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund.
All securities are valued as of 4:15 p.m., New York time.
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.
Repurchase Agreement: 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.
17
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Foreign Currency Translation: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and
liabilities--at the current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at the end of the period. Similarly, the Fund does
not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term debt
securities sold during the period. Accordingly, such realized foreign currency
gains and losses are included in the reported net realized gains on investment
transactions.
Net realized gains or losses on foreign currency transactions represent
net foreign exchange gains or losses from sales and maturities of short-term
securities and forward currency contracts, disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest,
discount and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net currency gains and
losses resulting from the valuing of foreign currency denominated assets
(excluding investments) and liabilities at year-end exchange rates are reflected
as a component of net unrealized appreciation or depreciation on investments and
foreign currencies.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. companies
as a result of, among other factors, the possibility of political or economic
instability and the level of governmental supervision and regulation of foreign
securities markets.
Financial Futures Contracts: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain
18
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
percentage of the contract amount. This amount is known as the 'initial margin.'
Subsequent payments, known as 'variation margin,' are made or received by the
Fund each day, depending on the daily fluctuations in the value of the
underlying security. Such variation margin is recorded for financial statement
purposes on a daily basis as unrealized gain or loss. When the contract expires
or is closed, the gain or loss is realized and is presented in the statement of
operations as net realized gain (loss) on financial futures contracts.
The Fund invests in financial futures contracts in order to hedge existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Options: The Fund may either purchase or write options in order to
hedge against adverse market movements or fluctuations in value caused by
changes in prevailing interest rates with respect to securities which the Fund
currently owns or intends to purchase. When the Fund purchases an option, it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost basis of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as writer of an option, has no control over whether the
underlying securities or currencies may be sold (called) or purchased (put). As
a result, the Fund bears the market risk of an unfavorable change in the price
of the security or currency underlying the written option. The Fund, as
purchaser of an option, bears the risk of the potential inability of the
counterparties to meet the terms of their contracts.
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
19
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
changes in foreign currency exchange rates on its foreign portfolio holdings or
on specific receivables and payables denominated in a foreign currency. The
contracts are valued daily at current exchange rates and any unrealized gain or
loss is included in net unrealized appreciation or depreciation on investments
and foreign currencies. Gain or loss is realized on the settlement date of the
contract equal to the difference between the settlement value of the original
and renegotiated forward contracts. This gain or loss, if any, is included in
net realized gain (loss) on foreign currency transactions. Risks may arise upon
entering into these contracts from the potential inability of the counterparties
to meet the terms of their contracts.
Security Transactions and Net Investment Income: Security transactions
are recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income, which is comprised of three elements: stated coupon, original
issue discount and market discount, is recorded on the accrual basis. Expenses
are recorded on the accrual basis, which may require the use of certain
estimates by management.
In November 2000, a revised AICPA Audit and Accounting Guide, Audits of
Investment Companies (the 'Guide'), was issued, and is effective for the fiscal
years beginning after December 15, 2000. The revised Guide will require the Fund
to amortize premiums on all fixed-income securities. Upon initial adoption, the
Fund will be required to adjust the cost of its fixed-income securities by the
cumulative amount that would have been recognized had the amortization been in
effect from the purchase date of each holding. Adopting this accounting
principle will not affect the Fund's net asset value, but will change the
classification of certain amounts between interest income and realized and
unrealized gain/loss in the Statement of Operations. The Fund expects that the
impact of the adoption of this principle will not be material to the financial
statements.
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 net income and capital gains, if any, to
shareholders. Therefore, no federal income or excise tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
20
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
Dividends and Distributions: Dividends are declared and paid quarterly.
Distributions of capital gains, if any, will be declared at least annually.
Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease accumulated net realized loss on investments by
$28,268,215, increase distributions in excess of net investment income by
$14,476,782 and decrease paid-in capital by $13,791,433 due to expiring capital
loss carryforward and foreign currency losses realized and recognized during the
year ended December 31, 2000. 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 subadvisor's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'), a wholly owned subsidiary of Prudential. The
subadvisory agreement provides that the subadvisor will furnish investment
advisory services in connection with the management of the Fund. In connection
therewith, the subadvisor is obligated to keep certain books and records of the
Fund. PIFM continues to have responsibility for all investment advisory services
pursuant to the management agreement and supervises the subadvisor's performance
of such services. PIFM pays for the services of PIC, the cost of compensation of
officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid to PIFM is computed daily and payable monthly at
an annual rate of .75 of 1% of the Fund's average daily net assets up to $500
million, .70 of 1% of such assets between $500 million and $1 billion, and .65
of 1% of such assets in excess of $1 billion.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
B, C and Z shares
21
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
of the Fund. The Fund compensates PIMS for distributing and servicing the Fund's
Class A, Class B and Class C shares, pursuant to plans of distribution (the
'Class A, B and C Plans'), regardless of expenses actually incurred by it. The
distribution fees are accrued daily and payable monthly. No distribution or
service fees are paid to PIMS as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B, and C shares, respectively.
Such expenses under the Plans were .25 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, 2000.
PIMS has advised the Fund that it has received approximately $14,200 and
$10,800 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended December 31, 2000. From these fees,
PIMS paid a substantial part of such sales charges to dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended December 31, 2000, it
received approximately $24,600 and $9,600 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the year ended December 31, 2000.
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), an affiliate of PIFM and an
indirect wholly owned subsidiary of Prudential, serves as the Fund's transfer
agent. During the year ended December 31, 2000, the Fund incurred fees of
approximately $553,500 for the services of PMFS. As of December 31, 2000,
approximately $39,200 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to nonaffiliates.
22
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments
for the year ended December 31, 2000, aggregated $970,249,006 and
$1,027,040,527, respectively.
During the year ended December 31, 2000, the Fund entered into financial
futures contracts. Details of open contracts at December 31, 2000 are as
follows:
Value at Value at
Number of Expiration Trade December 31, Unrealized
Contracts Type Date Date 2000 (Depreciation)
- --------- ---------------- ----------- ---------- ------------ ---------------
Short Position:
45 10 yr. T-Note Mar. 2001 $4,653,281 $4,718,672 $ (65,391)
---------------
---------------
At December 31, 2000, the Fund had outstanding forward currency contracts
to purchase and sell foreign currencies as follows:
Value at
Foreign Currency Current Settlement Date Unrealized Unrealized
Purchase Contracts Value Payable Appreciation (Depreciation)
- ------------------------ ------------ ---------------- -------------- --------------
Australian Dollars,
expiring 1/12/01 $ 5,145,199 $ 5,096,856 $ 48,343 $ --
Canadian Dollar,
expiring 1/8/01 -
1/10/01 7,783,623 7,647,219 136,404 --
Euros,
expiring 1/5/01 -
1/11/01 107,357,497 101,483,195 5,874,302 --
Japanese Yen,
expiring 1/5/01 -
1/9/01 19,467,104 20,062,656 -- (595,552)
New Zealand Dollars,
expiring 1/8/01 701,755 693,100 8,655 --
Pound Sterling,
expiring 1/5/01 1,661,535 1,577,574 83,961 --
South African Rand,
expiring 1/8/01 -
1/20/01 9,086,287 9,031,400 54,887 --
------------ ---------------- -------------- --------------
$151,203,000 $145,592,000 $6,206,552 $ (595,552)
------------ ---------------- -------------- --------------
------------ ---------------- -------------- --------------
23
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
Value at
Foreign Currency Current Settlement Date Unrealized Unrealized
Sale Contracts Value Receivable Appreciation (Depreciation)
- ------------------------ ------------ ---------------- -------------- --------------
Australian Dollars,
expiring 1/9/01 $ 4,525,895 $ 4,500,000 $ -- $ (25,895)
Canadian Dollar,
expiring 1/8/01 -
1/10/01 9,096,085 8,902,876 -- (193,209)
Danish Krone,
expiring 1/22/01 1,480,116 1,425,392 -- (54,724)
Euros,
expiring 1/5/01 -
1/11/01 136,034,943 128,552,417 -- (7,482,526)
Japanese Yen,
expiring 1/5/01 -
1/9/01 64,265,458 66,367,457 2,101,999 --
New Zealand Dollars,
expiring 1/8/01 12,477,673 11,858,880 -- (618,793)
South African Rand,
expiring 1/8/01 -
1/20/01 4,578,393 4,523,576 -- (54,817)
Swedish Krona,
expiring 1/1/01 15,985,567 15,205,685 -- (779,882)
------------ ---------------- -------------- --------------
$248,444,130 $241,336,283 $2,101,999 $ (9,209,846)
------------ ---------------- -------------- --------------
------------ ---------------- -------------- --------------
Transactions in written call options during the year ended December 31,
2000 were as follows:
Number of Premiums
Contracts Received
---------- ---------
Options outstanding at December 31, 1999 -- --
Options written 4,000 $89,978
Options exercised (4,000) (89,978)
---------- ---------
Options outstanding at December 31, 2000 -- $ --
---------- ---------
---------- ---------
The United States federal income tax basis of the Fund's investments at
December 31, 2000 was $220,021,139 and, accordingly, net unrealized depreciation
for United States federal income tax purposes was $1,658,192 (gross unrealized
appreciation--$5,484,352; gross unrealized depreciation--$7,142,544).
24
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
For federal income tax purposes, the Fund had a capital loss carryforward
as of December 31, 2000, of approximately $32,308,100, of which $22,786,500
expires in 2001, $1,565,600 expires in 2002, $326,200 expires in 2003,
$1,656,400 in 2005, $73,000 in 2006, $827,000 in 2007 and $5,073,400 in 2008.
During the fiscal year ended December 31, 2000, approximately $6,252,600 of the
capital loss carryforward expired unused. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such carryforward. In addition, the Fund has elected to
treat net capital losses of $310,465 incurred in the two month period ended
December 31, 2000 as having occurred in the next fiscal year.
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of December 31, 2000, the
Fund had a 0.03% undivided interest in the joint account. The undivided interest
for the Fund represents $301,000 in principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:
Bear, Stearns & Co. Inc., 6.00%, in the principal amount of $245,000,000,
repurchase price $245,163,333, due 1/2/01. The value of the collateral including
accrued interest was $250,948,197.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 6.00%, in the principal
amount of $245,000,000, repurchase price $245,163,333, due 1/2/01. The value of
the collateral including accrued interest was $249,901,068.
State Street Bank & Trust Co., 5.50%, in the principal amount of
$137,369,000, repurchase price $137,452,947, due 1/2/01. The value of the
collateral including accrued interest was $140,122,696.
Warburg Dillon Read Inc., 6.00%, in the principal amount of $245,000,000,
repurchase price $245,163,333, due 1/2/01. The value of the collateral including
accrued interest was $249,902,063.
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a
25
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
contingent deferred sales charge of 1% during the first 18 months. Prior to
November 2, 1998, Class C shares were sold with a contingent deferred sales
charge of 1% during the first year. Class B shares will automatically convert to
Class A shares on a quarterly basis approximately seven years after purchase. A
special exchange privilege is also available for shareholders who qualified to
purchase Class A shares at net asset value. Class Z shares are not subject to
any sales or redemption charge and are offered exclusively for sale to a limited
group of investors.
There are 2 billion authorized shares of common stock at $.01 par value
per share, divided equally into Class A, B, C and Z shares.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- -------------------------------------------------------- ----------- -------------
Year ended December 31, 2000:
Shares sold 339,437 $ 2,418,211
Shares issued in reinvestment of dividends and
distributions 715,875 5,026,331
Shares reacquired (7,274,279) (51,553,682)
----------- -------------
Net increase (decrease) in shares outstanding before
conversion (6,218,967) (44,109,140)
Shares issued upon conversion from Class B 62,581 444,797
----------- -------------
Net increase (decrease) in shares outstanding (6,156,386) $ (43,664,343)
----------- -------------
----------- -------------
Year ended December 31, 1999:
Shares sold 256,447 $ 1,936,647
Shares issued in connection with reorganization (Note 7) 20,010,669 159,581,878
Shares issued in reinvestment of dividends and
distributions 414,519 3,075,349
Shares reacquired (5,023,661) (37,816,441)
----------- -------------
Net increase (decrease) in shares outstanding before
conversion 15,657,974 126,777,433
Shares issued upon conversion from Class B 23,127 173,394
----------- -------------
Net increase (decrease) in shares outstanding 15,681,101 $ 126,950,827
----------- -------------
----------- -------------
Class B
- --------------------------------------------------------
Year ended December 31, 2000:
Shares sold 263,866 $ 1,866,824
Shares issued in reinvestment of dividends and
distributions 38,011 267,297
Shares reacquired (449,285) (3,175,491)
----------- -------------
Net increase (decrease) in shares outstanding before
conversion (147,408) (1,041,370)
Shares reacquired upon conversion into Class A (62,581) (444,797)
----------- -------------
Net increase (decrease) in shares outstanding (209,989) $ (1,486,167)
----------- -------------
----------- -------------
Year ended December 31, 1999:
Shares sold 217,107 $ 976,369
Shares issued in connection with reorganization (Note 7) 648,159 5,241,518
Shares issued in reinvestment of dividends and
distributions 28,530 212,311
Shares reacquired (247,247) (3,255,251)
----------- -------------
Net increase (decrease) in shares outstanding
before conversion 646,549 3,174,947
Shares reacquired upon conversion into Class A (23,127) (173,394)
----------- -------------
Net increase (decrease) in shares outstanding 623,422 $ 3,001,553
----------- -------------
----------- -------------
26
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
Class C Shares Amount
- -------------------------------------------------------- ----------- -------------
Year ended December 31, 2000:
Shares sold 537,665 $ 3,707,719
Shares issued in reinvestment of dividends and
distributions 2,908 20,478
Shares reacquired (558,150) (3,851,380)
----------- -------------
Net increase (decrease) in shares outstanding (17,577) $ (123,183)
----------- -------------
----------- -------------
Year ended December 31, 1999:
Shares sold 17,923 $ 145,005
Shares issued in connection with reorganization (Note 7) 49,309 386,351
Shares issued in reinvestment of dividends and
distributions 2,370 17,612
Shares reacquired (26,555) (198,104)
----------- -------------
Net increase (decrease) in shares outstanding 43,047 $ 350,864
----------- -------------
----------- -------------
Class Z
- --------------------------------------------------------
Year ended December 31, 2000:
Shares sold 386,513 $ 2,750,399
Shares issued in reinvestment of dividends and
distributions 90,273 634,889
Shares reacquired (759,544) (5,400,862)
----------- -------------
Net increase (decrease) in shares outstanding (282,758) $ (2,015,574)
----------- -------------
----------- -------------
Year ended December 31, 1999:
Shares sold 278,304 $ 2,122,619
Shares issued in connection with reorganization (Note 7) 1,481,032 11,175,217
Shares issued in reinvestment of dividends and
distributions 41,217 304,120
Shares reacquired (335,941) (2,522,068)
----------- -------------
Net increase (decrease) in shares outstanding 1,464,612 $ 11,079,888
----------- -------------
----------- -------------
Note 7. Reorganization
On May 26, 1999, the Board of Directors of the Fund approved an Agreement and
Plan of Reorganization (the 'Plan') which provided for the transfer of all of
the assets of the Class A, B, C and Z shares of the Prudential Global Limited
Maturity Fund, Inc. and the Prudential Intermediate Global Income Fund, Inc. in
exchange for like shares of the Fund and the Fund's assumption of the
liabilities of Prudential Global Limited Maturity Fund, Inc. and Prudential
Intermediate Global Income Fund, Inc.
The Plan was approved by the shareholders of Prudential Global Limited
Maturity Fund, Inc. and Prudential Intermediate Global Income Fund, Inc. at a
shareholder meeting held on October 19, 1999. The reorganization took place on
October 22, 1999. Prudential Global Limited Maturity Fund, Inc. and Prudential
Intermediate Global Income Fund, Inc. and the Fund incurred their pro rata share
of the costs of reorganization, including the costs of proxy solicitation.
27
Prudential Global Total Return Fund, Inc.
Notes to Financial Statements Cont'd.
The acquisition was accomplished by a tax-free exchange of the following
shares:
Prudential Global Prudential Global
Limited Maturity Total Return
Fund, Inc.: Fund, Inc. Value
Class A 6,701,965 Class A 6,692,871 $49,296,112
B 92,971 B 93,350 688,151
C 4,375 C 4,393 32,384
Z 6,521 Z 6,530 48,187
Prudential
Intermediate Global
Income Fund, Inc.:
Class A 13,210,252 A 13,317,798 $98,167,564
B 550,329 B 554,809 4,091,534
C 44,554 C 44,916 331,237
Z 1,464,579 Z 1,474,502 10,880,345
The aggregate net assets and unrealized depreciation of the funds
immediately before the acquisition were:
Unrealized
Net Assets Depreciation
----------- ------------
Global Limited Maturity Fund, Inc. $50,064,834 $ (3,937,015)
Intermediate Global Income Fund, Inc. 113,470,680 (6,836,162)
The aggregate net assets of the Prudential Global Total Return Fund, Inc.
immediately before the acquisition was $134,835,274.
The future utilization of the acquired capital loss carryforwards from
Prudential Global Limited Maturity Fund, Inc. and Prudential Intermediate Global
Income Fund, Inc. in the amounts of $19,106,058 and $13,554,306, respectively,
will be limited by Section 382 of the Internal Revenue Code of 1986, as amended.
For each fund, the annual limitation is $2,728,533 and $6,184,152, respectively.
28
Prudential Global Total Return Fund, Inc.
Financial Highlights
Class A
-----------------
Year Ended
December 31, 2000
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 7.26
-----------------
Income from investment operations
Net investment income .42
Net realized and unrealized gain (loss) on investment and
foreign currencies (.18)
-----------------
Total from investment operations .24
-----------------
Less distributions
Dividends from net investment income --
Distributions in excess of net investment income --
Distributions from net realized capital gains --
Tax return of capital distributions (.40)
-----------------
Total distributions (.40)
-----------------
Redemption fee retained by Fund --
-----------------
Net asset value, end of year $ 7.10
-----------------
-----------------
TOTAL INVESTMENT RETURN(a): 3.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 208,101
Average net assets (000) $ 225,914
Ratios to average net assets:
Expenses, including distribution fees 1.62%
Expenses, excluding distribution fees 1.37%
Net investment income 5.74%
For Class A, B, C, and Z shares:
Portfolio turnover rate 436%
- ------------------------------
(a) Total investment return based on net asset value is calculated assuming a
purchase of shares on the first day and a sale on the last day of each
period reported and includes reinvestment of dividends and distributions.
Total return does not consider the effect of sales load. Dividends and
distributions prior to January 15, 1996 are assumed for purposes of this
calculation to be reinvested at prices obtained under the dividend
reinvestment plan. This calculation does not reflect brokerage commissions.
(b) Calculated based upon weighted average shares outstanding during the year.
(c) Prior to January 15, 1996 the Fund operated as a closed-end investment
company.
See Notes to Financial Statements 29
Prudential Global Total Return Fund, Inc.
Financial Highlights Cont'd.
Class A(c)
- ------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------
1999(b) 1998(b) 1997(b) 1996(c)
- ------------------------------------------------------------------------------------
$ 8.03 $ 7.88 $ 8.38 $ 8.44
- ---------------- ---------------- ---------------- ----------------
.44 .52 .55 .62
(.75) .16 (.18) .32
- ---------------- ---------------- ---------------- ----------------
(.31) .68 .37 .94
- ---------------- ---------------- ---------------- ----------------
(.33) (.35) (.68) (.62)
-- (.02) (.19) (.50)
-- (.16) -- --
(.13) -- -- --
- ---------------- ---------------- ---------------- ----------------
(.46) (.53) (.87) (1.12)
- ---------------- ---------------- ---------------- ----------------
-- -- -- .12
- ---------------- ---------------- ---------------- ----------------
$ 7.26 $ 8.03 $ 7.88 $ 8.38
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
(3.95)% 8.92% 4.55% 13.15%
$257,548 $158,932 $183,054 $229,770
$166,940 $171,427 $204,795 $299,026
1.75% 1.33% 1.39% 1.33%
1.50% 1.18% 1.24% 1.18%
6.00% 6.42% 6.73% 7.01%
132% 46% 43% 32%
30 See Notes to Financial Statements
Prudential Global Total Return Fund, Inc.
Financial Highlights Cont'd.
Class B
-----------------
Year Ended
December 31, 2000
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 7.26
-------
Income from investment operations
Net investment income .37
Net realized and unrealized gain (loss) on investment and
foreign currencies (.17)
-------
Total from investment operations .20
-------
Less distributions
Dividends from net investment income --
Distributions in excess of net investment income --
Distributions from net realized capital gains --
Tax return of capital distributions (.36)
-------
Total distributions (.36)
-------
Redemption fee retained by Fund --
-------
Net asset value, end of period $ 7.10
-------
-------
TOTAL INVESTMENT RETURN(a): 2.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 6,145
Average net assets (000) $ 6,821
Ratios to average net assets:
Expenses, including distribution fees 2.12%
Expenses, excluding distribution fees 1.37%
Net investment income 5.24%
- ------------------------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than a full year are not annualized.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Commencement of offering of Class B shares.
See Notes to Financial Statements 31
Prudential Global Total Return Fund, Inc.
Financial Highlights Cont'd.
Class B
- -----------------------------------------------------------------------------------------
Year Ended December 31, January 15, 1996(d)
- ---------------------------------------------------------- Through
1999(b) 1998(b) 1997(b) December 31, 1996
- -----------------------------------------------------------------------------------------
$ 8.03 $ 7.89 $ 8.39 $ 8.51
------- ------- ------- -------
.40 .46 .49 .57
(.76) .16 (.16) .26
------- ------- ------- -------
(.36) .62 .33 .83
------- ------- ------- -------
(.28) (.30) (.64) (.57)
-- (.02) (.19) (.50)
-- (.16) -- --
(.13) -- -- --
------- ------- ------- -------
(.41) (.48) (.83) (1.07)
------- ------- ------- -------
-- -- -- .12
------- ------- ------- -------
$ 7.26 $ 8.03 $ 7.89 $ 8.39
------- ------- ------- -------
------- ------- ------- -------
(4.35)% 8.13% 3.98% 11.99%
$7,810 $3,625 $2,300 $ 175
$4,642 $3,048 $1,246 $ 52
2.25% 1.93% 1.99% 1.93%(c)
1.50% 1.18% 1.24% 1.18%(c)
5.49% 5.86% 6.13% 6.41%(c)
32 See Notes to Financial Statements
Prudential Global Total Return Fund, Inc.
Financial Highlights Cont'd.
Class C
-----------------
Year Ended
December 31, 2000
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 7.26
-------
Income from investment operations
Net investment income .36
Net realized and unrealized gain (loss) on investment and
foreign currencies (.16)
-------
Total from investment operations .20
-------
Less distributions
Dividends from net investment income --
Distributions in excess of net investment income --
Distributions from net realized capital gains --
Tax return of capital distributions (.36)
-------
Total distributions (.36)
-------
Redemption fee retained by Fund --
-------
Net asset value, end of period $ 7.10
-------
-------
TOTAL INVESTMENT RETURN(a): 2.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 424
Average net assets (000) $ 482
Ratios to average net assets:
Expenses, including distribution fees 2.12%
Expenses, excluding distribution fees 1.37%
Net investment income 5.29%
- ------------------------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than a full year are not annualized.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Figure is actual and not rounded to nearest thousand.
See Notes to Financial Statements 33
Prudential Global Total Return Fund, Inc.
Financial Highlights Cont'd.
Class C
- -----------------------------------------------------------------------------------------
Year Ended December 31, January 15, 1996(d)
- ---------------------------------------------------------- Through
1999(b) 1998(b) 1997(b) December 31, 1996
- -----------------------------------------------------------------------------------------
$ 8.03 $ 7.89 $ 8.39 $ 8.51
------- ------- ------- -------
.40 .46 .49 .57
(.76) .16 (.16) .26
------- ------- ------- -------
(.36) .62 .33 .83
------- ------- ------- -------
(.28) (.30) (.64) (.57)
-- (.02) (.19) (.50)
-- (.16) -- --
(.13) -- -- --
------- ------- ------- -------
(.41) (.48) (.83) (1.07)
------- ------- ------- -------
-- -- -- .12
------- ------- ------- -------
$ 7.26 $ 8.03 $ 7.89 $ 8.39
------- ------- ------- -------
------- ------- ------- -------
(4.35)% 8.13% 3.98% 11.99%
$ 561 $ 275 $ 190 $ 210(e)
$ 354 $ 220 $ 397 $ 204(e)
2.25% 1.93% 1.99% 1.93%(c)
1.50% 1.18% 1.24% 1.18%(c)
5.51% 5.84% 6.05% 6.41%(c)
34 See Notes to Financial Statements
Prudential Global Total Return Fund, Inc.
Financial Highlights Cont'd.
Class Z
---------------------------------------------------
March 17,
1997(d)
Year Ended December 31, Through
---------------------------------- December 31,
2000 1999(b) 1998(b) 1997(b)
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $ 7.27 $ 8.03 $ 7.88 $ 8.32
---------- ------- ------- ------------
Income from investment
operations
Net investment income .43 .42 .52 .39
Net realized and unrealized gain
(loss) on investment and
foreign currencies (.18) (.71) .17 .05
---------- ------- ------- ------------
Total from investment
operations .25 (.29) .69 .44
---------- ------- ------- ------------
Less distributions
Dividends from net investment
income -- (.34) (.36 ) (.69)
Distributions in excess of net
investment income -- -- (.02 ) (.19)
Distributions from net realized
capital gains -- -- (.16 ) --
Tax return of capital
distributions (.42) (.13) -- --
---------- ------- ------- ------------
Total distributions (.42) (.47) (.54 ) (.88)
---------- ------- ------- ------------
Redemption fee retained by Fund -- -- -- --
---------- ------- ------- ------------
Net asset value, end of period $ 7.10 $ 7.27 $ 8.03 $ 7.88
---------- ------- ------- ------------
---------- ------- ------- ------------
TOTAL INVESTMENT RETURN(a): 3.78% (3.74)% 9.07 % 5.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 10,551 $12,847 $2,435 $ 686
Average net assets (000) $ 11,136 $ 4,604 $1,771 $ 257
Ratios to average net assets:
Expenses, including
distribution fees 1.37% 1.50% 1.18 % 1.24%(c)
Expenses, excluding
distribution fees 1.37% 1.50% 1.18 % 1.24%(c)
Net investment income 5.98% 6.11% 6.65 % 5.41%(c)
- ------------------------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than a full year are not annualized.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Commencement of offering of Class Z shares.
See Notes to Financial Statements 35
Prudential Global Total Return Fund, Inc.
Report of Independent Accountants
To the Shareholders and Board of Directors of
Prudential Global Total Return Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Global Total Return
Fund, Inc. (the 'Fund') at December 31, 2000, 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 four years in
the period then ended, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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, 2000 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion. The accompanying financial highlights for the
year ended December 31, 1996 were audited by other independent accountants,
whose opinion dated February 14, 1997 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 26, 2001
36
Prudential Global Total Return Fund, Inc.
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Fund's fiscal year end (December 31, 2000) as to the federal tax status
of distributions paid by the Fund during such fiscal year. Accordingly, during
its fiscal year ended December 31, 2000, the Fund paid distributions of $.400
per Class A share, $.364 per Class B share, $.364 per Class C share and $.420
per Class Z share representing dividends as a return of capital.
We wish to advise you that the dividends received deduction for the Fund
is zero. Only funds that invest in U.S. equity securities are entitled to
pass-through a corporate dividends received deduction.
37
Prudential Global Total Return Fund, Inc.
Prudential Mutual Funds
Prudential offers a broad range of mutual funds designed to
meet your individual needs. For information about these funds,
contact your financial professional or call us at (800) 225-1852.
Read the prospectus carefully before you invest or send money.
STOCK FUNDS
Large Capitalization Stock Funds
Prudential 20/20 Focus Fund
Prudential Equity Fund, Inc.
Prudential Stock Index Fund
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Prudential Value Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Small- to Mid-Capitalization Stock Funds
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Prudential Small Company Fund, Inc.
Prudential Tax-Managed Small-Cap Fund, Inc.
Prudential U.S. Emerging Growth Fund, Inc.
Target Funds
Small Capitalization Growth Fund
Small Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Equity Opportunity Fund
Sector Stock Funds
Prudential Natural Resources Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Global/International Stock Funds
Global Utility Fund, Inc.
Prudential Europe Growth Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Target Funds
International Equity Fund
Strategic Partners Series
Strategic Partners Focused Growth Fund
Strategic Partners New Era Growth Fund
BALANCED/ALLOCATION FUNDS
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
www.prudential.com (800) 225-1852
BOND FUNDS
Taxable Bond Funds
Prudential Government Income Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Short-Term Corporate Bond Fund, Inc.
Income Portfolio
Prudential Total Return Bond Fund, Inc.
Target Funds
Total Return Bond Fund
Tax-Free Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
New Jersey Series
New York Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global/International Bond Funds
Prudential Global Total Return Fund, Inc.
MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Money Market Series
Tax-Free Money Market Funds
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
New Jersey Money Market Series
New York Money Market Series
Prudential Tax-Free Money Fund, Inc.
Other Money Market Funds
COMMAND Government Fund
COMMAND Money Fund
COMMAND Tax-Free Fund
Prudential Global Total Return Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--or other
financial materials--and stumbled across a word that you
don't understand?
Many shareholders have run into the same problem. We'd like
to help. So we'll use this space from time to time to
explain some of the words you might have read, but not
understood. And if you have a favorite word that no one can
explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one
percent is 50 basis points.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed
bonds that separate mortgage pools into different maturity
classes called tranches. These instruments are sensitive to
changes in interest rates and homeowner refinancing
activity. They are subject to prepayment and maturity
extension risk.
Derivatives: Securities that derive their value from other
securities. The rate of return of these financial
instruments rises and falls--sometimes very suddenly--in
response to changes in some specific interest rate,
currency, stock, or other variable.
Discount Rate: The interest rate charged by the Federal
Reserve on loans to member banks.
Federal Funds Rate: The interest rate charged by one bank to
another on overnight loans.
Futures Contract: An agreement to purchase or sell a
specific amount of a commodity or financial instrument
at a set price at a specified date in the future.
www.prudential.com (800) 225-1852
Leverage: The use of borrowed assets to enhance return. The
expectation is that the interest rate charged on borrowed
funds will be lower than the return on the investment. While
leverage can increase profits, it can also magnify losses.
Liquidity: The ease with which a financial instrument (or
product) can be bought or sold (converted into cash) in the
financial markets.
Price/Earnings Ratio: The price of a share of stock divided
by the earnings per share for a 12-month period.
Option: An agreement to purchase or sell something, such as
shares of stock, by a certain time for a specified price. An
option need not be exercised.
Spread: The difference between two values; often used to
describe the difference between "bid" and "asked" prices of a security,
or between the yields of two similar maturity bonds.
Yankee Bond: A bond sold by a foreign company or government
on the U.S. market and denominated in U.S. dollars.
Prudential Global Total Return Fund, Inc.
Class A Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 12/31/00
One Year Five Years Ten Years Since Inception (7/7/86)
With Sales Charge -0.65% 4.22% 6.46% 8.56%
Without Sales Charge 3.49% 5.07% 6.90% 8.87%
Past performance is not indicative of future results.
Principal and investment return will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less
than their original cost. The best- and worst-year
information within the graph is designed to give you an idea
of how much the Fund's returns can fluctuate from year to
year by measuring the best and worst calendar years in terms
of total annual return for the ten-year period. The graph
compares a $10,000 investment in the Prudential Global Total
Return Fund, Inc. (Class A shares) with a similar investment
in the J.P. Morgan Government Bond Index/Global (the GBI) by
portraying the initial account values at 12/31/90, and the
account values at the end of the current fiscal year (December
31, 2000), as measured on a quarterly basis. For
purposes of the graph, and unless otherwise indicated, it
has been assumed that (a) the maximum front-end sales charge
was deducted from the initial $10,000 investment in Class A
shares; (b) all recurring fees (including management fees)
were deducted; and (c) all dividends and distributions were
reinvested. The GBI is an unmanaged, market-weighted index of
total return of government bonds of the following nations:
Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, the United Kingdom, and the United States. The GBI is
traded, unhedged, and measured in U.S. dollars. The GBI's
total returns include the reinvestment of all dividends, but
do not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the
GBI may differ substantially from the securities in the
Fund. The GBI is not the only index that may be used to
characterize performance of global bond funds. Other indexes
may portray different comparative performance. Investors
cannot invest directly in an index.
This graph is furnished to you in accordance with SEC
regulations.
www.prudential.com (800) 225-1852
Class B Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 12/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge -2.18% N/A N/A 4.23%
Without Sales Charge 2.82% N/A N/A 4.40%
Past performance is not indicative of future results.
Principal and investment return will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less
than their original cost. The best- and worst-year information
within the graph is designed to give you an idea of how much
the Fund's returns can fluctuate from year to year by measuring
the best and worst calendar years in terms of total
annual return since inception of the share class. The graph
compares a $10,000 investment in the Prudential Global Total
Return Fund, Inc. (Class B shares) with a similar investment
in the GBI by portraying the initial account values at the
commencement of operations of Class B shares, and the account
values at the end of the current fiscal year (December 31, 2000),
as measured on a quarterly basis. For purposes of the graph,
and unless otherwise indicated, it has been assumed that (a)
the applicable contingent deferred sales charge was deducted
from the value of the investment in Class B shares, assuming
full redemption on December 31, 2000; (b) all recurring fees
(including management fees) were deducted; and (c) all
dividends and distributions were reinvested. Class B shares
will automatically convert to Class A shares, on a quarterly
basis, beginning approximately seven years after purchase.
The GBI is an unmanaged, market-weighted index of total
return of government bonds of the following nations:
Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, the United Kingdom, and the United States. The GBI is
traded, unhedged, and measured in U.S. dollars. The GBI's
total returns include the reinvestment of all dividends, but
do not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the
GBI may differ substantially from the securities in the
Fund. The GBI is not the only index that may be used to
characterize performance of global bond funds. Other
indexes may portray different comparative performance.
Investors cannot invest directly in an index.
This graph is furnished to you in accordance with SEC
regulations.
Prudential Global Total Return Fund, Inc.
Class C Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 12/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge 0.79% N/A N/A 4.19%
Without Sales Charge 2.82% N/A N/A 4.40%
Past performance is not indicative of future results.
Principal and investment return will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less
than their original cost. The best- and worst-year
information within the graph is designed to give you an idea
of how much the Fund's returns can fluctuate from year to
year by measuring the best and worst calendar years in terms
of total annual return since inception of the share class. The
graph compares a $10,000 investment in the Prudential Global Total
Return Fund, Inc. (Class C shares) with a similar investment
in the GBI by portraying the initial account values at the
commencement of operations of Class C shares, and the
account values at the end of the current fiscal year (December 31,
2000), as measured on a quarterly basis. For purposes of the
graph, and unless otherwise indicated, it has been assumed
that (a) the front-end sales charge was deducted from the
initial $10,000 investment in Class C shares; (b) the
applicable contingent deferred sales charge was deducted
from the value of the investment in Class C shares, assuming
full redemption on December 31, 2000; (c) all recurring fees
(including management fees) were deducted; and (d) all
dividends and distributions were reinvested.
The GBI is an unmanaged, market-weighted index of total return
of government bonds of the following nations: Australia, Belgium,
Canada, Denmark, France, Germany, Italy, Japan, the United Kingdom,
and the United States. The GBI is traded, unhedged, and
measured in U.S. dollars. The GBI's total returns include the
reinvestment of all dividends, but do not include the effect
of sales charges or operating expenses of a mutual fund.
The securities that comprise the GBI may differ substantially
from the securities in the Fund. The GBI is not the only index
that may be used to characterize performance of global bond funds.
Other indexes may portray different comparative performance. Investors
cannot invest directly in an index.
This graph is furnished to you in accordance with SEC
regulations.
www.prudential.com (800) 225-1852
Class Z Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 12/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge 3.78% N/A N/A 3.76%
Without Sales Charge 3.78% N/A N/A 3.76%
Past performance is not indicative of future results.
Principal and investment return will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less
than their original cost. The best- and worst-year
information within the graph is designed to give you an idea
of how much the Fund's returns can fluctuate from year to
year by measuring the best and worst calendar years in terms
of total annual return since inception of the share class. The
graph compares a $10,000 investment in the Prudential Global Total
Return Fund, Inc. (Class Z shares) with a similar investment
in the GBI by portraying the initial account values at the
commencement of operations of Class Z shares, and the account
values at the end of the current fiscal year (December 31, 2000),
as measured on a quarterly basis. For purposes of the graph,
and unless otherwise indicated, it has been assumed that (a)
all recurring fees (including management fees) were deducted;
and (b) all dividends and distributions were reinvested.
Class Z shares are not subject to a sales charge or distribution
and service (12b-1) fees.
The GBI is an unmanaged, market-weighted index of total return of
government bonds of the following nations: Australia, Belgium,
Canada, Denmark, France, Germany, Italy, Japan, the United Kingdom,
and the United States. The GBI is traded, unhedged, and measured
in U.S. dollars. The GBI's total returns include the reinvestment
of all dividends, but do not include the effect of sales charges
or operating expenses of a mutual fund. The securities that
comprise the GBI may differ substantially from the securities in
the Fund. The GBI is not the only index that may be used to
characterize performance of global bond funds. Other indexes
may portray different comparative performance. Investors
cannot invest directly in an index.
This graph is furnished to you in accordance with SEC
regulations.
FOR MORE INFORMATION
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Visit Prudential's website at:
http://www.prudential.com
Directors
Saul K. Fenster
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
W. Scott McDonald, Jr.
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
Judy A. Rice
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
David R. Odenath, Jr., President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Marguerite E.H. Morrison, Secretary
William V. Healey, Assistant Secretary
Manager
Prudential Investments
Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment
Management Services LLC
Three Gateway Center, 14th Floor
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 8098
Philadelphia, PA 19101
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
Fund Symbols NASDAQ CUSIP
Class A GTRAX 744337106
Class B PBTRX 744337205
Class C PCTRX 744337304
Class Z PZTRX 744337403
MF169E
(LOGO) Printed on Recycled Paper
ANNUAL REPORT DECEMBER 31, 2000
Prudential
International Bond Fund, Inc.
Fund Type Global debt
Objective Total return, made up of current income and capital appreciation
(GRAPHIC)
This report is not authorized for distribution to
prospective investors unless preceded or
accompanied by a current prospectus.
The views expressed in this report and information
about the Fund's portfolio holdings are for the
period covered by this report and are subject to
change thereafter.
(LOGO)
Build on the Rock
Investment Goals and Style
The Prudential International Bond Fund seeks total
return made up of current income and capital
appreciation. The Fund invests primarily in
intermediate- and long-term investment-grade debt
securities of issuers outside the United States.
However, up to 35% of total investments can be in
U.S. securities. The Fund may invest in debt
securities of developed and developing countries.
It may also invest up to 15% of total assets in
bonds rated below investment grade, with a minimum
rating of "B" by Standard & Poor's or Moody's
Investors Service, or of comparable quality in our
view. Lower-rated securities carry a greater risk
of loss of principal and interest than higher-rated
securities. There are special risks associated with
foreign investing, including social, political and
currency risks, as well as potential illiquidity.
There can be no assurance that the Fund will
achieve its investment objective.
Ten Largest Issuers
Expressed as a percentage of
net assets as of 12/31/00
15.1% Government of Japan
15.1 United States Treasury Notes
6.8 Republic of Austria
6.3 Government of Sweden
5.4 Government of Germany
5.0 Government of Canada
3.8 Republic of Italy
3.2 Osprey Trust
2.8 Federal National
Mortgage Association
2.8 Korea Electric Power Corp.
Holdings are subject to change.
www.prudential.com (800) 225-1852
Performance at a Glance
Cumulative Total Returns1 As of 12/31/00
One Five Ten Since
Year Years Years Inception2
Class A 2.82% 25.59% 93.94% 161.88%
Class B 2.54 N/A N/A 22.13
Class C 2.54 N/A N/A 22.13
Class Z 3.27 N/A N/A 12.40
Lipper Global Income Fund Avg.3 3.63 23.03 81.97 ***
Average Annual Total Returns1 As of 12/31/00
One Five Ten Since
Year Years Years Inception2
Class A -1.29% 3.81% 6.41% 7.11%
Class B -2.46 N/A N/A 3.94
Class C 0.52 N/A N/A 3.90
Class Z 3.27 N/A N/A 3.13
Distributions and Yields As of 12/31/00
Total Distributions 30-Day
Paid for 12 Months SEC Yield
Class A $0.43 4.06%
Class B $0.39 4.22
Class C $0.39 4.18
Class Z $0.45 4.47
Past performance is not indicative of future
results. Principal and investment return will
fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their
original cost. Past performance numbers, with the
exception of one-year returns, do not fully reflect
the higher operating expenses incurred since the
Fund commenced operations as an open-end mutual
fund on January 15, 1996. If these expenses had
been applied since the Fund's inception, past
performance returns would have been lower. Prior to
January 15, 1996, the Fund operated as a closed-end
fund with shares being traded on the New York Stock
Exchange.
1 Source: Prudential Investments Fund Management
LLC and Lipper Inc. The cumulative total returns do
not take into account sales charges. The average
annual total returns do take into account
applicable sales charges. The Fund charges a
maximum front-end sales charge of 4% for Class A
shares. Class B shares are subject to a declining
contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1%, and 1% for six years. Class B shares
will automatically convert to Class A shares, on a
quarterly basis, approximately seven years after
purchase. Class C shares are subject to a front-end
sales charge of 1% and a CDSC of 1% for 18 months.
Class Z shares are not subject to a sales charge or
distribution and service (12b-1) fees.
2 Inception dates: Class A, 7/31/87; Class B and
Class C, 1/15/96; and Class Z, 3/17/97.
3 Lipper average returns are for all funds in each
share class for the one- , five- , and ten-year
periods in the Global Income Fund category. The
Lipper average is unmanaged. Funds in the Global
Income category invest primarily in U.S. dollar
debt securities of issuers located in at least
three countries, one of which may be the United
States.
*** Lipper Since Inception returns are 151.51% for
Class A, 21.25% for Class B and Class C, and 13.34%
for Class Z, based on all funds in each share
class.
1
(LOGO) February 15, 2001
DEAR SHAREHOLDER,
Prices in many global bond markets finished 2000
solidly higher, with much of their gains posted in
the second half of the year. A more favorable
outlook for monetary policy in several regions
around the world contributed heavily to the
improvement in global bond markets.
Initially, the Federal Reserve (the Fed) and the
European Central Bank (ECB) had repeatedly
increased short-term rates to cool off their
respective economies and prevent higher inflation.
This trend, particularly in the first half of the
year, often exerted downward pressure on bond
prices, which move in the opposite direction of
interest rates.
Late in the year, U.S. and European economic growth
had slowed to the point that there was talk the Fed
and the ECB might cut short-term rates to bolster
economic growth in their respective domains.
Expectation of lower rates led many investors to
accept lower yields and pay higher prices for
global bonds.
The Prudential International Bond Fund benefited
from the rally in global bond prices. However,
its emphasis on low-volatility corporate bonds and
certain currency exposure detracted from its returns.
Consequently, the Fund's Class A shares returned 2.82%
in 2000, which is -1.29% for those subject to the initial
sales charge. By comparison, the Lipper Global Income
Fund Average, which is not subject to sales charges,
returned 3.63% for the year.
We explain the Fund's investments on the following pages.
Sincerely,
David R. Odenath, Jr., President
Prudential International Bond Fund, Inc.
2
Prudential International Bond Fund, Inc.
Annual Report December 31, 2000
INVESTMENT ADVISER'S REPORT
Global bond markets ended 2000 on a strong note
after battling back from a challenging first half
of the year. A change in the outlook for monetary
policy in the United States and Europe, among others,
was a primary catalyst behind solid gains in global
bond prices later in the year.
The first half of the year proved difficult for
global bonds as economies in the United States
and abroad expanded more rapidly than expected.
To curb economic growth and check inflation, some
central banks increased short-term interest rates.
Raising rates can slow economic momentum by encouraging
higher borrowing costs for consumers and businesses.
The Fed increased the federal funds rate (the rate
U.S. banks charge each other for overnight loans)
in February, March, and May 2000 by a total of one
percentage point. The ECB raised its key interest
rate by a total of 1.75 percentage points over the
course of the year, while the Bank of Japan (BOJ)
hiked its key rate by a quarter percentage point in
August 2000. In anticipation of these moves,
investors demanded higher yields in many bond
markets, sending bond prices lower.
However, reports released in June indicated that
repeated short-term rate hikes were beginning to
rein in U.S. economic growth. This data and the
Fed's decision to leave rates unchanged in June
boosted bond prices in the United States and
overseas--especially in emerging markets.
Favoring low-volatility corporate bonds
Because the Fund's goal is to achieve stable,
attractive returns, the majority of its holdings
are in intermediate-term bonds, whose prices tend
to be less volatile than the prices of longer-term
bonds. The Prudential Global Sector team seeks to
add value to the Fund by carefully selecting
intermediate-term corporate bonds that will deliver
higher returns than government bonds without
incurring significant volatility. In 2000, however,
government bonds
3
Prudential International Bond Fund, Inc.
Annual Report December 31, 2000
unexpectedly outperformed corporate bonds, which
were hurt by tighter liquidity conditions and rising
default rates. Our preference for low-volatility
debt securities also meant that the Fund did not
benefit as fully from the solid global bond market
rally that occurred later in the year. While our
portfolio positioning detracted from the Fund's
performance relative to its benchmark Lipper
Average, we believe corporate bonds will perform
better than government bonds in 2001.
Meanwhile, in the second half of 2000, the repeated
short-term rate hikes, higher energy prices, and
weakness in the stock market took their toll on
economic growth in the United States. As the U.S.
economy rapidly lost steam late in the year, many
investors believed the Fed would soon cut short-
term rates to keep the economic expansion on track.
Short-term rates were also expected to decline in
many European countries and in Australia.
Anticipation of lower short-term rates led
investors to accept sharply lower yields in many
global bond markets, which boosted bond prices. By
December 29, 2000, the yield on five-year U.S.
Treasuries stood at 4.97%, down 137 basis points
from the end of 1999. (A basis point is one-
hundredth of a percent.) The yield on five-year
German government bonds stood at 4.51%, down 29
basis points.
WEAK EURO DETRACTED FROM FUND RETIRNS
On the currency front, most of the Fund's holdings
remained hedged into U.S. dollars. However, the
Fund had a partially unhedged exposure to the euro
that hurt the Fund's relative performance. The
single European currency finished the year 2000
down roughly 6.50% versus the U.S. dollar, despite
gains in the final three months of the year. The
euro strengthened in the fourth quarter as some
analysts expect economic growth in the euro zone
to exceed that of the United States in 2001.
Meanwhile, we eliminated the Fund's exposure to the
Japanese yen in the fourth quarter of 2000 as that
currency lost approximately12% against the U.S. dollar
during the year.
4
www.prudential.com (800) 225-1852
LOOKING AHEAD
We believe the euro still has considerable room to
appreciate against the U.S. dollar. We therefore
plan to maintain a significant exposure to the euro
if this trend continues.
In contrast, we expect the Japanese yen to weaken
further in 2001, hurt by investment flows out of
Japan, low investment returns, and a lingering
financial crisis in Japan. Given the deflationary
economic conditions in Japan, we believe the BOJ
will not increase short-term rates in the near
future. With this in mind, we recently increased
the Fund's Japanese government bond position, which
is hedged back into U.S. dollars.
The Fed engineered two half-percentage-point
reductions in the federal funds rate that lowered
it to 5.50% from 6.50% in January 2001. The Fed cut
the key rate in an effort to revitalize the sagging
economy. But because the economy continues to
"flirt" with recession and inflation remains under
control, the central bank is widely expected to
continue easing monetary policy aggressively.
Until the Fed has finished reducing rates,
government bond yields could decline further.
However, we believe U.S. economic growth will
stabilize, and government bond yields will rise
moderately by the end of the year. In this market
environment, corporate bonds and emerging market
bonds should perform well relative to government
bonds.
Prudential International Bond Fund Management Team
PROPOSED REORGANIZATION
A proposal to merge the Prudential International
Bond Fund's assets with those of the Prudential
Global Total Return Fund will be put to a
shareholder vote at a special meeting of Prudential
International Bond Fund's shareholders on April 19,
2001. If approved, the merger is scheduled to take
place on April 27, 2001.
5
Prudential International Bond Fund, Inc.
Annual Report December 31, 2000
Financial
Statements
Prudential International Bond Fund, Inc.
Portfolio of Investments as of December 31, 2000
Principal
Amount US$
(000) Description Value (Note 1)
- ---------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 94.1%
- -------------------------------------------------------------------------------------
Canada 5.0%
Government of Canada,
C$ 1,177 5.75%, 9/1/06 $ 801,299
2,194 6.00%, 9/1/05 1,503,178
660 8.75%, 12/1/05 503,515
--------------
2,807,992
- -------------------------------------------------------------------------------------
Denmark 1.3%
DKK 6,040 Kingdom of Denmark,
5.00%, 8/15/05 753,899
- -------------------------------------------------------------------------------------
Eurobonds 26.9%
EURO 370 Callahan Nordrhein Westfalen (Denmark),
14.00%, 7/15/10 302,954
760 Depfa Bank AG,
5.50%, 2/12/08 718,456
370 Flag Telecom Holdings Ltd. (Belgium),
11.625%, 3/30/10 313,799
2,920 Government of Germany,
6.25%, 1/4/24 3,013,057
700 French Government Bonds,
8.50%, 4/25/23 903,048
1,440 Kingdom of Belgium,
5.50%, 3/28/28 1,295,365
325 Kingdom of Spain,
5.40%, 7/30/11 298,314
705 Level 3 Communications,
10.75%, 3/15/08 551,012
257 Neste Chemicals International Oy (Finland),
12.25%, 8/15/10 204,094
490 Netia Holdings BV (Netherlands),
13.75%, 6/15/10 393,459
1,912 Osprey Trust,
6.375%, 1/15/03 1,801,525
See Notes to Financial Statements 7
Prudential International Bond Fund, Inc.
Portfolio of Investments as of December 31, 2000 Cont'd.
Principal
Amount US$
(000) Description Value (Note 1)
- ---------------------------------------------------------------------------------------
Republic of Austria,
EURO 3,630 3.40%, 10/20/04 $ 3,229,935
690 4.00%, 7/15/09 591,869
Republic of Italy,
605 6.75%, 7/1/07 616,062
812 6.00%, 5/1/31 781,969
--------------
15,014,918
- -------------------------------------------------------------------------------------
Greece 0.7%
GRD 131,000 Republic of Greece,
6.50%, 10/22/19 377,664
- -------------------------------------------------------------------------------------
Japan 16.2%
Y 70,000 Banque Cent De Tunisie,
3.30%, 8/2/10 597,691
Government of Japan,
445,000 0.60%, 11/20/02 3,883,354
133,000 1.20%, 12/20/05 1,171,304
246,000 1.80%, 6/20/08 2,213,046
133,000 1.80%, 6/21/10 1,174,120
--------------
9,039,515
- -------------------------------------------------------------------------------------
New Zealand 5.0%
NZ$ 3,500 Federal National Mortgage Assocation,
7.25%, 6/20/02 1,561,696
2,500 Government of New Zealand,
8.00%, 11/15/06 1,209,422
--------------
2,771,118
- -------------------------------------------------------------------------------------
Russia 0.2%
RUB 4,500 European Bank for Reconstruction Development,
Zero Coupon, 5/28/02 119,660
- -------------------------------------------------------------------------------------
Sweden 6.3%
SEK 31,820 Government of Sweden,
6.00%, 2/9/05 3,536,746
8 See Notes to Financial Statements
Prudential International Bond Fund, Inc.
Portfolio of Investments as of December 31, 2000 Cont'd.
Principal
Amount US$
(000) Description Value (Note 1)
- ---------------------------------------------------------------------------------------
United Kingdom 1.4%
BP 500 Abbey National Treasury,
8.00%, 4/2/03 $ 777,080
- -------------------------------------------------------------------------------------
United States 31.1%
Corporate Bonds 9.7%
US$ 300 Chonhung Bank (Korea),
11.903%, 1/7/05 289,500
945 Fideicomiso Petacalco (Mexico),
10.16%, 12/23/09 926,100
160 Hanvit Bank (Korea),
12.75%, 3/1/10 160,000
500 Industrial Bank of Korea,
8.375%, 9/30/02 511,000
980 Korea Development Bank,
6.625%, 11/21/03 963,830
Korea Electric Power Corp,
219 7.00%, 10/1/02 218,253
1,360 6.375%, 12/1/03 1,320,560
555 Partner Communications Co. Ltd.,
13.00%, 8/15/10 477,300
300 Philippine Long Distance Telephone Co.
(Philippines),
10.50%, 4/15/09 252,000
300 Sakura Capital Funding (Cayman),
7.477%, 9/29/49 287,844
--------------
5,406,387
- -------------------------------------------------------------------------------------
Sovereign Bonds 5.2%
400 Embotelladora Andina SA (Chile),
7.875%, 10/1/97 302,538
500 Oman Sultanate (India),
7.125%, 3/20/02 498,750
750 Republic of Bulgaria,
3.00%, 7/28/12 555,000
500 Republic of Columbia,
7.25%, 2/23/04 431,000
See Notes to Financial Statements 9
Prudential International Bond Fund, Inc.
Portfolio of Investments as of December 31, 2000 Cont'd.
Principal
Amount US$
(000) Description Value (Note 1)
- ---------------------------------------------------------------------------------------
$ 787 Republic of Croatia, FRN,
7.75%, 7/31/06 $ 749,393
400 Republic of Lithuania,
7.125%, 7/22/02 397,000
--------------
2,933,681
- -------------------------------------------------------------------------------------
U.S. Government Obligations 16.2%
570 United States Treasury Bonds,
6.625%, 2/15/27 651,048
United States Treasury Notes,
4,410 5.625%, 5/15/08 4,525,763
3,550 6.50%, 2/15/10 3,883,913
--------------
9,060,724
--------------
Total United States 17,400,792
--------------
Total long-term investments (cost US$52,559,681) 52,599,384
--------------
SHORT-TERM INVESTMENTS 5.4%
- -------------------------------------------------------------------------------------
Eurobonds 1.3%
EURO 800 Republic of Italy,
4.50%, 7/1/01 743,169
- -------------------------------------------------------------------------------------
Hungary 0.5%
HUF 80,000 Government of Hungary,
15.00%, 7/24/01 286,836
- -------------------------------------------------------------------------------------
United States 3.6%
Sovereign Bonds 0.2%
US$ 92 Republic of Brazil, FRN,
7.875%, 1/1/01 92,250
- -------------------------------------------------------------------------------------
U.S. Government Obligations 0.1%
65 United States Treasury Bills,(a)
Zero Coupon, 4/12/01 63,897
10 See Notes to Financial Statements
Prudential International Bond Fund, Inc.
Portfolio of Investments as of December 31, 2000 Cont'd.
Shares Description Value (Note 1)
- ----------------------------------------------------------------------------------------
Money Market Fund 3.3%
1,826,555 Prudential Core Investment Fund Taxable Money
Market Series $ 1,826,555
--------------
Total short-term investments (cost US$3,058,313) 3,012,707
--------------
Total Investments 99.5% (cost $55,617,994; Note 4) 55,612,091
Other assets in excess of liabilities--0.5% 266,824
--------------
Net Assets 100% $ 55,878,915
--------------
--------------
- ------------------------------
Portfolio securities are classified according to the security's currency
denomination.
AG--Aktiengesellschaft (German Company).
BV--Beloten Vennootschap (Dutch Company).
FRN--Floating Rate Note, rate shown as of December 31, 2000.
Oy--Osakeyhtio (Finnish Company).
SA-- Sociedad Anonima (Spanish Corporation), or Societe Anonyme, (French
Corporation).
C$--Canadian Dollar.
DKK--Danish Krone.
EURO--Euro.
GRD--Greek Drachma.
HUF--Hungarian Forint.
Y--Japanese Yen.
NZ$--New Zealand Dollar.
BP--Pound Sterling.
RUB--Russian Ruble.
SEK--Swedish Krona.
(a) Security segregated as collateral for futures contracts.
The industry classification of portfolio holdings and other assets shown as a
percentage of net assets as of December 31, 2000 was as follows:
Foreign Government Securities.......................................... 59.9%
U.S. Government Securities............................................. 16.3
Financial Services..................................................... 8.6
Banks.................................................................. 7.4
Telecommunications..................................................... 3.6
Utilities.............................................................. 2.8
Cable.................................................................. 0.5
Chemicals.............................................................. 0.4
Other assets in excess of liabilities.................................. 0.5
-----
100.0%
-----
-----
See Notes to Financial Statements 11
Prudential International Bond Fund, Inc.
Statement of Assets and Liabilities
December 31, 2000
- ---------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $55,617,994) $55,612,091
Foreign currency, at value (cost $74,976) 75,460
Unrealized appreciation on forward currency contracts 2,163,810
Interest receivable 1,120,827
Receivable for investments sold 52,500
Receivable for Fund shares sold 3,867
Other assets 2,714
-----------------
Total assets 59,031,269
-----------------
LIABILITIES
Payable to custodian 53,720
Unrealized depreciation on forward currency contracts 2,557,139
Accrued expenses and other liabilities 303,210
Payable for Fund shares reacquired 116,283
Income distribution payable 73,909
Management fee payable 35,208
Distribution fee payable 11,166
Due from broker-variation margin 1,719
-----------------
Total liabilities 3,152,354
-----------------
NET ASSETS $55,878,915
-----------------
-----------------
Net assets were comprised of:
Common stock, at par $ 91,519
Paid-in capital in excess of par 58,361,462
-----------------
58,452,981
Distributions in excess of net investment income (205,481)
Accumulated net realized loss on investments and foreign
currency transactions (1,984,754)
Net unrealized depreciation on investments and foreign
currencies (383,831)
-----------------
Net assets, December 31, 2000 $55,878,915
-----------------
-----------------
12 See Notes to Financial Statements
Prudential International Bond Fund, Inc.
Statement of Assets and Liabilities Cont'd.
December 31, 2000
- ---------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($51,239,374 / 8,394,573 shares of common stock
issued and outstanding) $6.10
Maximum sales charge (4% of offering price) .25
-----------------
Maximum offering price to public $6.35
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per
share ($1,736,346 / 282,843 shares of common stock
issued and outstanding) $6.14
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($143,656 / 23,401 shares of common stock issued and
outstanding) $6.14
Sales charge (1% of offering price) .06
-----------------
Offering price to public $6.20
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per
share ($2,759,539 / 451,114 shares of common stock
issued and outstanding) $6.12
-----------------
-----------------
See Notes to Financial Statements 13
Prudential International Bond Fund, Inc.
Statement of Operations
Year
Ended
December 31, 2000
- ---------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of foreign withholding taxes of $2,743) $ 4,411,637
-----------------
Expenses
Management fee 453,807
Distribution fee--Class A 138,976
Distribution fee--Class B 10,156
Distribution fee--Class C 1,038
Custodian's fees and expenses 205,000
Transfer agent's fees and expenses 188,000
Reports to shareholders 115,000
Legal fees and expenses 40,000
Audit fees 36,000
Registration fees 30,000
Directors' fees and expenses 11,000
Miscellaneous 6,015
-----------------
Total expenses 1,234,992
-----------------
Net investment income 3,176,645
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Net realized loss on:
Investment transactions (1,403,990)
Foreign currency transactions (4,429,291)
-----------------
(5,833,281)
-----------------
Net change in unrealized appreciation/depreciation on:
Investments 4,202,704
Foreign currencies (1,976)
Financial futures contracts (15,984)
-----------------
4,184,744
-----------------
Net loss on investments and foreign currencies (1,648,537)
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,528,108
-----------------
-----------------
14 See Notes to Financial Statements
Prudential International Bond Fund, Inc.
Statement of Changes in Net Assets
Year Ended December 31,
---------------------------------
2000 1999
- ----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 3,176,645 $ 4,440,549
Net realized loss on investment and foreign
currency transactions (5,833,281) (3,500,819)
Net change in unrealized
appreciation/depreciation on investments
and foreign currency transactions 4,184,744 (4,500,538)
----------------- ------------
Net increase (decrease) in net assets
resulting from operations 1,528,108 (3,560,808)
----------------- ------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A -- (2,402,993)
Class B -- (43,976)
Class C -- (6,974)
Class Z -- (97,964)
----------------- ------------
-- (2,551,907)
----------------- ------------
Distributions from net realized gains
Class A -- (946,356)
Class B -- (18,501)
Class C -- (3,103)
Class Z -- (31,869)
----------------- ------------
-- (999,829)
----------------- ------------
Tax return of capital distributions
Class A (3,913,349) (2,195,215)
Class B (112,190) (47,298)
Class C (10,950) (7,507)
Class Z (217,957) (83,223)
----------------- ------------
(4,254,446) (2,333,243)
----------------- ------------
See Notes to Financial Statements 15
Prudential International Bond Fund, Inc.
Statement of Changes in Net Assets Cont'd.
Year Ended December 31,
---------------------------------
2000 1999
- ----------------------------------------------------------------------------------
Fund share transactions (net of share
conversions)
(Note 5)
Net proceeds from shares sold $ 3,838,993 $ 6,001,617
Net asset value of shares issued in
reinvestment of dividends and
distributions 1,651,081 2,006,537
Cost of shares reacquired (15,319,317) (17,864,198)
----------------- ------------
Decrease in net assets from Fund share
transactions (9,829,243) (9,856,044)
----------------- ------------
Total decrease (12,555,581) (19,301,831)
NET ASSETS
Beginning of year 68,434,496 87,736,327
----------------- ------------
End of year $ 55,878,915 $ 68,434,496
----------------- ------------
----------------- ------------
16 See Notes to Financial Statements
Prudential International Bond Fund, Inc.
Notes to Financial Statements
Prudential International Bond Fund, Inc., (the 'Fund'), is an open-end,
nondiversified management investment company. The Fund's investment objective is
to seek total return, made up of current income and capital appreciation. The
Fund invests primarily in debt securities of issuers located in at least three
countries, excluding the United States (except in periods of weakness). The Fund
invests in foreign debt securities issued by foreign corporate issuers as well
as securities issued or guaranteed by foreign governments, semi-governmental
entities, governmental agencies, supernational entities and other governmental
entities. The bonds are primarily of investment grade, i.e., bonds rated within
the four highest quality grades as determined by Moody's Investor's Service or
Standard & Poor's Rating's Group, or in unrated securities of equivalent
quality. In addition, the Fund is permitted to invest up to 15% of the it's
total assets in bonds rated below investment grade with a minimum rating of B,
or in unrated securities of equivalent quality. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country or region.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: In valuing the Fund's assets, quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the then current currency value. Portfolio securities that are
actively traded in the over-the-counter market, including listed securities for
which the primary market is believed to be over-the-counter, are valued on the
basis of valuations provided by an independent pricing agent or principal market
maker. Any security for which the primary market is on an exchange or NASDAQ
National Market System securities are valued at the last sale price on such
exchange on the day of valuation or, if there was no sale on such day, at the
mean between the last bid and asked prices on such day or at the last bid price
on such day in the absence of an asked price. Forward currency contracts are
valued at the current cost of covering or offsetting the contract on the day of
valuation. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
All securities are valued as of 4:15 p.m., New York time.
17
Prudential International Bond Fund, Inc.
Notes to Financial Statements Cont'd.
Repurchase Agreement: 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 on investment transactions.
Net realized gains or losses on foreign currency transactions represent
net foreign exchange gains or losses from sales and maturities of short-term
securities and forward currency contracts, disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest,
discount and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net currency gains and
losses resulting from the valuing of foreign currency denominated assets
(excluding investments) and liabilities at year-end exchange rates are reflected
as a component of net unrealized appreciation or depreciation on investments and
foreign currencies.
18
Prudential International Bond Fund, Inc.
Notes to Financial Statements Cont'd.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. companies
as a result of, among other factors, the possibility of political or economic
instability and the level of governmental supervision and regulation of foreign
securities markets.
Forward Currency Contracts: A forward currency contract is a commitment
to purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments and foreign currencies. Gain or loss is realized on
the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currency
transactions. Risks may arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
Security Transactions and Net Investment Income: Security transactions
are recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income, which is comprised of three elements: stated coupon, original
issue discount and market discount, is recorded on the accrual basis. Expenses
are recorded on the accrual basis, which may require the use of certain
estimates by management.
In November 2000, a revised AICPA Audit and Accounting Guide, Audits of
Investment Companies (the 'Guide'), was issued, and is effective for the fiscal
years beginning after December 15, 2000. The revised Guide will require the Fund
to amortize premiums on all fixed-income securities. Upon initial adoption, the
Fund will be required to adjust the cost of its fixed-income securities by the
cumulative amount that would have been recognized had the amortization been in
effect from the purchase date of each holding. Adopting this accounting
principle will not effect the Fund's net asset value, but will change the
classification of certain amounts between interest income and realized and
unrealized gain/loss in the Statement of Operations. The Fund expects that the
impact of the adoption of this principle will not be material to the financial
statements.
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
19
Prudential International Bond Fund, Inc.
Notes to Financial Statements Cont'd.
all of its taxable net income and capital gains, if any, to shareholders.
Therefore, no federal income or excise tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
Dividends and Distributions: The Fund declares daily and pays dividends
from book basis net investment income monthly and makes distributions at least
annually of any net capital gains. Dividends and distributions are recorded on
the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase distributions in excess of net investment income
by $3,382,126, decrease net realized loss on investments by $5,716,808, and
decrease paid-in capital by $2,334,682. This was primarily the result of net
foreign currency losses realized and recognized during the year ended December
31, 2000. 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 subadvisor's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'), a wholly owned subsidiary of Prudential. The
subadvisory agreement provides that the subadvisor will furnish investment
advisory services in connection with the management of the Fund. In connection
therewith, the subadvisor is obligated to keep certain books and records of the
Fund. PIFM continues to have responsibility for all investment advisory services
pursuant to the management agreement and supervises the subadvisor's performance
of such services. PIFM pays for the services of PIC, the cost of compensation of
officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an
annual rate of .75 of 1% of the Fund's average daily net assets up to $1 billion
and .70 of 1% of such assets in excess of $1 billion.
20
Prudential International Bond Fund, Inc.
Notes to Financial Statements Cont'd.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
B, C and Z shares of the Fund. The Fund compensates PIMS for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
No distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, .75 of 1% and .75 of 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
period January 1, 2000 through August 22, 2000. Effective August 23, 2000 such
expenses under the plans were .25 of 1%, .25 of 1% and .25 of 1% of the average
daily net assets of Class A, B, and C shares, respectively.
PIMS has advised the Fund that it has received approximately $3,100 and
$50 in front-end sales charges resulting from sales of Class A and C shares,
respectively, during the year ended December 31, 2000. From these fees, PIMS
paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended December 31, 2000, it
received approximately $8,800 and $700 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America ('Prudential').
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the year ended December 31, 2000.
21
Prudential International Bond Fund, Inc.
Notes to Financial Statements Cont'd.
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), an affiliate of PIFM and an
indirect wholly owned subsidiary of Prudential, serves as the Fund's transfer
agent. During the year ended December 31, 2000, the Fund incurred fees of
approximately $162,700 for the services of PMFS. As of December 31, 2000,
approximately $12,900 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to nonaffiliates.
The Fund invested in the Taxable Money Market Series (the 'Series'), a
portfolio of Prudential Core Investment Fund, pursuant to an exemptive order
received from the Securities and Exchange Commission. The Series is a money
market registered under the Investment Company Act of 1940, as amended, and
managed by PIFM. As of December 31, 2000, the Fund earned income from the Series
of approximately $96,167 by investing its excess cash.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 2000 aggregated $254,052,074 and $261,758,270,
respectively.
During the year ended December 31, 2000, the Fund entered into financial
futures contracts. Details of open contracts at December 31, 2000 are as
follows:
Value at Value at
Number of Expiration Trade December 31, Unrealized
Contracts Type Date Date 2000 (Depreciation)
- --------- ----------------- ----------- ---------- ------------ ---------------
Short Position:
11 30 yr. T-Note Sept. 2001 $1,137,469 $1,153,453 $ (15,984)
---------------
---------------
At December 31, 2000, the Fund had outstanding forward currency contracts
to purchase and sell foreign currencies, as follows:
Value at
Foreign Currency Current Settlement Date Unrealized Unrealized
Purchase Contracts Value Payable Appreciation (Depreciation)
- ---------------------------- ----------- --------------- ------------ --------------
Australian Dollar, expiring
1/12/01 $ 1,281,854 $ 1,269,736 $ 12,118 $ --
Canadian Dollar, expiring
1/10/01 1,555,499 1,532,200 23,299 --
22
Prudential International Bond Fund, Inc.
Notes to Financial Statements Cont'd.
Value at
Foreign Currency Current Settlement Date Unrealized Unrealized
Purchase Contracts Value Payable Appreciation (Depreciation)
- ---------------------------- ----------- --------------- ------------ --------------
Euro Currency, expiring
1/5/01 - 1/11/01 $28,500,192 $26,920,513 $ 1,579,679 $ --
Pound Sterling, expiring
1/10/01 996,564 946,205 50,359 --
Japanese Yen, expiring
1/5/01 - 1/9/01 4,426,050 4,557,790 -- (131,740)
South African Rand, expiring
1/8/01 - 1/22/01 2,252,045 2,238,400 13,645 --
----------- --------------- ------------ --------------
$39,012,204 $37,464,844 $ 1,679,101 $ (131,740)
----------- --------------- ------------ --------------
----------- --------------- ------------ --------------
Value at
Foreign Currency Current Settlement Date Unrealized Unrealized
Sale Contracts Value Receivable Appreciation (Depreciation)
- ---------------------------- ----------- --------------- ------------ --------------
Australian Dollar, expiring
1/9/01 $ 1,106,330 $ 1,100,000 $ -- $ (6,330)
Canadian Dollar, expiring
1/8/01 - 1/10/01 2,532,467 2,472,971 -- (59,496)
Danish Krone, expiring
1/22/01 376,133 362,226 -- (13,907)
Euro Currency, expiring
1/5/01 - 1/11/01 34,622,449 32,599,905 -- (2,022,544)
Japanese Yen, expiring
1/5/01 - 1/11/01 14,996,277 15,480,986 484,709 --
New Zealand Dollar, expiring
1/8/01 2,815,762 2,685,413 -- (130,349)
Swedish Krona, expiring
1/11/01 3,805,057 3,625,747 -- (179,310)
South African Rand, expiring
1/8/01 1,124,517 1,111,054 -- (13,463)
----------- --------------- ------------ --------------
$61,378,992 $59,438,302 $484,709 $ (2,425,399)
----------- --------------- ------------ --------------
----------- --------------- ------------ --------------
The United States federal income tax basis of the Fund's investments at
December 31, 2000 was $55,707,313 and, accordingly, net unrealized depreciation
for United States federal income tax purposes was $95,222 (gross unrealized
appreciation--$1,393,477; gross unrealized depreciation--$1,488,699).
For federal income tax purposes, the Fund had a capital loss carryforward
as of December 31, 2000 of approximately $1,878,000, of which $422,000 expires
in 2007, and $1,456,000 expires in 2008. Accordingly, no capital gain
distribution is expected to be paid to shareholders until net capital gains have
been realized in excess of such amount.
The Fund will elect, for United States Federal income tax purposes, to
treat net capital losses of $118,569 incurred in the two-month period ended
December 31, 2000 as having been incurred in the following fiscal year.
23
Prudential International Bond Fund, Inc.
Notes to Financial Statements Cont'd.
Note 5. Capital
There are 2 billion shares of common stock, $.01 par value per share, authorized
divided into four classes, designated Class A, Class B, Class C and Class Z
common stock, consisting of 500 million shares of each class.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- ---------------------------------------------------------- ---------- ------------
Year ended December 31, 2000:
Shares sold 243,620 $ 1,482,182
Shares issued in reinvestment of dividends and
distributions 222,918 1,353,252
Shares reacquired (2,040,480) (12,476,936)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (1,573,942) (9,641,502)
Shares issued upon conversion from Class B 7,474 46,111
---------- ------------
Net increase (decrease) in shares outstanding (1,566,468) $ (9,595,391)
---------- ------------
---------- ------------
Year ended December 31, 1999:
Shares sold 302,079 $ 1,995,054
Shares issued in reinvestment of dividends and
distributions 254,193 1,701,726
Shares reacquired (2,303,857) (15,461,489)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (1,747,585) (11,764,709)
Shares issued upon conversion from Class B 201 1,323
---------- ------------
Net increase (decrease) in shares outstanding (1,747,384) $(11,763,386)
---------- ------------
---------- ------------
Class B
- ----------------------------------------------------------
Year ended December 31, 2000:
Shares sold 94,619 $ 580,801
Shares issued in reinvestment of dividends and
distributions 16,083 98,024
Shares reacquired (97,019) (591,804)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion 13,683 87,021
Shares issued upon conversion from Class B (7,449) (46,111)
---------- ------------
Net increase (decrease) in shares outstanding 6,234 $ 40,910
---------- ------------
---------- ------------
Year ended December 31, 1999:
Shares sold 200,931 $ 1,360,681
Shares issued in reinvestment of dividends and
distributions 14,238 94,984
Shares reacquired (107,807) (721,299)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion 107,362 734,366
Shares reacquired upon conversion into Class A (201) (1,323)
---------- ------------
Net increase (decrease) in shares outstanding 107,161 $ 733,043
---------- ------------
---------- ------------
24
Prudential International Bond Fund, Inc.
Notes to Financial Statements Cont'd.
Class C Shares Amount
- ---------------------------------------------------------- ---------- ------------
Year ended December 31, 2000:
Shares sold 3,142 $ 19,444
Shares issued in reinvestment of dividends and
distributions 1,512 9,238
Shares reacquired (20,087) (123,301)
---------- ------------
Net increase (decrease) in shares outstanding (15,433) $ (94,619)
---------- ------------
---------- ------------
Year ended December 31, 1999:
Shares sold 6,775 $ 45,628
Shares issued in reinvestment of dividends and
distributions 2,269 15,192
Shares reacquired (6,039) (40,929)
---------- ------------
Net increase (decrease) in shares outstanding 3,005 $ 19,891
---------- ------------
---------- ------------
Class Z
- ----------------------------------------------------------
Year ended December 31, 2000:
Shares sold 283,754 $ 1,756,566
Shares issued in reinvestment of dividends and
distributions 31,309 190,567
Shares reacquired (346,981) (2,127,276)
---------- ------------
Net increase (decrease) in shares outstanding (31,918) $ (180,143)
---------- ------------
---------- ------------
Year ended December 31, 1999:
Shares sold 386,570 $ 2,600,254
Shares issued in reinvestment of dividends and
distributions 29,107 194,635
Shares reacquired (245,883) (1,640,481)
---------- ------------
Net increase (decrease) in shares outstanding 169,794 $ 1,154,408
---------- ------------
---------- ------------
Note 6. Plan of Reorganization
On August 23, 2000, the Directors of the Fund approved an Agreement and Plan of
Reorganization (the 'Plan'), which provides for the transfer of all of the
assets and liabilities of the Fund to Prudential Global Total Return Fund in
exchange for Class A, B, C and Z shares of the Prudential Global Total Return
Fund and Prudential Global Total Return Fund's assumption of the liabilities of
the Fund.
The Plan is subject to approval by the shareholders of the Fund at a
shareholder meeting scheduled to be held on April 19, 2001. If the Plan is
approved, it is expected that the reorganization will take place on or about
April 27, 2001. The Global Total Return Fund and the Fund will each bear their
pro-rata share of the costs of the reorganization, including the cost of proxy
solicitation.
25
Prudential International Bond Fund, Inc.
Financial Highlights
Class A
--------------------
Year Ended
December 31, 2000(c)
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 6.36
--------
Income from investment operations:
Net investment income .32
Net realized and unrealized gain (loss) on investments and
foreign currencies (.15)
--------
Total from investment operations .17
--------
Less distributions:
Dividends from net investment income --
Distributions in excess of net investment income --
Distributions from net realized capital gains --
Tax return of capital distributions (.43)
--------
Total dividends and distributions (.43)
--------
Redemption fee retained by Fund --
--------
Net asset value, end of year $ 6.10
--------
--------
TOTAL INVESTMENT RETURN(a) 2.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 51,239
Average net assets (000) $ 55,590
Ratios to average net assets:
Expenses, including distribution and service (12b-1)
fees 2.04%
Expenses, excluding distribution and service (12b-1)
fees 1.79%
Net investment income 5.25%
For Class A, B, C and Z shares:
Portfolio turnover rate 457%
- ------------------------------
(a) Total investment return based on net asset value is calculated assuming a
purchase on the first day and a sale at the current net asset value on the
last day of each year reported and includes reinvestment of dividends and
distributions. Total investment return does not consider the effect of sales
load. Prior to January 15, 1996, the Fund operated as a closed-end
investment company and total investment return was calculated based on
market value assuming a purchase of common stock as the current market value
on the first day and a sale at the current market value on the last day of
each year reported. Dividends and distributions are assumed for purposes of
this calculation to be reinvested at prices obtained under the dividend
reinvestment plan. This calculation does not reflect brokerage commissions.
(b) Prior to January 15, 1996 the Fund operated as a closed-end, non-diversified
management investment company.
(c) Calculated based upon weighted average shares outstanding during the year.
26 See Notes to Financial Statements
Prudential International Bond Fund, Inc.
Financial Highlights Cont'd.
Class A
- -------------------------------------------------------------------------------------
Year Ended December 31,
- -------------------------------------------------------------------------------------
1999(c) 1998(c) 1997(c) 1996(b)
- -------------------------------------------------------------------------------------
$ 7.17 $ 7.08 $ 7.63 $ 7.68
-------- ---------------- ---------------- ----------------
.39 .43 .49 .56
(.68) .12 (.22) .28
-------- ---------------- ---------------- ----------------
(.29) .55 .27 .84
-------- ---------------- ---------------- ----------------
(.22) (.25) (.58) (.67)
-- (.17) (.24) (.40)
(.09) (.04) -- --
(.21) -- -- --
-------- ---------------- ---------------- ----------------
(.52) (.46) (.82) (1.07)
-------- ---------------- ---------------- ----------------
-- -- -- .18
-------- ---------------- ---------------- ----------------
$ 6.36 $ 7.17 $ 7.08 $ 7.63
-------- ---------------- ---------------- ----------------
-------- ---------------- ---------------- ----------------
(4.27)% 8.00% 3.62% 14.02%
$ 63,343 $ 84,008 $ 96,365 $125,637
$ 72,413 $ 89,970 $110,910 $180,588
1.86% 1.63% 1.64% 1.48%
1.61% 1.48% 1.49% 1.34%
5.77% 6.08% 6.54% 6.45%
110% 46% 53% 38%
See Notes to Financial Statements 27
Prudential International Bond Fund, Inc.
Financial Highlights Cont'd.
Class B
------------------------
Year Ended
December 31, 2000(d)
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 6.38
-------
Income from investment operations:
Net investment income .30
Net realized and unrealized gain (loss) on investments
and foreign currencies (.15)
-------
Total from investment operations .15
-------
Less distributions:
Dividends from net investment income --
Distributions in excess of net investment income --
Distributions from net realized gains --
Tax return of capital distributions (.39)
-------
Total dividends and distributions (.39)
-------
Redemption fee retained by Fund --
-------
Net asset value, end of period $ 6.14
-------
-------
TOTAL INVESTMENT RETURN(a) 2.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $1,736
Average net assets (000) $1,753
Ratios to average net assets:
Expenses, including distribution and service (12b-1)
fees 2.36%
Expenses, excluding distribution and service (12b-1)
fees 1.79%
Net investment income 4.90%
- ------------------------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than one full year are not annualized.
(b) Annualized.
(c) Commencement of offering of Class B shares.
(d) Calculated based upon weighted average shares outstanding during the period.
28 See Notes to Financial Statements
Prudential International Bond Fund, Inc.
Financial Highlights Cont'd.
Class B
- ----------------------------------------------------------------------------------
January 15, 1996(c)
Year Ended December 31, Through
- ---------------------------------------------------------- December 31,
1999(d) 1998(d) 1997(d) 1996
- ----------------------------------------------------------------------------------
$ 7.19 $ 7.10 $ 7.64 $ 7.72
------- ------- ------- -------
.35 .37 .44 .52
(.68) .11 (.20) .25
------- ------- ------- -------
(.33) .48 .24 .77
------- ------- ------- -------
(.18) (.21) (.54) (.63)
-- (.14) (.24) (.40)
(.09) (.04) -- --
(.21) -- -- --
------- ------- ------- -------
(.48) (.39) (.78) (1.03)
------- ------- ------- -------
-- -- -- .18
------- ------- ------- -------
$ 6.38 $ 7.19 $ 7.10 $ 7.64
------- ------- ------- -------
------- ------- ------- -------
(4.76)% 7.32% 3.25% 12.86%
$1,764 $1,218 $ 531 $ 75
$1,560 $ 785 $ 335 $ 23
2.36% 2.23% 2.24% 2.09%(b)
1.61% 1.48% 1.49% 1.34%(b)
5.29% 5.51% 6.00% 5.85%(b)
See Notes to Financial Statements 29
Prudential International Bond Fund, Inc.
Financial Highlights Cont'd.
Class C
--------------------
Year Ended
December 31, 2000(d)
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 6.38
-------
Income from investment operations:
Net investment income .29
Net realized and unrealized gain (loss) on investments and
foreign currencies (.14)
-------
Total from investment operations .15
-------
Less distributions:
Dividends from net investment income --
Distributions in excess of net investment income --
Distributions from net realized gains --
Tax return of capital distributions (.39)
-------
Total dividends and distributions (.39)
-------
Redemption fee retained by Fund --
-------
Net asset value, end of period $ 6.14
-------
-------
TOTAL INVESTMENT RETURN(a) 2.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 144
Average net assets (000) $ 173
Ratios to average net assets:
Expenses, including distribution and service (12b-1)
fees 2.36%
Expenses, excluding distribution and service (12b-1)
fees 1.79%
Net investment income 4.94%
- ------------------------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than one full year are not annualized.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Calculated based upon weighted average shares outstanding during the period.
30 See Notes to Financial Statements
Prudential International Bond Fund, Inc.
Financial Highlights Cont'd.
Class C
- ---------------------------------------------------------------------------------
January 15, 1996(c)
Year Ended December 31, Through
- --------------------------------------------------------- December 31,
1999(d) 1998(d) 1997(d) 1996
- ---------------------------------------------------------------------------------
$ 7.19 $ 7.10 $ 7.64 $ 7.72
------- ------- ------- -------
.35 .37 .40 .52
(.68) .11 (.16) .25
------- ------- ------- -------
(.33) .48 .24 .77
------- ------- ------- -------
(.18) (.21) (.54) (.63)
-- (.14) (.24) (.40)
(.09) (.04) -- --
(.21) -- -- --
------- ------- ------- -------
(.48) (.39) (.78) (1.03)
------- ------- ------- -------
-- -- -- .18
------- ------- ------- -------
$ 6.38 $ 7.19 $ 7.10 $ 7.64
------- ------- ------- -------
------- ------- ------- -------
(4.76)% 7.32% 3.25% 12.86%
$ 248 $ 257 $ 76 $ 13
$ 248 $ 126 $ 26 $ 8
2.36% 2.23% 2.24% 2.09%(b)
1.61% 1.48% 1.49% 1.34%(b)
5.29% 5.53% 5.96% 5.85%(b)
See Notes to Financial Statements 31
Prudential International Bond Fund, Inc.
Financial Highlights Cont'd.
Class Z
-------------------------------------------------------------
March 17,
Year Ended 1997(c)
December 31, Through
-------------------------------------- December 31,
2000(d) 1999(d) 1998(d) 1997(d)
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $ 6.38 $ 7.19 $ 7.10 $ 7.57
------------ -------- -------- ------------
Income from investment operations:
Net investment income .34 .40 .44 .38
Net realized and unrealized gain
(loss) on investments and
foreign currencies (.15) (.68) .10 (.02)
------------ -------- -------- ------------
Total from investment
operations .19 (.28) .54 .36
------------ -------- -------- ------------
Less distributions:
Dividends from net investment
income -- (.23) (.25) (.59)
Distributions in excess of net
investment income -- -- (.16) (.24)
Distributions from net realized
gains -- (.09) (.04) --
Tax return of capital
distributions (.45) (.21) -- --
------------ -------- -------- ------------
Total dividends and
distributions (.45) (.53) (.45) (.83)
------------ -------- -------- ------------
Net asset value, end of period $ 6.12 $ 6.38 $ 7.19 $ 7.10
------------ -------- -------- ------------
------------ -------- -------- ------------
TOTAL INVESTMENT RETURN(a) 3.27% (4.14)% 8.16% 4.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $2,760 $3,080 $2,253 $ 628
Average net assets (000) $2,992 $2,720 $1,487 $ 121
Ratios to average net assets:
Expenses, including
distribution and service
(12b-1) fees 1.79% 1.61% 1.48% 1.49%(b)
Expenses, excluding
distribution and service
(12b-1) fees 1.79% 1.61% 1.48% 1.49%(b)
Net investment income 5.49% 6.04% 6.29% 6.82%(b)
- ------------------------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total investment return does
not consider the effect of sales load. Total investment returns for periods
of less than one full year are not annualized.
(b) Annualized.
(c) Commencement of offering of Class Z shares.
(d) Calculated based upon weighted average shares outstanding during the period.
32 See Notes to Financial Statements
Prudential International Bond Fund, Inc.
Report of Independent Accountants
To the Shareholders and Board of Directors of
Prudential International Bond 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 International Bond Fund,
Inc. (the 'Fund') at December 31, 2000, 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 accounting principles generally accepted in the
United States of America. 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 auditing standards generally accepted in
the United States of America, 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, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
As described in Note 6 to the financial statements, on August 23, 2000, the
Board of Directors of the Fund approved an agreement and Plan of Reorganization,
subject to shareholder approval, whereby the Fund would be merged into
Prudential Global Total Return Fund, Inc.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 26, 2001
33
Prudential International Bond Fund, Inc.
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Fund's fiscal year end (December 31, 2000) as to the federal tax status
of distributions paid by The Fund during such fiscal year. Accordingly, during
its fiscal year ended December 31, 2000, the Fund distributed a tax return of
capital of $.43 per Class A share, $.39 per Class B share, $.39 per Class C
share, and $.45 per Class Z share which is taxable as such.
We wish to advise you that the dividends received deduction for the Fund
is zero. Only funds that invest in U.S. equity securities are entitled to
pass-through a corporate dividends received deduction.
34
Prudential International Bond Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
When you invest through Prudential Mutual Funds,
you receive financial advice from a Prudential
Securities Financial Advisor or Pruco Securities
registered representative. Your financial
professional can provide you with the following
services:
THERE'S NO REWARD WITHOUT RISK; BUT IS THIS RISK WORTH IT?
Your financial professional can help you match the
reward you seek with the risk you can tolerate.
Risk can be difficult to gauge--sometimes even the
simplest investments bear surprising risks. The
educated investor knows that markets seldom move in
just one direction. There are times when a
market sector or asset class will lose value or
provide little in the way of total return. Managing
your own expectations is easier with help from
someone who understands the markets, and who knows
you!
KEEPING UP WITH THE JONESES
A financial professional can help you wade through
the numerous available mutual funds to find the
ones that fit your individual investment profile
and risk tolerance. While the newspapers and
popular magazines are full of advice about
investing, they are aimed at generic groups of
people or representative individuals--not at you
personally. Your financial professional will review
your investment objectives with you. This means you
can make financial decisions based on the assets
and liabilities in your current portfolio and your
risk tolerance--not just based on the current
investment fad.
BUY LOW, SELL HIGH
Buying at the top of a market cycle and selling at
the bottom are among the most common investor
mistakes. But sometimes it's difficult to hold on
to an investment when it's losing value every
month. Your financial professional can answer
questions when you're confused or worried about
your investment, and should remind you that you're
investing for the long haul.
Prudential International Bond Fund, Inc.
Prudential Mutual Funds
Prudential offers a broad range of mutual funds
designed to meet your individual needs. For
information about these funds, contact your
financial professional or call us at (800)
225-1852. Read the prospectus carefully
before you invest or send money.
STOCK FUNDS
Large Capitalization Stock Funds
Prudential 20/20 Focus Fund
Prudential Equity Fund, Inc.
Prudential Stock Index Fund
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Prudential Value Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Small- to Mid-Capitalization Stock Funds
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Prudential Small Company Fund, Inc.
Prudential Tax-Managed Small-Cap Fund, Inc.
Prudential U.S. Emerging Growth Fund, Inc.
Target Funds
Small Capitalization Growth Fund
Small Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Equity Opportunity Fund
Sector Stock Funds
Prudential Natural Resources Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Global/International Stock Funds
Global Utility Fund, Inc.
Prudential Europe Growth Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Target Funds
International Equity Fund
Strategic Partners Series
Strategic Partners Focused Growth Fund
Strategic Partners New Era Growth Fund
BALANCED/ALLOCATION FUNDS
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
www.prudential.com (800) 225-1852
BOND FUNDS
Taxable Bond Funds
Prudential Government Income Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Short-Term Corporate Bond Fund, Inc.
Income Portfolio
Prudential Total Return Bond Fund, Inc.
Target Funds
Total Return Bond Fund
Tax-Free Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
New Jersey Series
New York Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global/International Bond Funds
Prudential Global Total Return Fund, Inc.
MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Money Market Series
Tax-Free Money Market Funds
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
New Jersey Money Market Series
New York Money Market Series
Prudential Tax-Free Money Fund, Inc.
Other Money Market Funds
COMMAND Government Fund
COMMAND Money Fund
COMMAND Tax-Free Fund
Prudential International Bond Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this--
they don't read annual and semiannual reports. It's
quite understandable. These annual and semiannual
reports are prepared to comply with federal
regulations, and are often written in language that
is difficult to understand. So when most people run
into those particularly daunting sections of these
reports, they don't read them.
WE THINK THAT'S A MISTAKE
At Prudential Mutual Funds, we've made some changes
to our report to make it easier to understand and
more pleasant to read. We hope you'll find it
profitable to spend a few minutes familiarizing
yourself with your investment. Here's what you'll
find in the report:
PERFORMANCE AT A GLANCE
Since an investment's performance is often a
shareholder's primary concern, we present
performance information in two different formats.
You'll find it first on the "Performance at a
Glance" page where we compare the Fund and the
comparable average calculated by Lipper, Inc., a
nationally recognized mutual fund rating agency. We
report both the cumulative total returns and the
average annual total returns. The cumulative total
return is the total amount of income and
appreciation the Fund has achieved in various time
periods. The average annual total return is an
annualized representation of the Fund's
performance. It gives you an idea of how much the
Fund has earned in an average year for a given time
period. Under the performance box, you'll see
legends that explain the performance information,
whether fees and sales charges have been included
in returns, and the inception dates for the Fund's
share classes.
See the performance comparison charts at the back
of the report for more performance information.
Please keep in mind that past performance is not
indicative of future results.
www.prudential.com (800) 225-1852
INVESTMENT ADVISER'S REPORT
The portfolio manager, who invests your money for
you, reports on successful--and not-so-successful--
strategies in this section of your report. Look for
recent purchases and sales here, as well as
information about the sectors the portfolio manager
favors, and any changes that are on the drawing board.
PORTFOLIO OF INVESTMENTS
This is where the report begins to appear
technical, but it's really just a listing of
each security held at the end of the reporting
period, along with valuations and other
information. Please note that sometimes we discuss
a security in the "Investment Adviser's Report"
section that doesn't appear in this listing because
it was sold before the close of the reporting
period.
STATEMENT OF ASSETS AND LIABILIATIES
The balance sheet shows the assets (the value of
the Fund's holdings), liabilities (how much the
Fund owes), and net assets (the Fund's
equity, or holdings after the Fund pays its debts)
as of the end of the reporting period. It also
shows how we calculate the net asset value per
share for each class of shares. The net asset value
is reduced by payment of your dividend, capital gain,
or other distribution, but remember that the money
or new shares are being paid or issued to you. The
net asset value fluctuates daily, along with the
value of every security in the portfolio.
STATEMENT OF OPERATIONS
This is the income statement, which details income
(mostly interest and dividends earned) and expenses
(including what you pay us to manage your money).
You'll also see capital gains here--both realized
and unrealized.
Prudential International Bond Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
STATEMENT OF CHANGES IN NET ASSETS
This schedule shows how income and expenses
translate into changes in net assets. The Fund
is required to pay out the bulk of its income
to shareholders every year, and this statement
shows you how we do it (through dividends and
distributions) and how that affects the net
assets. This statement also shows how money
from investors flowed into and out of the Fund.
NOTES TO FINANCIAL STATEMENTS
This is the kind of technical material that can
intimidate readers, but it does contain useful
information. The Notes provide a brief history and
explanation of your Fund's objectives. In addition,
they outline how Prudential Mutual Funds prices
securities. The Notes also explain who manages and
distributes the Fund's shares and, more
importantly, how much they are paid for doing so.
Finally, the Notes explain how many shares are
outstanding and the number issued and redeemed over
the period.
FINANCIAL HIGHLIGHTS
This information contains many elements from prior
pages, but on a per-share basis. It is designed to
help you understand how the Fund performed, and to
compare this year's performance and expenses to
those of prior years.
INDEPENDENT ACCOUNYANT'S REPORT
Once a year, an independent accountant looks over
our books and certifies that the financial statements
are fairly presented in accordance with generally accepted
accounting principles.
TAX INFORMATION
This is information that we report annually about
how much of your total return is taxable. Should
you have any questions, you may want to consult a
tax adviser.
www.prudential.com (800) 225-1852
PERFORMANCE COMPARISON
These charts are included in the annual report and
are required by the Securities Exchange Commission.
Performance is presented here as a hypothetical
$10,000 investment in the Fund since its inception
or for 10 years (whichever is shorter). To help you
put that return in context, we are required to
include the performance of an unmanaged, broad-based
securities index as well. The index does not reflect
the cost of buying the securities it contains or
the cost of managing a mutual fund. Of course, the
index holdings do not mirror those of the Fund--the
index is a broad-based reference point commonly used
by investors to measure how well they are doing. A
definition of the selected index is also provided.
Investors cannot invest directly in an index.
Prudential International Bond Fund, Inc.
Class A Growth of a $10,000 Investment
(CHART)
Average Annual Total Returns as of 12/31/00
One Year Five Years Ten Years Since Inception (7/31/87)
With Sales Charge -1.29% 3.81% 6.41% 7.11%
Without Sales Charge 2.82% 4.66% 6.85% 7.44%
Past performance is not indicative of future
results. Principal and investment return will
fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their
original cost. The best- and worst-year information
within the graph is designed to give you an idea of
how much the Fund's returns can fluctuate from year
to year by measuring the best and worst calendar
years in terms of total annual return for the ten-
year period. The graph compares a $10,000
investment in the Prudential International Bond
Fund, Inc. (Class A shares) with a similar
investment in the J.P. Morgan Government Bond
Index/Global (the GBI) by portraying the initial
account values at 12/31/90, and the account values
at the end of the current fiscal year (December 31,
2000), as measured on a quarterly basis. For
purposes of the graph, and unless otherwise
indicated, it has been assumed that (a) the maximum
front-end sales charge was deducted from the
initial $10,000 investment in Class A shares; (b)
all recurring fees (including management fees) were
deducted; and (c) all dividends and distributions
were reinvested.
The GBI is an unmanaged, market-weighted index of
total return of government bonds of the following
nations: Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, the United Kingdom,
and the United States. The GBI is traded, unhedged,
and measured in U.S. dollars. The GBI's total
returns include the reinvestment of all dividends,
but do not include the effect of sales charges or
operating expenses of a mutual fund. The securities
that comprise the GBI may differ substantially from
the securities in the Fund. The GBI is not the only
index that may be used to characterize performance
of global bond funds. Other indexes may portray
different comparative performance. Investors cannot
invest directly in an index.
This graph is furnished to you in accordance with
SEC regulations.
www.prudential.com (800) 225-1852
Class B Growth of a $10,000 Investment
(CHART)
Average Annual Total Returns as of 12/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge -2.46% N/A N/A 3.94%
Without Sales Charge 2.54 N/A N/A 4.11%
Past performance is not indicative of future
results. Principal and investment return will
fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their
original cost. The best- and worst-year information
within the graph is designed to give you an idea of
how much the Fund's returns can fluctuate from year
to year by measuring the best and worst calendar
years in terms of total annual return since
inception of the share class. The graph compares a
$10,000 investment in the Prudential International
Bond Fund, Inc. (Class B shares) with a similar
investment in the GBI by portraying the
initial account values at the commencement of
operations of Class B shares, and the account
values at the end of the current fiscal year
(December 31, 2000), as measured on a quarterly
basis. For purposes of the graph, and unless
otherwise indicated, it has been assumed that (a)
the applicable contingent deferred sales charge was
deducted from the value of the investment in Class
B shares, assuming full redemption on December 31,
2000; (b) all recurring fees (including management
fees) were deducted; and (c) all dividends and
distributions were reinvested. Class B shares will
automatically convert to Class A shares, on a
quarterly basis, beginning approximately seven years
after purchase.
The GBI is an unmanaged, market-weighted index of
total return of government bonds of the following
nations: Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, the United Kingdom,
and the United States. The GBI is traded, unhedged,
and measured in U.S. dollars. The GBI's total
returns include the reinvestment of all dividends,
but do not include the effect of sales charges or
operating expenses of a mutual fund. The securities
that comprise the GBI may differ substantially from
the securities in the Fund. The GBI is not the only
index that may be used to characterize performance
of global bond funds. Other indexes may portray
different comparative performance. Investors cannot
invest directly in an index.
This graph is furnished to you in accordance with
SEC regulations.
Prudential International Bond Fund, Inc.
Class C Growth of a $10,000 Investment
(CHART)
Average Annual Total Returns as of 12/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge 0.52% N/A N/A 3.90%
Without Sales Charge 2.54% N/A N/A 4.11%
Past performance is not indicative of future
results. Principal and investment return will
fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their
original cost. The best- and worst-year information
within the graph is designed to give you an idea of
how much the Fund's returns can fluctuate from year
to year by measuring the best and worst calendar
years in terms of total annual return since
inception of the share class. The graph compares a
$10,000 investment in the Prudential International
Bond Fund, Inc. (Class C shares) with a similar
investment in the GBI by portraying the initial
account values at the commencement of operations of
Class C shares, and the account values at the end
of the current fiscal year (December 31, 2000), as
measured on a quarterly basis. For purposes of the
graph, and unless otherwise indicated, it has been
assumed that (a) the front-end sales charge was
deducted from the initial $10,000 investment in
Class C shares; (b) the applicable contingent
deferred sales charge was deducted from the value
of the investment in Class C shares, assuming full
redemption on December 31, 2000; (c) all recurring
fees (including management fees) were deducted; and
(d) all dividends and distri-butions were
reinvested.
The GBI is an unmanaged, market-weighted index of
total return of government bonds of the following
nations: Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, the United Kingdom,
and the United States. The GBI is traded, unhedged,
and measured in U.S. dollars. The GBI's total
returns include the reinvestment of all dividends,
but do not include the effect of sales charges or
operating expenses of a mutual fund. The securities
that comprise the GBI may differ substantially from
the securities in the Fund. The GBI is not the only
index that may be used to characterize performance
of global bond funds. Other indexes may portray
different comparative performance. Investors cannot
invest directly in an index.
This graph is furnished to you in accordance with
SEC regulations.
www.prudential.com (800) 225-1852
Class Z Growth of a $10,000 Investment
(CHART)
Average Annual Total Returns as of 12/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge 3.27% N/A N/A 3.13%
Without Sales Charge 3.27% N/A N/A 3.13%
Past performance is not indicative of future
results. Principal and investment return will
fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their
original cost. The best- and worst-year information
within the graph is designed to give you an idea of
how much the Fund's returns can fluctuate from year
to year by measuring the best and worst calendar
years in terms of total annual return since
inception of the share class. The graph compares a
$10,000 investment in the Prudential International
Bond Fund, Inc. (Class Z shares) with a similar
investment in the GBI by portraying the initial
account values at the commencement of operations of
Class Z shares, and the account values at the end
of the current fiscal year (December 31, 2000), as
measured on a quarterly basis. For purposes of the
graph, and unless otherwise indicated, it has been
assumed that (a) all recurring fees (including
management fees) were deducted, and (b) all
dividends and distributions were reinvested. Class
Z shares are not subject to a sales charge or
distribution and service (12b-1) fees.
The GBI is an unmanaged, market-weighted index of
total return of government bonds of the following
nations: Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, the United Kingdom,
and the United States. The GBI is traded, unhedged,
and measured in U.S. dollars. The GBI's total
returns include the reinvestment of all dividends,
but do not include the effect of sales charges or
operating expenses of a mutual fund. The securities
that comprise the GBI may differ substantially from
the securities in the Fund. The GBI is not the only
index that may be used to characterize performance
of global bond funds. Other indexes may portray
different comparative performance. Investors cannot
invest directly in an index.
This graph is furnished to you in accordance with
SEC regulations.
FOR MORE INFORMATION
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Visit Prudential's website at:
http://www.prudential.com
Directors
Saul K. Fenster
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
W. Scott McDonald, Jr.
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
Judy A. Rice
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
David R. Odenath, Jr., President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Marguerite E.H. Morrison, Secretary
William V. Healey, Assistant Secretary
Manager
Prudential Investments
Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment
Management Services LLC
Three Gateway Center, 14th Floor
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 8098
Philadelphia, PA 19101
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
Fund Symbols NASDAQ CUSIP
Class A GGPAX 74436Q101
Class B PDBBX 74436Q200
Class C PIBCX 74436Q309
Class Z PIBZX 74436Q408
MF170E
(LOGO) Printed on Recycled Paper
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940 (the 1940 Act) and pursuant to Article VI of the Registrant's Articles of
Incorporation (Exhibit 1(a) to the Registration Statement), Article VII of the
Registrant's By-Laws (Exhibit 2 to the Registration Statement), officers,
directors, employees and agents of the Registrant will not be liable to the
Registrant, any shareholder, officer, director, employee, agent or other person
for any action or failure to act, except for bad faith, willful misfeasance,
gross negligence or reckless disregard of duties, and those individuals may be
indemnified against liabilities in connection with the Registrant, subject to
the same exceptions. Section 2-418 of the Maryland General Corporation Law
permits indemnification of directors who acted in good faith and reasonably
believed that the conduct was in the best interests of the Registrant. As
permitted by Section 17(i) of the 1940 Act, pursuant to Section 10 of the
Distribution Agreement (Exhibit 7(a) to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provision or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of successful defense of any action, suit or proceeding) is asserted
against the Registrant by such director, officer or controlling person in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1940 Act and
will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 6(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 6(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 Articles of Incorporation and By-Laws and the Distribution
Agreement in a manner consistent with Release No. 11330 of the Securities and
Exchange Commission under the 1940 Act so long as that interpretation of
Sections 17(h) and 17(i) of such Act remains in effect and is consistently
applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including counsel who does work for either the
Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) provides a written opinion, based upon a
review of the facts,
C-1
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange Commission
staff's position on Section 17(h), advances will be limited in the following
respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including
cost connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds
the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance; and
(4) Such surety bond or other insurance must be paid for by the recipient
or such advance.
ITEM 16. EXHIBITS
1. (a) Amended and Restated Articles of Incorporation.(1)
(b) Amendment to Articles of Incorporation.(1)
(c) Articles of Amendment.(5)
(d) Articles Supplementary.(2)
(e) Articles Supplementary.(3)
2. Amended and Restated By-Laws.(7)
4. Agreement and Plan of Reorganization and Liquidation filed herewith as
Appendix A to the Proxy Statement and Prospectus.
5. Instruments defining rights of shareholders.(1)
6. (a) Amended and Restated Management Agreement between the Registrant and
Prudential Investments Fund Management LLC.(5)
(b) Amended and Restated Subadvisory Agreement between Prudential Mutual
Fund Management, LLC and The Prudential Investment Corporation.(5)
7. (a) Distribution Agreement between the Registrant and Prudential Investment
Management Services LLC.(3)
(b) Form of Selected Dealer Agreement.(3)
9. (a) Custodian Contract between the Registrant and State Street Bank and
Trust Company.(1)
(b) Amendment to Custodian Contract.(5)
10. (a) Amended and Restated Distribution and Service Plan for Class A
Shares.(4)
(b) Amended and Restated Distribution and Service Plan for Class B
Shares.(4)
(c) Amended and Restated Distribution and Service Plan for Class C
Shares.(4)
(d) Amended Rule 18f-3 Plan.(3)
11. Opinion and Consent of Counsel.*
12. Tax Opinion and Consent.*
13. (a) Transfer Agency and Service Agreement.(1)
(b) Amendment to Transfer Agency Agreement.(5)
14. Consent of Independent Accountants.*
17. (a) Proxy.*
(b) Prospectus of Prudential International Bond Fund, Inc. dated March 8,
2000.*
(c) Supplements dated March 27, 2000, August 28, 2000 and August 30, 2000,
respectively, to Prudential International Bond Fund, Inc.
Prospectus.(6)
C-2
(d) Statement of Additional Information for Prudential International
Bond Fund, Inc. dated March 8, 2000.*
(e) Prospectus of Prudential Global Total Return Fund, Inc. dated March 8,
1999.*
(f) Supplements dated March 27, 2000 and August 30, 2000, respectively, to
Prudential Global Total Return Fund, Inc. Prospectus.(6)
- -----------
(1) Incorporated by reference to Registration Statement on Form N-1A on or
about November 3, 1995 (File No. 33-63943).
(2) Incorporated by reference to Registrant's Post-Effective Amendment No. 2 to
its Registration Statement on Form N-1A filed on or about February 28, 1997
(File No. 33-63943).
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 4 to
its Registration Statement on Form N-1A filed on or about December 31, 1998
(File No. 33-63943).
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 5 to
its Registration Statement on Form N-1A filed on or about March 1, 1999
(File No. 33-63943).
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 6 to
its Registration Statement on Form N-1A filed on or about March 7, 2000
(File No. 33-63943).
(6) Incorporated by reference to Registrant's Registration Statement on Form
N-14 filed on February 2, 2001 (File No. 333-54928).
(7) Incorporated by reference to Registrant's Post-Effective Amendment No. 7 to
its Registration Statement filed on or about March 1, 2001 (File No.
33-63943).
* Filed herewith.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering of
the securities through the use of a prospectus which is a part of this
statement by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) of the Securities Act, the reoffering prospectus
will contain the information called for by the applicable registration form
for reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the 1933 Act, each
post-effective amendment shall be deemed to be a new registration statement
for the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of them.
(3) The undersigned registrant undertakes to file, by post-effective amendment,
an opinion of counsel supporting the tax consequences of the proposed
reorganization within a reasonable time after receipt of such opinion.
C-3
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of Newark, and the State of
New Jersey, on the 12th day of March, 2001.
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
/s/ David R. Odenath, Jr.
-------------------------
David R. Odenath, Jr., President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Saul K. Fenster
- ------------------------------------
Saul K. Fenster Director March 12, 2001
/s/ Delayne D. Gold
- ------------------------------------
Delayne D. Gold Director March 12, 2001
/s/ Robert F. Gunia
- ------------------------------------
Robert F. Gunia Director March 12, 2001
/s/ Douglas H. McCorkindale
- ------------------------------------
Douglas H. McCorkindale Director March 12, 2001
/s/ W. Scott McDonald, Jr.
- ------------------------------------
W. Scott McDonald, Jr. Director March 12, 2001
/s/ Thomas T. Mooney
- ------------------------------------
Thomas T. Mooney Director March 12, 2001
/s/ Stephen P. Munn
- ------------------------------------
Stephen P. Munn Director March 12, 2001
/s/ David R. Odenath, Jr.
- ------------------------------------
David R. Odenath, Jr. President and Director March 12, 2001
/s/ Richard A. Redeker
- ------------------------------------
Richard A. Redeker Director March 12, 2001
/s/ Judy A. Rice
- ------------------------------------
Judy A. Rice Director March 12, 2001
/s/ Robin B. Smith
- ------------------------------------
Robin B. Smith Director March 12, 2001
C-4
/s/ Louis A. Weil, III
- ------------------------------------
Louis A. Weil, III Director March 12, 2001
/s/ Clay T. Whitehead
- ------------------------------------
Clay T. Whitehead Director March 12, 2001
/s/ Grace C. Torres Treasurer and Principal Financial and Accounting
- ------------------------------------
Grace C. Torres Officer March 12, 2001
C-5
EXHIBIT INDEX
1. (a) Amended and Restated Articles of Incorporation.(1)
(b) Amendment to Articles of Incorporation.(1)
(c) Articles of Amendment.(5)
(d) Articles Supplementary.(2)
(e) Articles Supplementary.(3)
2. Amended and Restated By-Laws.(7)
4. Agreement and Plan of Reorganization and Liquidation filed herewith as
Appendix A to the Proxy Statement and Prospectus.
5. Instruments defining rights of shareholders.(1)
6. (a) Amended and Restated Management Agreement between the Registrant and
Prudential Investments Fund Management LLC.(5)
(b) Amended and Restated Subadvisory Agreement between Prudential Mutual
Fund Management, LLC and The Prudential Investment Corporation.(5)
7. (a) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.(3)
(b) Form of Selected Dealer Agreement.(3)
9. (a) Custodian Contract between the Registrant and State Street Bank and
Trust Company.(1)
(b) Amendment to Custodian Contract.(5)
10. (a) Amended and Restated Distribution and Service Plan for Class A
Shares.(4)
(b) Amended and Restated Distribution and Service Plan for Class B
Shares.(4)
(c) Amended and Restated Distribution and Service Plan for Class C
Shares.(4)
(d) Amended Rule 18f-3 Plan.(3)
11. Opinion and Consent of Counsel.*
12. Tax Opinion and Consent.*
13. (a) Transfer Agency and Service Agreement.(1)
(b) Amendment to Transfer Agency Agreement.(5)
14. Consent of Independent Accountants.*
17. (a) Proxy*
(b) Prospectus of Prudential International Bond Fund, Inc. dated March 8,
2000.*
(c) Supplements dated March 27, 2000, August 28, 2000 and August 30, 2000,
respectively, to Prudential International Bond Fund, Inc.
Prospectus.(6)
(d) Statement of Additional Information for Prudential International
Bond Fund, Inc. dated March 8, 2000.*
(e) Prospectus of Prudential Global Total Return Fund, Inc. dated March 8,
1999.*
(f) Supplements dated March 27, 2000 and August 30, 2000, respectively, to
Prudential Global Total Return Fund, Inc. Prospectus.(6)
- -----------
(1) Incorporated by reference to Registration Statement on Form N-1A on or
about November 3, 1995 (File No. 33-63943).
(2) Incorporated by reference to Registrant's Post-Effective Amendment No.
2 to its Registration Statement on Form N-1A filed on or about
February 28, 1997 (File No. 33-63943).
(3) Incorporated by reference to Registrant's Post-Effective Amendment No.
4 to its Registration Statement on Form N-1A filed on or about
December 31, 1998 (File No. 33-63943).
(4) Incorporated by reference to Registrant's Post-Effective Amendment No.
5 to its Registration Statement on Form N-1A filed on or about March
1, 1999 (File No. 33-63943).
(5) Incorporated by reference to Registrant's Post-Effective Amendment No.
6 to its Registration Statement on Form N-1A filed on or about March
7, 2000 (File No. 33-63943).
(6) Incorporated by reference to Registrant's Registration Statement on
Form N-14 filed on February 2, 2001 (File No. 333-54928).
(7) Incorporated by reference to Registrant's Post-Effective Amendment
No. 7 to its Registration Statement filed on or about March 1, 2001
(File No. 33-63943).
* Filed herewith.