AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 1997
REGISTRATION NO. 333-
811-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. [ ]
(Check appropriate box or boxes)
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PRUDENTIAL SMALL-CAP QUANTITATIVE FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102
(Address of Principal Executive Offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
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Registrant hereby elects, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, to register an indefinite number or amount of shares by
this Registration Statement. 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 of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine.
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
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N-1A ITEM NO. LOCATION
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PART A
Item 1. Cover Page ................... Cover Page
Item 2. Synopsis ..................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial .......... Fund Expenses; How the Fund
Information Calculates Performance
Item 4. General Description of ....... Cover Page; Fund Highlights; How
Registrant the Fund Invests; General
Information
Item 5. Management of the Fund ....... How the Fund is Managed
Item 5A. Management's Discussion of ... Not Applicable
Fund Performance
Item 6. Capital Stock and Other ...... Taxes, Dividends, and Distributions;
Securities General Information
Item 7. Purchase of Securities ....... Shareholder Guide; How the Fund Values
Being Offered its Shares
Item 8. Redemption or Repurchase ..... Shareholder Guide; How the Fund Values
its Shares
Item 9. Pending Legal Proceedings .... Not Applicable
PART B
Item 10. Cover Page ................... Cover Page
Item 11. Table of Contents ............ Table of Contents
Item 12. General Information and ...... General Information
History
Item 13. Investment Objectives and .... Investment Objective and Policies;
Policies Investment Restrictions
Item 14. Management of the Fund ....... Directors and Officers; Manager;
Distributor
Item 15. Control Persons and .......... Manager
Principal Holders of
Securities
Item 16. Investment Advisory and ...... Manager; Distributor; Custodian,
Other Services Transfer and Dividend Disbursing Agent
and Independent Accountants
Item 17. Brokerage Allocation and ..... Portfolio Transactions
Other Practices
Item 18. Capital Stock and Other ...... Not Applicable
Securities
Item 19. Purchase, Redemption and ..... Purchase and Redemption of Fund
Pricing of Securities Being Shares; Shareholder Investment
Offered Account; Net Asset Value
Item 20. Tax Status ................... Taxes
Item 21. Underwriters ................. Distributor
Item 22. Calculation of Performance ... Performance Information
Data
Item 23. Financial Statements ......... Statement of Assets and Liabilities
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
PRUDENTIAL SMALL-CAP QUANTITATIVE
FUND, INC.
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PROSPECTUS DATED ___________, 1997
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Prudential Small-Cap Quantitative Fund, Inc. (the Fund) is a diversified,
open-end, management investment company with an investment objective of
long-term capital appreciation. The Fund seeks to achieve its objective by
investing primarily in equity securities of small-cap U.S. companies (market
capitalization of less than $1.5 billion). The Fund's portfolio manager will
employ computer-driven quantitative strategies designed to maximize returns
while attempting to control risk. There can be no assurance that the Fund's
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is Gateway Center Three, Newark, New
Jersey 07102, and its telephone number is (800) 225-1852.
Prudential Securities will solicit subscriptions for Class A, Class B, Class C
and Class Z shares of the Fund during a subscription period commencing on or
about __________,1997 and currently expected to end on or about __________,
1997.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated ___________, 1997, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS THE SMALL-CAP QUANTITATIVE FUND?
Prudential Small-Cap Quantitative Fund, Inc. is a mutual fund. A mutual
fund pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
diversified management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is long-term capital appreciation. It seeks
to achieve its objective by investing primarily in equity securities of
small-cap U.S. companies (companies with a market capitalization of less than
$1.5 billion). The Fund's portfolio manager will employ computer-driven
quantitative strategies designed to maximize returns while attempting to control
risk. See "How the Fund Invests--Investment Objective and Policies" at page 5.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The small-cap companies in which the Fund invests may be subject to
significant price fluctuation and above-average risk. In addition, these
companies are likely to reinvest their earnings rather than distribute them; as
a result, the Fund is not likely to receive significant dividend income on its
portfolio securities. An investment in the Fund should not be considered a
complete investment program and may not be appropriate for all investors. As
with an investment in any mutual fund, an investment in this Fund can decrease
in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management LLC (PMF or the Manager), is the manager
of the Fund and is compensated for its services at an annual rate of .60 of 1%
of average daily net assets of the Fund. As of March 31, 1997, PMF served as
manager or administrator to ___ investment companies, including ___ mutual
funds, with aggregate assets of approximately $__ billion. The Prudential
Investment Corporation, which does business under the name of Prudential
Investments (PI, the investment adviser or the Subadviser), furnishes investment
advisory services in connection with the management of the Fund under a
Subadvisory Agreement with PMF. See "How the Fund is Managed--Manager" at page
12.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares. PSI is
paid a distribution and/or service fee with respect to Class A shares which is
currently being charged at the annual rate of .25 of 1% of the average daily net
assets of the Class A shares and is paid a distribution and service fee with
respect to Class B and Class C shares which is currently being charged at the
annual rate of 1% of the average daily net assets of the Class B and Class C
shares. Prudential Securities incurs the expense of distributing the Fund's
Class Z shares under a Distribution Agreement with the Fund, none of which is
reimbursed by or paid for the Fund. See "How the Fund is Managed--Distributor"
at page 12.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A or Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
investment requirements. There is no minimum investment requirement for certain
employee savings plans or custodial accounts for the benefit of minors. For
purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Guide--How to Buy
Shares of the Fund" at page 19 and "Shareholder Guide--Shareholder Services" at
page 30.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge, which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See "How
The Fund Values its Shares" at page 15 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 19.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
o Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
o Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining to zero
from 5% of the lower of the amount invested or the
redemption proceeds), which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B
shares will automatically convert to Class A shares
approximately seven years after purchase.
o Class C Shares: Sold without an initial sales charge but, for one year
after purchase, are subject to a CDSC of 1% on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares,
but Class C shares, do not convert to another class.
o Class Z Shares: Sold without either an initial or contingent deferred sales
charge to a limited group of investors. Class Z shares are
not subject to any ongoing service or distribution-related
expenses. See "Shareholder Guide--Alternative Purchase Plan"
at page 21.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 25.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any,
annually and distributions of any net capital gains at least annually. Dividends
and distributions will be automatically reinvested in additional shares of the
Fund at NAV without a sales charge unless you request that they be paid to you
in cash. See "Taxes, Dividends and Distributions" at page 16.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) .............. 5% None None None
Maximum Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) .................... None 5% during the first 1% on None
year, decreasing by 1% redemp-
annually to 1% in the tions made
fifth and sixth years within one
and 0% in the year of
seventh year* purchase
Maximum Sales Load Imposed on Reinvested
Dividends ........................................ None None None None
Redemption Fees ................................... None None None None
Exchange Fee ...................................... None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees ................................. .60% .60% .60% .60%
12b-1 Fees (After Reduction) .................... .25%++ 1.00% 1.00% None
Other Expenses .................................. .50% .50% .50% .50%
---- ---- ---- ----
Total Fund Operating Expenses (After Reduction) . 1.35% 2.10% 2.10% 1.10%
==== ==== ==== ====
</TABLE>
EXAMPLE 1 YEAR 3 YEARS
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
Class A ...................................... $63 $91
Class B ...................................... $71 $96
Class C ...................................... $31 $66
Class Z ...................................... $11 $35
You would pay the following expenses on the same investment,
assuming no redemption:
Class A ...................................... $63 $91
Class B ...................................... $21 $66
Class C ...................................... $21 $66
Class Z ...................................... $11 $35
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the various
types of costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" include estimated
operating expenses of the Fund, for the fiscal year ending March 31, 1998, such
as Directors' and professional fees, registration fees, reports to shareholders
and transfer agency and custodian (domestic and foreign) fees.
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges (12b-1 fees) on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on the Fund rather than on a per shareholder basis. Therefore,
long-term Class B and Class C shareholders of the Fund may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay up to an annual rate of .30 of 1% of the average daily net assets
of the Class A shares, the Distributor has agreed to limit its distribution
fees with respect to Class A shares of the Fund so as not to exceed .25 of
1% of the average daily net assets of the Class A shares for the fiscal
year ending March 31, 1998. See "How the Fund is Managed--Distributor."
Total Fund Operating Expenses without such limitation for Class A shares
would be 1.40%.
4
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS LONG-TERM CAPITAL APPRECIATION. UNDER
NORMAL MARKET CONDITIONS, THE FUND INTENDS TO INVEST PRIMARILY (AT LEAST 80% OF
ITS NET ASSETS) IN EQUITY SECURITIES OF SMALL-CAP U.S. COMPANIES WITH MARKET
CAPITALIZATIONS OF LESS THAN $1.5 BILLION. THE FUND'S PORTFOLIO MANAGER WILL
EMPLOY COMPUTER-DRIVEN QUANTITATIVE STRATEGIES DESIGNED TO IDENTIFY COMPANIES
WHICH POSSESS BOTH ATTRACTIVE VALUATIONS AND GOOD EARNINGS MOMENTUM AND TO
CONSTRUCT A PORTFOLIO THAT IS INTENDED TO MAXIMIZE RETURNS WHILE ATTEMPTING TO
CONTROL RISK. THERE CAN BE NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS
OBJECTIVE. SEE "INVESTMENT OBJECTIVE AND POLICIES" IN THE STATEMENT OF
ADDITIONAL INFORMATION.
AS WITH AN INVESTMENT IN ANY MUTUAL FUND, AN INVESTMENT IN THIS FUND CAN
DECREASE IN VALUE AND YOU CAN LOSE MONEY.
THE PROCESS. The portfolio manager will employ computer-driven quantitative
strategies designed to maximize returns while attempting to control risk. The
quantitative model (the QV Model) is a multi-factor stock valuation model that
was developed and is maintained by Prudential Securities' Quantitative Analysis
Group to identify companies that are attractively valued and exhibit good
earnings momentum. The model does this by looking at three general categories or
factors: current valuation; profitability momentum; and earnings surprise. The
QV Model is more fully described in the QV Model Appendix below. The portfolio
manager may invest at different times and in different amounts of the securities
recommended by the QV Model based on quantitative analysis and market
conditions.
EQUITY SECURITIES
Equity securities include common stocks, preferred stocks, rights,
warrants, securities convertible into or exchangeable for common or preferred
stocks, equity investments in partnerships, joint ventures and other forms of
non-corporate investment and American Depositary Receipts (ADRs). ADRs are U.S.
dollar-denominated certificates issued by a United States bank or trust company
and represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. ADRs are considered domestic
securities.
It is the intention of the Fund to purchase securities of companies with
market capitalizations of less than $1.5 billion. Market capitalization is
measured at the time of purchase. The Fund does not anticipate that it will hold
most securities when the market capitalization of the underlying company has
exceeded $1.5 billion.
Although a small-cap fund, the Fund may also invest up to 20% of its total
assets in equity securities of companies with market capitalizations of greater
than $1.5 billion, obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, derivatives and cash. The Fund may invest up to
20% of its net assets in foreign securities. Investing in securities of foreign
companies and countries involves certain risks and considerations not typically
associated with investments in domestic companies. See "Other Investments and
Policies--Foreign Investments" below.
Securities of small-cap companies have historically been more volatile than
those in the Standard & Poor's S&P 500 Stock Index or the broader market.
Accordingly, during periods when stock prices decline generally, it can be
expected that the value of the Fund will decline more than the broad market. In
addition, small-cap companies are likely to reinvest their earnings rather than
distribute them; as a result, the Fund is not likely to receive significant
dividend income on its portfolio securities.
5
<PAGE>
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may temporarily
invest without limit in money market instruments, including commercial paper of
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, non-convertible debt securities
(corporate and government), obligations issued or guaranteed by the U.S.
Government, its agencies or its instrumentalities, repurchase agreements
(described more fully below) and cash (foreign currencies or U.S. dollars). 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.
In addition, the portfolio's manager may invest in securities other than
recommended by the quantitative model when market conditions warrant a defensive
strategy.
The Fund may also temporarily hold cash or invest in high quality foreign
or domestic money market instruments pending investment of proceeds from new
sales of Fund shares or to meet ordinary daily cash needs. See "Other
Investments and Policies" below.
[THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY OF THE FUND.]
FUNDAMENTAL POLICIES MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A
MAJORITY OF THE FUND'S OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED (INVESTMENT COMPANY ACT). INVESTMENT
POLICIES THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
OTHER INVESTMENTS AND POLICIES
FOREIGN INVESTMENTS
THE FUND MAY INVEST UP TO 30% OF ITS TOTAL ASSETS IN SECURITIES OF FOREIGN
ISSUERS. For purposes of this limitation, American Depositary Receipts are not
deemed to be foreign securities. Investing in securities of foreign companies
and countries involves certain considerations and risks which are not typically
associated with investing in securities of domestic companies. Foreign companies
are not generally subject to uniform accounting, auditing and financial
standards or other requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and public companies than exists in the
United States. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes which may decrease the net return on such
investments as compared to dividends and interest paid to the Fund by domestic
companies. There may be the possibility of expropriations, confiscatory
taxation, political, economic or social instability or diplomatic developments
which could affect assets of the Fund held in foreign countries. In addition, a
portfolio of foreign securities may be adversely affected by fluctuations in the
relative rates of exchange between the currencies of different nations and by
exchange control regulations.
There may be less publicly available information about foreign companies
and governments compared to reports and ratings published about U.S. companies.
Foreign securities markets have substantially less volume than, for example, the
New York Stock Exchange and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Brokerage
commissions and other transaction costs of foreign securities exchanges are
generally higher than in the United States.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in securities of real estate investment trusts or
REITs. Unlike corporations, REITs do not have to pay income taxes if they meet
certain Internal Revenue Code requirements. To qualify, a REIT must distribute
at least 95% of its taxable income to its shareholders and receive at least 75%
of that income from rents, mortgages and sales of property. REITs offer
investors greater liquidity and diversification than direct ownership of a
handful of properties, as
6
<PAGE>
well as greater income potential than an investment in common stock. Like any
investment in real estate, though, a REIT's performance depends on several
factors, such as its ability to find tenants for its properties, to renew leases
and to finance property purchases and renovations.
SHORT SELLING
The Fund may sell a security it does not own in anticipation of a decline
in the market value of that security (short sales). To complete such a
transaction, the Fund must borrow the security to make delivery to the buyer.
The Fund then is obligated to replace the security borrowed by purchasing it at
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay to the lender any dividends or
interest which accrue during the period of the loan. To borrow the security, the
Fund also may be required to pay a premium, which would increase the cost of the
security sold. The proceeds of the short sale will be retained by the broker, to
the extent necessary to meet margin requirements, until the short position is
closed out. Until the Fund replaces a borrowed security, the Fund will maintain
daily a segregated account, containing cash or liquid assets, at such a level
that (i) the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the security sold short and
(ii) the amount deposited in the segregated account plus the amount deposited
with the broker as collateral will not be less than the market value of the
security at the time it was sold short. The Fund will incur a loss as a result
of the short sale if the price of the security increases between the date of the
short sale and the date on which the Fund replaces the borrowed security. The
Fund will realize a gain if the security declines in price between those dates.
This result is the opposite of what one would expect from a cash purchase of a
long position in a security. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with a short sale. No
more than 25% of the Fund's net assets will be, when added together: (i)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales; and (ii) allocated to segregated accounts in connection with
short sales.
The Fund also may make short sales "against-the-box," in which the Fund
enters into a short sale of a security which the Fund owns or has the right to
obtain at no added cost. Not more than 25% of the Fund's net assets (determined
at the time of the short sale against-the-box) may be subject to such sales. See
"Investment Restrictions" in the Statement of Additional Information.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S. Treasury
or by an agency or instrumentality of the U.S. Government. Not all U.S.
Government securities are backed by the full faith and credit of the United
States. Some are supported only by the credit of the issuing agency. See
"Investment Objective and Policies--U.S. Government Securities" in the Statement
of Additional Information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually quite short, possibly
overnight or a few days, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss. The Fund participates in a joint repurchase
account with other investment companies managed by Prudential Mutual Fund
Management LLC pursuant to an order of the Securities and Exchange
7
<PAGE>
Commission (SEC). See "Investment Objective and Policies--Repurchase Agreements"
in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS
The Fund may hold cash or invest in high quality money market instruments,
including commercial paper of a U.S. or non-U.S. company, foreign government
securities, certificates of deposit, bankers' acceptances and time deposits of
domestic and foreign banks, and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar denominated or denominated in a foreign currency. Money market
instruments typically have a maturity of one year or less as measured from the
date of purchase. The Fund may hold cash or invest in money market instruments
without limit for temporary defensive purposes. To the extent that the Fund
otherwise holds cash or invests in money market instruments, it is subject to
its investment policies described above.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is generally not expected to exceed
200%. High portfolio turnover (over 100%) may involve correspondingly greater
brokerage commissions and other transaction costs, which will be borne directly
by the Fund. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information. In addition, high portfolio turnover may result in
increased short-term capital gains, which, when distributed to shareholders, are
treated as ordinary income. See "Taxes, Dividends and Distributions."
BORROWING
The Fund may borrow an amount equal to no more than 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. The
Fund may pledge up to 20% of its total assets to secure these borrowings. If the
Fund's asset coverage for borrowings falls below 300%, the Fund will take prompt
action to reduce its borrowings. The Fund will not purchase portfolio securities
when borrowings exceed 5% of the value of its total assets. See "Investment
Objective and Policies--Borrowing" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act) and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. The Fund's investment in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. Repurchase agreements subject to demand are
deemed to have a maturity equal to the applicable notice period. See "Investment
Objective and Policies--Illiquid Securities" in the Statement of Additional
Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or liquid assets or secures an irrevocable
letter of credit in favor of the Fund in an amount equivalent to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregated account pursuant to applicable regulations. During
the time
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portfolio securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividend or interest paid on such securities and the Fund may
invest the cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. As with any extensions
of credit, there are risks of delay in recovery and in some cases loss of rights
in the collateral should the borrower of the securities fail financially. As a
matter of fundamental policy, the Fund cannot lend more than 33 1/3% of the
value of its total assets. The Fund may pay reasonable administration and
custodial fees in connection with a loan.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-isued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place as much as a month or more in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. The Fund's Custodian will maintain, in a
segregated account of the Fund, cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, having
a value equal to or greater than the Fund's purchase commitments. 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.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE
WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC). THE FUND,
AND THUS THE INVESTOR, MAY LOSE MONEY IF THE FUND IS UNSUCCESSFUL IN ITS USE OF
THESE STRATEGIES. These futures contracts and related options will be on stock
indices and foreign currencies. A futures contract is an agreement to purchase
or sell an agreed amount of securities or currencies at a set price for delivery
in the future.
STOCK INDEX FUTURES. THE FUND MAY USE STOCK INDEX FUTURES TRADED ON A
COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN HEDGING AND RISK MANAGEMENT
PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE WITH REGULATIONS OF
THE COMMODITY FUTURES TRADING COMMISSION. THE FUND PRIMARILY INTENDS TO USE
STOCK INDEX FUTURES TO FACILITATE NEW INVESTMENTS OR FUNDING REDEMPTIONS.
A STOCK INDEX FUTURES CONTRACT IS AN AGREEMENT IN WHICH THE WRITER (OR
SELLER) OF THE CONRACT AGREES TO DELIVER TO THE BUYER AN AMOUNT OF CASH EQUAL TO
A SPECIFIC DOLLAR AMOUNT TIMES THE DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC
STOCK INDEX AT THE CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE
AT WHICH THE AGREEMENT IS MADE. No physical delivery of the underlying stocks in
the index is made. When the futures contract is entered into, each party
deposits with a broker or in a segregated custodial account approximately 5% of
the contract amount, called the "initial margin." Subsequent payments to and
from the broker, called "variation margin," will be made on a daily basis as the
price of the underlying stock index fluctuates, making the long and short
positions in the futures contracts more or less valuable, a process known as
"marked to market."
OPTIONS ON STOCK INDEX FUTURES. The Fund may also purchase and write
options on stock index futures for certain hedging, return enhancement and risk
management purposes. In the case of options on stock index futures, the holder
of the option pays a premium and receives the right, upon exercise of the option
at a specified price during the option period, to assume a position in a stock
index futures contract (a long position if the option is a call and a short
positiion if the option is a put). If the option is exercised by the holder
before the last trading day during the option period, the option
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writer delivers the futures position, as well as any balance in the writer's
futures margin account, which represents the amount by which the market price of
the stock index futures contract at exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
stock index future. If it is exercised on the last trading day, the option
writer delivers to the option holder cash in an amount equal to the difference
between the option exercise price and the closing level of the relevant index on
the date the option expires.
FUTURES CONTRACTS ON FOREIGN CURRENCIES. THE FUND MAY BUY AND SELL FUTURES
CONTRACTS ON FOREIGN CURRENCIES SUCH AS THE EUROPEAN CURRENCY UNIT, AND PURCHASE
AND WRITE OPTIONS THEREON FOR HEDGING AND RISK MANAGEMENT PURPOSES. A European
Currency Unit is a basket of specified amounts of the currencies of certain
member states of the European Union, a Western European economic cooperative
organization including, inter alia, France, Germany, The Netherlands and the
United Kingdom. The Fund will engage in transactions in only those futures
contracts and options thereon that are traded on a commodities exchange or a
board of trade. A "sale" of a futures contract on foreign currency means the
assumption of a contractual obligation to deliver the specified amount of
foreign currency at a specified price in a specified future month. A "purchase"
of a futures contract means the assumption of a contractual obligation to
acquire the currency called for by the contract at a specified price in a
specified future month. At the time a futures contract is purchased or sold, the
Fund must allocate cash or securities as initial margin. Thereafter, the futures
contract is valued daily and the payment of "variation margin" may be required,
resulting in the Fund's paying or receiving cash that reflects any decline or
increase, respectively, in the contract's value, i.e. "marked-to-market."
LIMITATIONS ON PURCHASES AND SALES OF FUTURES CONTRACTS AND OPTIONS
THEREON. UNDER THE REGULATIONS OF THE COMMODITY EXCHANGE ACT, AN INVESTMENT
COMPANY REGISTERED UNDER THE INVESTMENT COMPANY ACT IS 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 DO NOT EXCEED 5% OF THE LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS.
Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If the Fund does not hold the
security or currency underlying the futures contract, the Fund will be required
to segregate on an ongoing basis with its Custodian cash or liquid securities in
an amount at least equal to the Fund's obligations with respect to such futures
contracts.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the movements in the index or price of the
currencies underlying the futures contract is imperfect and there is a risk that
the value of the indices or currencies underlying the futures contract may
increase or decrease at a greater rate than the related futures contracts,
resulting in losses to the Fund. The use of these instruments will hedge only
the currency risks associated with investments in foreign securities, not market
risks. Certain futures exchanges or boards of trade have established daily
limits on the amount that the price of futures contracts or related options may
vary, either up or down, from the previous day's settlement price. These daily
limits may restrict the Fund's ability to purchase or sell certain futures
contracts or related options on any particular day. In addition, if the Fund
purchases futures to hedge against market advances before it can invest in
common stock in an advantageous manner and the market declines, the Fund might
experience a loss on the futures contract. In addition, the ability of the Fund
to close out a futures position or an option depends on a liquid secondary
market. There is no assurance that at any particular time liquid secondary
markets will exist for any particular futures contract or option thereon. See
"Investment Objective and Policies" in the Statement of Additional Information.
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THE FUND'S ABILITY TO ENTER INTO OR CLOSE ON FUTURES CONTRACTS AND OPTIONS
THEREON MAY ALSO BE LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. See "Taxes, Dividends and
Distributions" and "Investment Objective and Policies" in the Statement of
Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS THE
INVESTOR, MAY LOSE MONEY IF THE FUND IS UNSUCCESSFUL IN ITS USE OF THESE
STRATEGIES. If the Subadviser's predictions of movements in the direction of the
securities and foreign currency markets are inaccurate, the adverse consequences
to the Fund may leave the Fund in a worse position than if such strategies were
not used. Risks inherent in the use of options, foreign currency and futures
contracts and options on futures contracts include (1) dependence on the
Subadviser's ability to predict correctly movements in the direction of
securities prices and currency markets; (2) imperfect correlation between the
price of options and futures contracts and options thereon and movements in the
prices of the securities or currencies being hedged; (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; (5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences; and (6) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need for
the Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate securities in connection with
hedging transactions. See "Taxes, Dividends and Distributions" in the Statement
of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
The Fund is responsible for the payment of certain fees and expenses
including, among others, the following: (i) management and distribution fees;
(ii) the fees of unaffiliated Directors; (iii) the fees of the Fund's Custodian
and Transfer and Dividend Disbursing Agent; (iv) the fees of the Fund's legal
counsel and independent accountants; (v) brokerage commissions incurred in
connection with portfolio transactions; (vi) all taxes and charges of
governmental agencies; (vii) the reimbursement of organization expenses; and
(viii) expenses related to shareholder communications including all expenses of
shareholders' and Board of Directors' meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders.
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MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, NEWARK, NEW JERSEY 07102, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .60 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. PMF is organized in New York as a limited liability company. It is the
successor to Prudential Mutual Fund Management, Inc., which transferred its
assets to PMF in September 1996. See "Manager" in the Statement of Additional
Information.
As of __________, 1997, PMF served as the manager to __ open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to __ closed-end investment companies with aggregate assets of
approximately $ ____ billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The Fund's portfolio manager is John Leib, CFA, a vice president of
Prudential Investments, who is responsible for the day-to-day management of the
Fund. He manages the Fund with the help of a team of investment professionals.
Mr. Leib and the team manage another quantitative strategy portfolio, which Mr.
Leib has managed since 1988. Mr. Leib joined The Prudential Insurance Company of
America (Prudential) in 1987 as a quantitative analyst.
PMF and PIC are wholly-owned subsidiaries of Prudential, a major
diversified insurance and financial services company, and are part of Prudential
Investments, a business group of Prudential.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE THAT SERVES AS THE DISTRIBUTOR OF THE CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED
SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES.
Prudential Securities also incurs the expenses of distributing the Fund's Class
Z shares under the Distribution Agreement, none of which is reimbursed by or
paid for by the Fund. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions
and account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses
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exceed its distribution and service fees, the Fund will not be obligated to pay
any additional expenses. If the Distributor's expenses are less than such
distribution and service fees, it will retain its full fees and realize a
profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. Prudential Securities has agreed
to limit its distribution-related fees payable under the Class A Plan to .25 of
1% of the average daily net assets of the Class A shares for the fiscal year
ending March 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED EXPENSES 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 provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of each of the Class B and Class C shares,
respectively, and (ii) a service fee of .25 of 1% of the average daily net
assets of each of the Class B and Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
The Fund records all payments made under the Plans as expenses in the
calculation of net investment income. See "Distributor" in the Statement of
Additional Information.
Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of the Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the
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entry of an SEC Administrative Order which stated that PSI's conduct violated
the federal securities laws, directed PSI to cease and desist from violating the
federal securities laws, pay civil penalties, and adopt certain remedial
measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purposes of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of $5,000,000 in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets, which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
PMF 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. Fee waivers
and expense subsidies will increase the Fund's total return. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Fund provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906.
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HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. FOR
VALUATION PURPOSES, QUOTATIONS OF FOREIGN SECURITIES IN A FOREIGN CURRENCY ARE
CONVERTED TO U.S. DOLLAR EQUIVALENTS. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., EASTERN TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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 the other three
classes because Class Z shares are not subject to any distribution and/or
service fees. It is expected, however, that the NAV of the four classes will
tend to converge immediately after the recording of dividends, which will differ
by approximately the amount of distribution and/or service fee expense accrual
differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are
based on historical earnings and are not intended to indicate future
performance. The "total return" shows how much an investment in the Fund would
have increased (decreased) over a specified period of time (i.e., one, five, or
ten years or since inception of the Fund) assuming that all distributions and
dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects actual
performance over a stated period of time. "Average annual" total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance and
takes into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The "yield" refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include comparative performance information in advertising or marketing the
15
<PAGE>
Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., and other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information will be contained in the Fund's annual and semi-annual reports to
shareholders, which will be available without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND INTENDS TO ELECT TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO FEDERAL
INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT IT
DISTRIBUTES TO ITS SHAREHOLDERS.
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts). At
the end of each year, such investments held by the Fund will be required to be
"marked-to-market" for federal income tax purposes; that is, treated as having
been sold at market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition may be
treated as ordinary gain or loss. These gains or losses increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency fluctuation
losses exceed other investment company taxable income during a taxable year,
distributions made by the Fund during the year would be characterized as a
return of capital to shareholders, reducing the shareholder's basis in his or
her Fund shares.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term capital gains (i.e., the excess of net short-term capital gains
over net long-term capital losses) distributed to shareholders will be taxable
as ordinary income to the shareholders whether or not reinvested. Any net
capital gains (i,e., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individual shareholders is 28% and the
maximum tax rate for ordinary income is 39.6%. The maximum long-term capital
gains rate for corporate shareholders is currently the same as the maximum tax
rate for ordinary income.
Dividends paid by the Fund are eligible for the 70% dividends-received
deduction for corporate shareholders, to the extent that the Fund's income is
derived from certain dividends received from domestic corporations. Capital gain
distributions are not eligible for the 70% dividends-received deduction.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year, and
otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held six months or less, however, will be treated as a long-term
capital loss to the extent of any capital gain distributions received by the
shareholder.
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<PAGE>
The Fund has obtained an opinion of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
any class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
WITHHOLDING TAXES. Under the Internal Revenue Code, the Fund is required to
withhold and remit to the U.S. Treasury 31% of dividends, capital gain income
and redemption proceeds, payable on the accounts of those shareholders who fail
to furnish their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in
the case of certain foreign shareholders) with the required certifications
regarding the shareholder's status under the federal income tax laws.
Withholding at this rate is also required from dividends and capital gains
distributions (but not redemption proceeds) payable to shareholders who are
otherwise subject to backup withholding. Dividends of net investment income and
short-term capital gains paid to a foreign shareholder will generally be subject
to U.S. withholding tax at the rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY,
ANNUALLY AND TO MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET
LONG-TERM CAPITAL LOSSES AT LEAST ANNUALLY. Dividends paid by the Fund with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class (other than Class Z) will bear its own
distribution and/or service fee charges, generally resulting in lower dividends
for Class B and Class C shares in relation to Class A and Class Z shares and
lower dividends for Class A shares in relation to Class Z shares. Distribution
of net capital gains, if any, will be paid in the same amount for each class of
shares. See "How The Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED
ON THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attn: Account Maintenance Unit, P.O. Box 15015, New
Brunswick, New Jersey 08906. If you hold shares through Prudential Securities,
you should contact your financial adviser to elect to receive dividends and
distributions in cash. The Fund will notify each shareholder after the close of
the Fund's taxable year both of the dollar amount and the taxable status of that
year's dividends and distributions on a per share basis.
WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ATTRIBUTABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS FOUR BUSINESS
DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR
DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO YOU AS A
TAXABLE DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF DIVIDENDS
WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON FEBRUARY 4, 1997. THE FUND IS
AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE,
DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND
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CLASS Z COMMON STOCK, [each of which consists of 500 million anthorized shares.]
Each class of common stock of the Fund represents an interest in the same assets
of the Fund and is identical in all respects except that (i) each class is
subject to different sales charges and distribution and/or service fees (except
for Class Z shares which are not subject to any sales charges and distribution
and/or service fees), which may affect performance, (ii) each class has
exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "How the Fund is
Managed--Distributor." In accordance with the Fund's Articles of Incorporation,
the Board of Directors may authorize the creation of additional series of common
stock and classes within such series, with such preferences, privileges,
limitations and voting and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class (with the
exception of Class Z shares, which are not subject to any distribution or
service fees) bears the expenses related to the distribution of its shares.
Except for the conversion feature applicable to the Class B shares, there are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of common stock of the Fund is entitled to its portion
of all of the Fund's assets after all debts and expenses of the Fund have been
paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees. The Fund's shares do not have cumulative voting rights for the election of
Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OR MORE
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.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
INITIAL OFFERING OF SHARES
Prudential Securities will solicit subscriptions for Class A, Class B,
Class C and Class Z shares of the Fund during a subscription period (the
Subscription Period) commencing on or about ___ , 1997, and currently expected
to end on
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<PAGE>
or about ______ , 1997. Shares of the Fund subscribed for during the
Subscription Period will be issued at a net asset value of $10.00 per share on a
closing date (which is expected to occur on ____ , 1997 or the third business
day after the end of the Subscription Period). An initial sales charge of 5%
(5.26% of the net amount invested) is imposed on each transaction in Class A
shares. This initial sale charge may be reduced, depending on the amount of the
purchase, as set forth in the table under "Alternative Purchase Plan." Each
investor's dealer will notify such investor of the end of the Subscription
Period and payment will be due within three days thereafter. If any orders
received during the Subscription Period are accompanied by payment, such payment
will be returned unless instructions have been received authorizing investment
in a money market fund. All such funds received and invested in a money market
fund, including any dividends received on these funds, will be automatically
invested in the Fund on the closing date without any further action by the
investor. Shareholders who purchase their shares during the Subscription Period
will not receive stock certificates. The minimum initial investment during the
Subscription Period is $1,000 per class for Class A and Class B shares and
$5,000 for Class C shares. There are no minimum investment requirements for
Class Z shares and for certain retirement and employee saving plans or custodial
accounts for the benefit of minors.
Subscribers for shares will not have any of the rights of a shareholder of
the Fund until the shares subscribed for have been paid for and their issuance
has been reflected in the books of the Fund. The Fund reserves the right to
withdraw, modify or terminate the initial offering without notice and to refuse
any order in whole or in part.
CONTINUOUS OFFERING OF SHARES
The Fund reserves the right to delay commencement of the continuous
offering of its shares to the public for a period (the Closing Period) of up to
30 business days after the end of the Subscription Period, although redemptions
will be permitted during this time. Immediately after the expiration of the
Closing Period, the Fund expects to commence a continuous offering of its
shares.
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order by the Transfer Agent or
Prudential Securities plus a sales charge which, at your option, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at net asset value without any sales charge. See "Alternative Purchase
Plan" and "How the Fund Values its Shares."
The minimum initial investment is $1,000 per class for Class A and Class B
shares and $5,000 for Class C shares, except that the minimum initial investment
for Class C shares may be waived from time to time. There is no minimum initial
investment requirement for Class Z shares. The minimum subsequent investment is
$100 for Class A, Class B and Class C shares, except for Class Z shares for
which there is no such minimum. All minimum investment requirements are waived
for certain employee savings plans or custodial accounts for the benefit of
minors. For purchases through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Services"
below.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
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<PAGE>
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Small-Cap Quantitative Fund, Inc., specifying on
the wire the account number assigned by PMFS and your name and identifying the
sales charge alternative (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street Bank and Trust Company (State
Street) of federal funds prior to the calculation of NAV (4:15 P.M., New York
time) on a business day, you may purchase shares of the Fund as of that day. See
"Net Asset Value" in the Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Small-Cap
Quantitative Fund, Inc., Class A, Class B, Class C or Class Z shares and your
name and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing federal funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ----------- -----------------
CLASS A Maximum initial sales .30 of 1% (currently Initial sales charge
charge of 5% of the being charged at a waived or reduced
public offering price rate of .25 of 1%) for certain purchases
CLASS B Maximum contingent 1% Shares convert to
deferred sales charge or Class A shares
CDSC of 5% of the lesser approximately seven
of the amount invested or years after the
the redemption proceeds; purchase
declines to zero after
six years
CLASS C Maximum CDSC of 1% of the 1% Shares do not convert
lesser of the amount to another class
invested or the
redemption proceeds on
redemptions made within
one year of purchase
CLASS Z None None Sold to a limited
group of investors
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<PAGE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
and/or service fees) bears the separate expenses of its Rule 12b-1 distribution
and service plan, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class and
(iii) only Class B shares have a conversion feature. See "How to Exchange Your
Shares" below. The income attributable to each class and the dividends payable
on the shares of each class will be reduced by the amount of the distribution
fee (if any) of each class. Class B and Class C shares bear the expenses of a
higher distribution fee which will generally cause them to have higher expense
ratios and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund.
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% 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 7 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class A or Class B shares over Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fees on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
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<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------ ---------------- --------------- -----------------
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of the Class A shares at NAV (without payment
of an initial sales charge), the Manager, the Distributor or one of their
affiliates will pay dealers, financial advisers and other persons who distribute
shares a finders' fee based on a percentage of the net asset value of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are repaying
loans made from such plans to the participant.
PRUARRAY AND SMARTPATH PLANS. Class A shares may be purchased at NAV by
certain retirement and deferred compensation plans, qualified or non-qualified
under the Internal Revenue Code, including pension, profit-sharing, stock-bonus
or other employee benefit plans under Section 401 of the Internal Revenue Code
and deferred compensation and annuity plans under Sections 457 or 403(b)(7)of
the Internal Revenue Code that participate in the Transfer Agent's PruArray or
SmartPath Programs (benefit plan recordkeeping services) (hereafter referred to
as a PruArray or SmartPath Plan); provided that the plan has at least $1 million
in existing assets or 250 eligible employees or participants. The term "existing
assets" for this purpose includes stock issued by a PruArray or SmartPath Plan
sponsor, shares of non-money market Prudential Mutual Funds and shares of
certain unaffiliated non-money market mutual funds that participate in the
PruArray or SmartPath Programs (Participating Funds). "Existing assets" also
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<PAGE>
include shares of money market funds acquired by exchange from a Participating
Fund, monies invested in The Guaranteed Interest Account (GIA), a group annuity
insurance product issued by Prudential, and units of The Stable Value Fund
(SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided
(i) the purchase is made with the proceeds of a redemption from either GIA or
SVF and (ii) Class A shares are an investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers which
are members of a common trade, professional or membership association
("Association") that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit Plans
or non-qualified plans may purchase Class A shares at net asset value without
regard to the assets or number of participants in the individual employer's
qualified Plan(s) or non-qualified plans so long as the employers in the
Association (i) have retirement plan assets in the aggregate of at least $1
million or 250 participants in the aggregate and (ii) maintain their accounts
with the Fund's transfer agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset
value to employees of companies that enter into a written agreement with
Prudential Retirement Services to participate in the PruArray Savings Program.
Under this Program, a limited number of Prudential Mutual Funds are available
for purchase at net asset value by Individual Retirement Accounts and Savings
Accumulation Plans of the company's employees. The Program is available only to
(i) employees who open an IRA or Savings Accumulation Plan account with the
Fund's transfer agent and (ii) spouses of employees who open an IRA account with
the Fund's transfer agent. The Program is offered to companies that have at
least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that purchases
at NAV are permitted by such person's employer, (d) Prudential, employees and
special agents of Prudential and its subsidiaries and all persons who have
retired directly from active service with Prudential or one of its subsidiaries,
(e) registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities provided that purchases at
NAV are permitted by such person's employer and (f) investors who have a
business relationship with a financial adviser who joined Prudential Securities
from another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of benefit plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end, non-money
market fund sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less) and (iii)
the financial adviser served as the client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is
23
<PAGE>
no sales charge imposed at the time of purchase, redemption of Class B and Class
C shares may be subject to a CDSC. See "How to Sell Your Shares--Contingent
Deferred Sales Charges." The Distributor will pay sales commissions of up to 4%
of the purchase price of Class B shares to dealers, financial advisers and other
persons who sell Class B shares at the time of sale from its own resources. This
facilitates the ability of the Fund to sell the Class B shares without an
initial sales charge being deducted at the time of purchase. The Distributor
anticipates that it will recoup its advancement of sales commissions from the
combination of the CDSC and the distribution fee. See "How the Fund is
Managed--Distributor." In connection with the sale of Class C shares, the
Distributor will pay dealers, financial advisers and other persons which
distribute Class C shares a sales commission of up to 1% of the purchase price
at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors: (i) pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation plans and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code, and non-qualified plans for which the Fund is an
available option (collectively, Benefit Plans), provided that such Benefit Plans
(in combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution assets;
(ii) participants in any fee-based program or trust program sponsored by
Prudential Securities Incorporated (Prudential Securities), The Prudential
Savings Bank, F.S.B. (or any affiliate) which includes mutual funds as
investment options and for which the Fund is an available option; (iii) certain
participants in the MEDLEY Program (group variable annuity contracts) sponsored
by The Prudential Insurance Company of America (Prudential) for whom Class Z
shares of the Prudential Mutual Funds are an available investment option; (iv)
Benefit Plans for which Prudential Retirement Services serves as record keeper
and as of September 20, 1996, (a) were Class Z shareholders of the Prudential
Mutual Funds, or (b) executed a letter of intent to purchase Class Z shares of
the Prudential Mutual Funds; (v) the Prudential Securities Cash Balance Pension
Plan, an employee defined benefit plan sponsored by Prudential Securities (only
applicable to Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.
and Prudential Pacific Growth Fund, Inc.); (iv) current and former
Directors/Trustees of the Prudential Mutual Funds (including the Fund); and
(vii) employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan.
In connection with the sale of Class Z Shares, the Manager, Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
who distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges."
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
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If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices. In the
case of redemptions from a PruArray or SmartPath Plan, if the proceeds of the
redemption are invested in another investment option of the plan, in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or the right of
redemption suspended at times (a) when the New York Stock Exchange is closed for
other than customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (d) during any other period when the SEC, by order, so permits;
provided that applicable rules and regulations of the SEC shall govern as to
whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund has, however, elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during the 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
any such shareholder 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No contingent deferred
sales charge will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a pro rata basis.) You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect the federal tax
treatment of any gain realized upon redemption. For more information on the rule
which disallows a loss on the sale or exchange of shares of the Fund which are
replaced, see "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
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<PAGE>
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred
sales charge (CDSC) declining to zero from 5% over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and one year, in the case of Class C shares. A CDSC will
be applied on the lesser of the original purchase price or the current value of
the shares being redeemed. Increases in the value of your shares or shares
purchased through reinvestment of dividends or distributions are not subject to
CDSC. The amount of any contingent deferred sales charge will be paid to and
retained by the Distributor. See "How the Fund is Managed--Distributor" and
"Waiver of the Contingent Deferred Sales Charges" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month after
the initial purchase, excluding the time shares were held in a money market
fund. See "How to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
- ------------------ --------------------------
First .............................................. 5.0%
Second ............................................. 4.0%
Third .............................................. 3.0%
Fourth ............................................. 2.0%
Fifth .............................................. 1.0%
Sixth .............................................. 1.0%
Seventh ............................................ None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results generally in the lowest
possible rate. It will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset value
above the total amount of payments for the purchase of Fund shares made during
the preceding six years; then of amounts representing the cost of shares held
beyond the applicable CDSC period; and finally, of amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase, you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
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<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination or disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section
403(b) custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii)in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service, i.e.,
following voluntary or involuntary termination of employment or following
retirement. Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan unless such
redemptions otherwise qualify as a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PruArray or SmartPath Plans. The CDSC will be waived on redemptions from
certain qualified and non-qualified retirement and deferred compensation plans
that participate in the Transfer Agent's PruArray and SmartPath Programs,
provided that the investment options of the plan include shares of Prudential
Mutual Funds and shares of non-affiliated mutual funds.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your
27
<PAGE>
account (ii) multiplied by the total number of Class B shares then in your
account. Each time any Eligible Shares in your account convert to Class A
shares, all shares or amounts representing Class B shares then in your account
that were acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 or 47.62% multiplied by 200 shares or 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus, although
the aggregate dollar value will be the same, you may receive fewer Class A
shares than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS
C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE
NAV. No sales charge will be imposed at the time of exchange. Any applicable
CDSC payable upon the redemption of shares exchanged will be that imposed by the
fund in which shares are initially purchased and will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund, Inc. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares." An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
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<PAGE>
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, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. (The Fund or its agents could be subject to liability
if they fail to employ reasonable procedures.) All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request is
received in good order. The exchange privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares, will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in PSI's 401(k) Plan for which the Fund's Class Z
shares is an available option and who wish to transfer their Class Z shares out
of the PSI 401(k) Plan following separation of service (i.e., voluntary or
involuntary termination of employment or retirement) will have their Class Z
shares exchanged for Class A shares at NAV.
The Fund reserves the right to reject any exchange order including
exchanges (and market timing transactions) which are of size and/or frequency
engaged in by one or more accounts acting in concert or otherwise, that have or
may have an adverse effect on the ability of the Subadviser to manage the
portfolio. The determination that such exchanges or activity
29
<PAGE>
may have an adverse effect and the determination to reject any exchange
order shall be in the discretion of the Manager and the Subadviser.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:
o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTION WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
o AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec registered representative
or the Transfer Agent directly.
o TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7)of the Internal Revenue Code are
available through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction of
accounts by participants, or a pooled account arrangement. Information regarding
the establishment of these plans, the administration, custodial fees and other
details is available from Prudential Securities or the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal or
tax adviser with respect to the establishment and maintenance of such a plan.
o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional Information.
o REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at
Gateway Center Three, Newark, New Jersey 07102. In addition, monthly unaudited
financial data are available upon request from the Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, Newark, New Jersey 07102, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A. at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
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APPENDIX
THE QV MODEL
BACKGROUND ON PRUDENTIAL SECURITIES SMALL-CAP MULTIFACTOR MODEL (QV MODEL)
The QV Model, developed by Prudential Securities' Quantitative Analysis
Group, is a multifactor stock ranking model which incorporates components
stressing valuation, momentum in earnings and earnings surprise. Claudia Mott
researches and publishes the small cap version for Prudential Securities.
Ms. Mott is a First Vice President of Prudential Securities and Director of
Small-Cap Research. She provides quantitative research to the small-cap and
mid-cap investment communities in the form of stock valuation and earnings
surprise models as well as topical studies and screens. She is well known for
her work on the various benchmarks used to measure small-cap and mid-cap
performance.
Ms. Mott joined Prudential Securities in 1986 as a quantitative analyst
supporting the existing large-cap quantitative model and related screening
software. She was voted to Institutional Investor magazine's annual research
all-star team in each of the past six years, ranking first in the small-company
category for the past four years. Prior to joining Prudential Securities, she
was a senior consultant for Interactive Data Corporation in Boston and a
financial analyst for Boston Gas Company.
THE PROCESS
Over 1,000 stocks with market capitalizations generally between $100
million and $1.5 billion are ranked according to 8 fundamental factors that have
been broken into three general categories or "blocks"; value, momentum and
surprise. The components of each "block" are as follows.
Value Book/Price
Cash Flow Yield
Implied Return from Internal Growth
Relative P/E Comparison
Structured Dividend Discount Model
Momentum Profitability Momentum (return on
invested capital)
Surprise Estimate Revision
Earnings Surprise
Each of the factor weightings is a result of its past performance and the
value it added to the Model's overall performance. Weightings are adjusted
monthly based on the results of a multiple regression, which measures each
factor's performance over the prior month. A single score for each stock is
calculated on the weighted average of the percentile rankings of the factors.
These scores are ranked and grouped into quintiles to get a QV Rank.
A-1
<PAGE>
The Fund's portfolio manager, Mr. Leib will use the QV rankings provided by
the Prudential Securities Quantitative Analysis Group. Mr. Leib and his team
will then apply quantitative analysis to determine stock selections and
weightings and will compare their findings against the Standard & Poor's Small
Cap 600 Index.
The Fund intends to hold no more than 200 stocks with no single-issue
representing more than 2% of the total assets at the time of rebalancing.
PERFORMANCE OF THE QV MODEL
Set forth below is historical performance data of the QV Model. The data
illustrates the QV Model's performance as measured against the Russell 2000
Small-Cap Index, an unmanaged index comprised of 2000 small-cap stocks (Russell
2000), and the Standard & Poor's Small-Cap 600 Index, an unmanaged index
comprised of 600 small-cap stocks (S&P 600). The returns quoted are total rates
of return, which include the impact of capital appreciation as well as the
reinvestment of dividends, as appropriate. The returns reflect the deduction of
applicable advisory fees and operating expenses, but not any sales charges (the
indices do not incur fees, operating expenses, or charges). Investors should not
consider this performance data as an indication of the future performance of the
Fund.
QV MODEL TOTAL RETURN
FOR PERIOD ENDED __________, 1997
QV MODEL RUSSELL 2000 S&P 600
- -Month Period % % %
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Term Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantitative Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
o Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
================================================================================
TABLE OF CONTENTS
FUND HIGHLIGHTS ...................................................... 2
What are the Fund's Risk Factors and Special
Characteristics? ................................................... 2
FUND EXPENSES ........................................................ 4
HOW THE FUND INVESTS ................................................. 5
Investment Objective and Policies ................................... 5
Other Investments and Policies ...................................... 6
Hedging and Return Enhancement Strategies ........................... 9
Investment Restrictions ............................................. 11
HOW THE FUND IS MANAGED .............................................. 11
Manager ............................................................. 12
Distributor ......................................................... 12
Fee Waivers and Subsidy ............................................. 14
Portfolio Transactions .............................................. 14
Custodian and Transfer and
Dividend Disbursing Agent .......................................... 16
HOW THE FUND VALUES ITS SHARES ....................................... 15
HOW THE FUND CALCULATES PERFORMANCE .................................. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS ................................... 16
GENERAL INFORMATION .................................................. 17
Description of Common Stock ......................................... 17
Additional Information .............................................. 18
SHAREHOLDER GUIDE .................................................... 18
How to Buy Shares of the Fund ....................................... 18
Alternative Purchase Plan ........................................... 20
How to Sell Your Shares ............................................. 24
Conversion Feature--Class B Shares .................................. 27
How to Exchange Your Shares ......................................... 28
Shareholder Services ................................................ 30
THE QV MODEL APPENDIX ................................................ A-1
THE PRUDENTIAL MUTUAL FUND FAMILY .................................... B-1
================================================================================
[MF173A] 42M2575
Class A:
CUSIP Nos.: Class B:
Class C:
Class Z:
PRUDENTIAL
SMALL-CAP
QUANTITATIVE
FUND, INC.
PROSPECTUS
, 1997
[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>
PRUDENTIAL SMALL-CAP QUANTITATIVE FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED ______, 1997
Prudential Small-Cap Quantitative Fund,Inc. (the Fund) is a diversified,
open-end, management investment company. The investment objective of the Fund is
long-term capital appreciation. The Fund seeks to achieve this objective by
investing primarily in equity securities of small-cap U.S. companies with market
capitalizations of less than $1.5 billion. The Fund's portfolio manager will
employ computer-driven quantitative strategies designed to maximize returns
while attempting to control risk. There can be no assurance that the Fund's
investment objective will be achieved. See "Investment Objective and Policies."
The Fund's address is Gateway Center Three, Newark, New Jersey 07102, and
its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Fund dated _____, 1997, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ----------
<S> <C> <C>
Investment Objective and Policies ........................................................ B-2 5
Investment Restrictions .................................................................. B-9 11
Directors and Officers ................................................................... B-11 --
Manager .................................................................................. B-14 12
Distributor .............................................................................. B-16 12
Portfolio Transactions and Brokerage ..................................................... B-17 14
Purchase and Redemption of Fund Shares ................................................... B-18 19
Shareholder Investment Account ........................................................... B-21 30
Net Asset Value .......................................................................... B-24 15
Taxes, Dividends and Distributions ....................................................... B-25 16
Performance Information .................................................................. B-28 15
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants ............ B-29 15
Report of Independent Accountants ........................................................ B-30 --
Statement of Assets and Liabilities ...................................................... B-31 --
Appendix I--General Investment Information ............................................... I-1 --
Appendix II--Historical Performance Data ................................................. II-1 --
Appendix III--Information Relating to The Prudential ..................................... III-1 --
=======================================================================================================================
</TABLE>
MF168B
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Prudential Small-Cap Quantitative Fund, Inc. (the Fund) is a diversified,
open-end, management investment company. The investment objective of the Fund is
long-term capital appreciation. Under normal market conditions, the Fund intends
to invest primarily in equity securities of small-cap U.S. companies (market
capitalization of less than $1.5 billion). The Fund's portfolio manager will
employ computer-driven quantitative strategies designed to maximize returns
while attempting to control risk. The Fund may also invest in equity securities
of companies with market capitalization above $1.5 billion, obligations issued
or guaranteed by the U.S. Government, its agencies and instrumentalities,
futures contracts and options thereon and foreign securities. See "How the Fund
Invests--Investment Objective and Policies" in the Prospectus. There can be no
assurance that the Fund's investment objective will be achieved.
EQUITY SECURITIES--AMERICAN DEPOSITARY RECEIPTS
Generally, ADRs are in registered form. There are no fees imposed on the
purchase or sale of ADRs when purchased from the issuing bank or trust company
in the initial underwriting, although the issuing bank or trust company may
impose charges for the collection of dividends and the conversion of ADRs into
the underlying securities. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i) ADRs are U.S.
dollar-denominated investments that are registered domestically, easily
transferable, and for which market quotations are readily available; and (ii)
issuers whose securities are represented by ADRs are usually subject to
auditing, accounting, and financial reporting standards comparable to those of
domestic issuers.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund is permitted to invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by agencies of the
U.S. Government or instrumentalities of the U.S. Government. These obligations,
including those which are guaranteed by Federal agencies or instrumentalities,
may or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association (GNMA), the Farmers
Home Administration and the Small Business Administration are backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest which are not backed by the full faith and credit of the United States
include obligations such as those issued by the Federal Home Loan Bank, the
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association, the Student Loan Marketing Association, Resolution Funding
Corporation and the Tennessee Valley Authority, each of which has the right to
borrow from the U.S. Treasury to meet its obligations, and obligations of the
Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency. FHLMC investments may include
collateralized mortgage obligations.
Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by the Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are commonly
referred to as Treasury strips.
The values of U.S. Government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. During periods of
falling U.S. interest rates, the values of U.S. Government securities generally
rise and, conversely, during periods of rising interest rates, the values of
such securities generally decline. The magnitude of these fluctuations will
generally be greater for securities with longer-term maturities.
FOREIGN SECURITIES
The Fund is permitted to invest up to 20% of its net assets in foreign
securities.
If the security is denominated in a foreign currency, it will be affected
by changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any
B-2
<PAGE>
such currency against the U.S. dollar will result in a corresponding change in
the U.S. dollar value of the Fund's securities denominated in that currency.
Such changes also will affect the Fund's income and distributions to
shareholders. In addition, although the Fund will receive income in such
currencies, the Fund will be required to compute and distribute its income in
U.S. dollars. Therefore, if the exchange rate for any such currency declines
after the Fund's income has been accrued and translated into U.S. dollars, the
Fund could be required to liquidate portfolio securities to make such
distributions, particularly in instances in which the amount of income the Fund
is required to distribute is not immediately reduced by the decline in such
currency. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred. [The Fund may, but
need not, enter into forward foreign currency exchange contracts, options on
foreign currencies and futures contracts on foreign currencies and related
options, for hedging purposes, including: locking-in the U.S. dollar price of
the purchase or sale of securities denominated in a foreign currency; locking-in
the U.S. dollar equivalent of dividends to be paid on such securities which are
held by the Fund; and protecting the U.S. dollar value of such securities which
are held by the Fund.]
Under the Internal Revenue Code of 1986, as amended (the Internal Revenue
Code), changes in an exchange rate which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities will result in foreign currency gains or
losses that increase or decrease an investment company's taxable income. The
exchange rates between the U.S. dollar and other currencies can be volatile and
are determined by such factors as supply and demand in the currency exchange
markets, international balances of payments, government intervention,
speculation and other economic and political conditions.
Foreign securities include securities of any foreign country the investment
adviser considers appropriate for investment by the Fund. Foreign securities may
also include securities of foreign issuers that are traded in U.S. dollars in
the United States although the underlying security is usually denominated in a
foreign currency.
The costs attributable to foreign investing are higher than the costs of
domestic investing. For example, the cost of maintaining custody of foreign
securities generally exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing are frequently higher than
those attributable to domestic investing. Foreign investment income may be
subject to foreign withholding or other government taxes that could reduce the
return to the Fund on those securities. Tax treaties between the United States
and certain foreign countries may, however, reduce or eliminate the amount of
foreign tax to which the Fund would be subject.
FUTURES CONTRACTS
As a purchaser of a futures contract, the Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the futures contract
at a specified time in the future for a specified price. As a seller of a
futures contract, the Fund incurs an obligation to deliver the specified amount
of the underlying obligation at a specified time in return for an agreed upon
price. The Fund may purchase futures contracts on stock indices and foreign
currencies. The Fund may purchase futures contracts on debt securities,
including U.S. Government securities, aggregates of debt securities, stock
indices and foreign currencies.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures contracts are settled on a net cash payment basis rather than by the
sale and delivery of the securities or currency underlying the futures contract.
U.S. futures contracts have been designed by exchanges that have been designated
as "contract markets" by the Commodity Futures Trading Commission (the CFTC), an
agency of the U.S. Government, and must be executed through a futures commission
merchant (i.e., a brokerage firm) which is a member of the relevant contract
market. Futures contracts trade on these contract markets and the exchange's
affiliated clearing organization guarantees performance of the contracts as
between the clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment (initial margin). It is expected that
the initial margin on U.S. exchanges will vary from one-half of 1% to 4% of the
face value of the contract. Under certain circumstances, however, such as during
periods of high volatility, the Fund may be required by an exchange to increase
the level of its initial margin payment. Thereafter, the futures contract is
valued daily and the payment in cash of "variation margin" may be required, a
process known as "mark-to-the-market." Each day the Fund is required to provide
or is entitled to receive variation margin in an amount equal to any change in
the value of the contract since the preceding day.
B-3
<PAGE>
Although most futures contracts call for actual delivery or acceptance of
securities or cash, the contracts usually are closed out before the settlement
date without the making or taking of delivery. A futures contract sale is closed
out by effecting a futures contract purchase for the same aggregate amount of
the specific type of security and the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would pay the difference and would realize a loss. Similarly,
a futures contract purchase is closed out by effecting a futures contract sale
for the same aggregate amount of the specific type of security (or currency) and
the same delivery date. If the offsetting sale price exceeds the purchase price,
the purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that the Fund will be able to enter into a closing transaction.
When the Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction, an "initial margin" of cash or liquid securities
equal to approximately 2-3% of the contract amount. Initial margin requirements
are established by the Exchanges on which futures contracts trade and may, from
time to time, change. In addition, brokers may establish margin deposit
requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked-to-market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or liquid securities,
called "variation margin", in the name of the broker, which are reflective of
price fluctuations in the futures contract.
The ordinary spreads between values in the cash and futures markets, due to
differences in the character of those markets, are subject to distortions. In
addition, futures contracts entail risks. First, all participants in the futures
market are subject to initial and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures market depends on participants entering into offsetting transactions
rather than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced, thus
producing price distortions. Third, from the point of view of speculators, the
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Increased participation by speculators in
the futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
investment adviser may still not result in a successful transaction.
OPTIONS ON FUTURES CONTRACTS
The Fund will also enter into options on futures contracts for certain bona
fide hedging, return enhancement and risk management purposes. The Fund may
purchase put and call options and write (i.e., sell) "covered" put and call
options on futures contracts that are traded on U.S. and foreign exchanges. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume a short futures position (if the
option is a call) or a long futures position (if the option is a put). Upon
exercise of the option, the assumption of offsetting futures positions by the
writer and holder of the option will be accompanied by delivery of the
accumulated cash balance in the writer's futures margin account which represents
the amount by which the market price of the futures contract at exercise,
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract.
The Fund may only write (i.e., sell) covered put and call options on
futures contracts. The Fund will be considered "covered" with respect to a call
option it writes on a futures contract if the Fund owns the securities or
currency which is deliverable under the futures contract or an option to
purchase that futures contract having a strike price equal to or less than the
strike price of the "covered" option and having an expiration date not earlier
than the expiration date of the "covered" option, or if it segregates and
maintains with its Custodian for the term of the option cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal to the fluctuating value of the optioned futures.
The Fund will be considered "covered" with respect to a put option it writes on
a futures contract if it owns an option to sell that futures contract having a
strike price equal to or greater than the strike price of the "covered" option
and having an expiration date not earlier than the expiration date of the
"covered" option, or if it segregates and maintains with its Custodian for the
term of the option cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets, marked-to-market daily, at all times equal in value
to the
B-4
<PAGE>
exercise price of the put (less any initial margin deposited by the Fund with
its Custodian with respect to such put option). There is no limitation on the
amount of the Fund's assets which can be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of securities the Fund intends to acquire. If
the futures price at expiration of the option is above the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase that may have occurred in the price of the securities
the Fund intends to acquire. If the market price of the underlying futures
contract is below the exercise price when the option is exercised, the Fund will
incur a loss, which may be wholly or partially offset by the decrease in the
value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written call
option is below the exercise price, the Fund will retain the full amount of the
option premium, thereby partially hedging against any decline that may have
occurred in the Fund's holdings of securities. If the futures price when the
option is exercised is above the exercise price, however, the Fund will incur a
loss, which may be wholly or partially offset by the increase in the value of
the securities in the Fund's portfolio which were being hedged.
The Fund will purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the securities it owns
as a result of market activity or fluctuating currency exchange rates. The Fund
will also purchase call options on futures contracts as a hedge against an
increase in the value of securities the Fund intends to acquire as a result of
market activity or fluctuating currency exchange rates.
CURRENCY FUTURES AND OPTIONS THEREON
Generally, foreign currency futures contracts and options thereon are
similar to the futures contracts and options thereon discussed previously. By
entering into currency futures and options thereon on U.S. and foreign
exchanges, the Fund will seek to establish the rate at which it will be entitled
to exchange U.S. dollars for another currency at a future time. By selling
currency futures, the Fund will seek to establish the number of dollars it will
receive at delivery for a certain amount of a foreign currency. In this way,
whenever the Fund anticipates a decline in the value of a foreign currency
against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund can attempt
to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the price
of the premium and related transaction costs it must pay for the option, to
decide whether or not to buy (in the case of a call option) or to sell (in the
case of a put option) a futures contract at a specified price at any time during
the period before the option expires. If the investment adviser, in purchasing
an option, has been correct in its judgment concerning the direction in which
the market or 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, market or currency exchange
losses otherwise suffered by the Fund. If exchange rates move in a way the Fund
did not anticipate, however, the Fund will have incurred the expense of the
option without obtaining the expected benefit; any such movement in exchange
rates may also thereby reduce rather than enhance the Fund's profits on its
underlying securities transactions.
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES
CONTRACTS AND FORWARD CONTRACTS
Futures contracts, and options thereon on securities and currencies may be
traded on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the U.S., may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities. The value of
such positions also could be adversely affected by (i) other complex foreign
political, legal and economic factors, (ii) lesser availability than in the U.S.
of data on which to make trading decisions, (iii) delays in the Fund's ability
to act upon economic events occurring in the foreign markets during non-business
hours in the U.S., (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the U.S. and (v) lesser
trading volume.
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.
B-5
<PAGE>
SPECIAL RISK CONSIDERATIONS RELATING TO FUTURES AND OPTIONS THEREON
The Fund's ability to establish and close out positions in futures
contracts and options on futures contracts will be subject to the development
and maintenance of liquid markets. Although the Fund generally will purchase or
sell only those futures contracts and options thereon for which there appears to
be a liquid market, there is no assurance that a liquid market on an exchange
will exist for any particular futures contract or option thereon at any
particular time. In the event no liquid market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it will not
be possible to effect a closing transaction in that contract or to do so at a
satisfactory price and the Fund would have to either make or take delivery under
the futures contract or, in the case of a written option, wait to sell the
underlying securities until the option expires or is exercised or, in the case
of a purchased option, exercise the option. In the case of a futures contract or
an option on a futures contract which the Fund has written and which the Fund is
unable to close, the Fund would be required to maintain margin deposits on the
futures contract or option and to make variation margin payments until the
contract is closed.
Successful use of futures contracts and options thereon by the Fund is
subject to the ability of the investment adviser to predict correctly movements
in the direction of interest and foreign currency rates. If the investment
adviser's expectations are not met, the Fund would be in a worse position than
if a hedging strategy had not been pursued. For example, if the Fund has hedged
against the possibility of an increase in interest rates which would adversely
affect the price of securities in its portfolio and the price of such securities
increases instead, the Fund will lose part or all of the benefit of the
increased value of its securities because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash to meet daily variation margin requirements, it may have to sell securities
to meet the requirements. These sales may, but will not necessarily, be at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it is disadvantageous to do so.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS
The Fund will engage in transactions in futures contracts and options
thereon only for bona fide hedging, return enhancement and risk management
purposes, in each case in accordance with the rules and regulations of the CFTC,
and not for speculation.
In accordance with CFTC regulations, the Fund may not purchase or sell
futures contracts or options thereon if the initial margin and premiums for
options on futures would exceed 5% of the liquidation value of the Fund's total
assets after taking into account unrealized profits and unrealized losses on
such contracts; provided, however, that in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The above restriction does not apply
to the purchase and sale of futures contracts and options thereon for bona fide
hedging purposes within the meaning of the CFTC regulations. In instances
involving the purchase of futures contracts or call options thereon or the
writing of put options thereon by the Fund, an amount of cash and other liquid
assets equal to the market value of the futures contracts and options thereon
(less any related margin deposits), will be deposited in a segregated account
with the Fund's Custodian to cover the position, or alternative cover will be
employed, thereby insuring that the use of such instruments is unleveraged.
The Fund's purchase and sale of futures contracts and purchase and writing
of options on futures contracts will be for the purpose of protecting its
portfolio against anticipated future changes in foreign currency exchange rates
which might otherwise either adversely affect the value of the Fund's portfolio
securities or adversely affect the prices of securities that the Fund intends to
purchase at a later date, and to enhance the Fund's return. As an alternative to
bona fide hedging as defined by the CFTC, the Fund may comply with a different
standard established by CFTC rules with respect to futures contracts and options
thereon purchased by the Fund incidental to the Fund's activities in the
securities markets, under which the value of the assets underlying such
positions will not exceed the sum of (i) cash set aside in an identifiable
manner or short-term U.S. Government or other U.S. dollar denominated liquid
assets segregated for this purpose, (ii) cash proceeds on existing investments
due within thirty days and (iii) accrued profits on the particular futures
contract or option thereon.
In addition, CFTC regulations may impose limitations on the Fund's ability
to engage in certain return enhancement and risk management strategies. There
are no limitations on the Fund's use of futures contracts and options on futures
contracts beyond the restrictions set forth above.
Although the Fund intends to purchase or sell futures and options on
futures only on exchanges where there appears to be an active market, there is
no guarantee that an active market will exist for any particular contract or at
any particular time. If there is not a liquid market at a particular time, it
may not be possible to close a futures position at such time, and, in the event
of adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, when futures positions are used to
hedge portfolio securities, such securities will not be sold until the futures
positions can be liquidated. In such circumstances, an increase in the price of
securities, if any, may partially or completely offset losses on the futures
contracts.
B-6
<PAGE>
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may temporarily
invest without limit in money market instruments, including commercial paper of
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, non-convertible debt securities
(corporate and government), obligations issued or guaranteed by the U.S.
Government, its agencies or its instrumentalities, repurchase agreements
(described more fully below) and cash (foreign currencies or U.S. dollars). 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. See "How the Fund Invests--Other Investments and
Policies" in the Prospectus.
In addition, the portfolio's manager may invest in securities other than
recommended by the quantitative model when market conditions warrant a defensive
strategy.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by cash or liquid
assets. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Board of Directors.
The investment adviser will monitor the creditworthiness of such parties, under
the general supervision of the Board of Directors. In the event of a default or
bankruptcy by a seller, the Fund may liquidate the collateral. To the extent
that the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the repurchase price, the Fund will
suffer a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management LLC (PMF) pursuant to an
order of the SEC. 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.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33 1/3% of the value of
the Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral
(including a letter of credit) that is equal to at least the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive payments in lieu of the interest and dividends of
the loaned securities, while at the same time earning interest either directly
from the borrower or on the collateral which will be invested in short-term
obligations.
A loan may be terminated by the Fund at any time. If the borrower fails to
maintain the requisite amount of collateral, the loan automatically terminates,
and the Fund could use the collateral to replace the securities while holding
the borrower liable for any excess of replacement cost over collateral. As with
any extensions of credit, there are risks of delay in recovery and in some cases
loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made to
firms determined to be creditworthy pursuant to procedures approved by the Board
of Directors of the Fund. On termination of the loan, the borrower is required
to return the securities to the Fund, and any gain or loss in the market price
during the loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loan, in whole or
in part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated at the time of the borrowing) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings. If the
Fund's asset coverage for borrowings falls below 300%, the Fund will take prompt
action to reduce its borrowings. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, the Fund may be required to sell
portfolio securities to reduce the debt and restore the 300% asset coverage,
even though it may be disadvantageous from an investment standpoint to sell
securities at that time. Such liquidations could
B-7
<PAGE>
cause the Fund to realize gains on securities held for less than three months.
Because no more than 30% of the Fund's gross income may be derived from the sale
or disposition of securities held for less than three months to maintain the
Fund's status as a regulated investment company under the Internal Revenue Code,
such gains would limit the ability of the Fund to sell other securities held for
less than three months that the Fund might wish to sell. See "Taxes, Dividends
and Distributions." The Fund will not purchase portfolio securities when
borrowings exceed 5% of the value of its total assets.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible 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. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). In addition, in order for commercial paper that is issued in reliance
on Section 4(2) of the Securities Act to be considered liquid, (i) it must be
rated in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund is permitted to invest up to 10% of its total assets in securities
of other non-affiliated investment companies. Generally, the Fund does not
intend to invest in such securities. If a Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees. See "Investment Restrictions."
B-8
<PAGE>
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, but the Fund's portfolio
turnover rate is not expected to exceed 200%. 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 portfolio. High portfolio turnover (over 100%) 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 "Portfolio Transactions
and Brokerage" 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 with respect to the Fund, the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain 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 if, when
added together, more than 25% of the value of the Fund's net assets would be (i)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to this limitation.
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 or for the clearance of transactions. The Fund may pledge up to 20% of
the value of its total assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
futures contracts and options thereon and with respect to the writing of options
and obligations of the Fund to Directors pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets subject to this
restriction.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of investment) would then be invested in securities of a single issuer,
or (ii) 25% or more of the Fund's total assets (determined at the time of the
investment) would be invested in a single industry.
5. Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts. The Fund may not purchase interests
in real estate limited partnerships which are not readily marketable.
6. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon, and forward
foreign currency exchange contracts.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other non-affiliated investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which the Fund will not hold more than 3% of the
outstanding voting securities of any one investment company, will not have
invested more than 5% of its total assets in any one investment company and will
not have invested more than 10% of its total assets (determined at the time of
investment) in such securities of one or more investment companies, or except as
part of a merger, consolidation or other acquisition.
10. Make loans, except through (i)repurchase agreements and (ii)loans of
portfolio securities limited to 33 1/3% of the Fund's total assets.
B-9
<PAGE>
11. Purchase more than 10% of all outstanding voting securities of any one
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.
<TABLE>
DIRECTORS AND OFFICERS
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------ --------- --------------------
<S> <C> <C>
Edward D. Beach (72) Director President and Director of BMC Fund, Inc., a closed-end investment
company; prior thereto, Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the Board
of Trustees of Mars Hill College; Director of The High Yield Income
Fund, Inc.
Delayne Dedrick Gold (58) Director Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (50) Director Comptroller (since May 1996) of Prudential Investments; Executive
Vice President and Treasurer (since December 1996) of Prudential
Mutual Fund Investments LLC (PMF), Senior Vice President (since
March 1987) of Prudential Securities Incorporated (Prudential
Securities); Chief Administrative Officer (July 1990 - September
1996); Director (January 1989 - September 1996) and Executive Vice
President, Treasurer and Chief Financial Officer (June 1987 -
September 1996) of Prudential Mutual Fund Management, Inc.; Vice
President and Director (since May 1989) of Asia Pacific Fund, Inc.;
Director of The High Yield Income Fund, Inc.
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------ ---------- ----------------------
<S> <C> <C>
Donald D. Lennox (77) Director Chairman (Since February 1990) and Director (since April
1989) of International Imaging Materials, Inc. (thermal transfer
ribbon manufacturer); Retired Chairman, Chief Executive Officer and
Director of Schiegel Corporation (industrial manufacturing)
(March 1987 - February 1989); Director of Gleason Corporation,
Personal Sound Technologies, Inc. and The High Yield Income
Fund, Inc.
Douglas H. McCorkindale Director Vice Chairman, Gannett Co. Inc. (publishing and media)(since
(57) March 1984); Director of Gannett Co. Inc., Frontier Corporation
and Continental Airlines, Inc.
*Mendel A. Melzer, CFA,(35) Director Chief Investment Officer (since October 1996) of Prudential
751 Broad Street Mutual Funds & Annuities; formerly Chief Financial Officer
Newark, NJ 07102 (November 1995 - September 1996) of Prudential Investments, Senior
Vice President and Chief Financial Officer (April 1993 - November
1995) of Prudential Preferred Financial Services, Managing Director
(April 1991 - April 1993) of Prudential Investment Advisors
and Senior Vice President (July 1989 - April 1991) of Prudential
Capital Corporation; Chairman and Director of Prudential
Series Fund, Inc.; Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (55) Director President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for Govern-
mental Research, Inc.; Director of Blue Cross of
Rochester, Monroe County Water Authority, Rochester Jobs, Inc.,
Executive Service Corps of Rochester, Monroe County Industrial
Development Corporation, Northeast-Midwest Institute, The Business
Council of New York State, First Financial Fund, Inc., The High Yield
Plus Fund, Inc. and The High Yield Income Fund, Inc.
Stephen P. Munn (54) Director Chairman (since January 1994), Director and President (since 1988)
and Chief Executive Officer (1988 - December 1993) of Carlisle
Companies Incorporated (manufacturer of industrial products).
</TABLE>
B-l1
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ----------------------- --------- -------------------
<S> <C> <C>
*Richard A. Redeker (53) President and Employee of Prudential Investments; formerly President, Chief
751 Broad St. Director Executive Officer and Director (October 1993 - September 1996)
Newark NJ 07102 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 of Kemper
Financial Services, Inc. (September 1978 - September 1993);
President and Director of The High Yield Income Fund, Inc.
Robin B. Smith (57) Director Chairman and Chief Executive Officer (since August 1996),
formerly President and Chief Executive Officer (January 1989 - August
1996) and President and Chief Operating Officer (September 1981
- December 1988) of Publishers Clearing House; Director of
BellSouth Corporation, The Omnicom Group, Inc., Texaco Inc.,
Springs Industries Inc. and Kmart Corporation
Louis A. Weil, III (55) Director Publisher and Chief Executive Officer (since January 1996)and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996), Publisher and
Chief Executive Officer (August 1991 - December 1995) of
Phoenix Newspapers, Inc.; formerly Publisher of Time Magazine
(May 1989 - March 1991); formerly President, Publisher &
Chief Executive Officer of The Detroit News (February 1986 -
August 1989); formerly member of the Advisory Board, Chase
Manhattan Bank-Westchester; Director of The High Yield Income Fund,
Inc.
Clay T. Whitehead (57) Director President (since May 1983) of National Exchange Inc. (new
business development firm).
Susan C. Cote (42) Vice President Executive Vice President (since February 1997) and Chief Financial
Officer (since May 1996) of PMF; Managing Director, Prudential
Investments and Vice President, PIC (February 1995 - May
1996); Senior Vice President (January 1989 - January 1995) of
Prudential Mutual Fund Management, Inc.; Senior Vice President
(January 1992 - January 1995) of Prudential Securities.
Thomas A. Early (42) Vice President Executive Vice President, Secretary and General Counsel
(since December 1996) of PMF; Vice President and General Counsel
(since March 1994) of Prudential Retirement Services; formerly
Associate General Counsel and Chief Financial Services
Officer, Frank Russell Company (1988 - 1994).
S. Jane Rose (50) Secretary Senior Vice President (since December 1996) of PMF; formerly
Senior Vice President (January 1991 - September 1996) and
Senior Counsel (June 1987 - September 1996) of Prudential
Mutual Fund Management, Inc.; Senior Vice President and Senior
Counsel (since July 1992) of Prudential Securities.
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- -------- ---------------- --------- --------------------
<S> <C> <C>
Grace C. Torres (37) Treasurer and First Vice President (since December 1996) of PMF; formerly
Principal First Vice President (March 1994 - September 1996) Prudential
Financial and Mutual Fund Management, Inc.; First Vice President (since
Accounting March 1994) of Prudential Securities; formerly Vice President
Officer of Bankers Trust Corporation (July 1989 - March 1994).
Marguerite E. H. Morrison Assistant Vice President and Associate General Counsel (since December
(40) Secretary 1996) of PMF; formerly Vice President and Associate General
Counsel (June 1991 - September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Associate General Counsel of
Prudential Securities.
Stephen M. Ungerman (43) Assistant Tax Director (since March 1996) of Prudential Investments
Treasurer and the Private Asset Group of The Prudential Insurance Company of
America (Prudential); formerly First Vice President of Prudential
Mutual Fund Management, Inc. (February 1993 - September 1996); prior
thereto, Senior Tax Manager (1981 - January 1993) of Price Waterhouse LLP.
</TABLE>
- --------------
* "Interested" Director, as defined in the Investment Company Act, by reason
of affiliation with Prudential Securities, Prudential or PMF.
** Unless otherwise indicated, the address of the Directors and Officers is
c/o Prudential Mutual Funds, Gateway Center Three, Newark, New Jersey
07102.
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," oversee such actions and decide on general policy.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors of Prudential
Mutual Funds who were age 68 or older as of December 31, 1993. Under this
phase-in provision, Messrs. Beach and Lennox are scheduled to retire on December
31, 1999 and 1997, respectively.
The Fund pays each of its Directors who is not an affiliated person of PMF
or Prudential Investments (PI, the Subadviser or the investment adviser) annual
compensation of $2,500, in addition to certain out-of-pocket expenses. The
amount of annual compensation paid to each Director may change as a result of
the introduction of additional funds upon which the Director will be asked to
serve.
B-13
<PAGE>
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 Directors' fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills
at the beginning of each calendar quarter or, pursuant to an SEC exemptive
order, at the daily rate of return of the Fund (the Fund rate). 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 estimated aggregate compensation
estimated to be paid by the Fund for the fiscal year ending March 31, 1998 to
the Directors who are not affiliated with the Manager and the aggregate
compensation paid to such Directors for service on the boards of all other funds
managed by PMF (Fund Complex) for the calendar year ended December 31, 1996.
COMPENSATION TABLE
PENSION OR
RETIREMENT ESTIMATED TOTAL
BENEFITS ANNUAL COMPENSATION
AGGREGATE ACCRUED BENEFITS FROM FUND
COMPENSATION AS PART OF UPON COMPLEX PAID
NAME OF DIRECTOR FROM FUND FUND EXPENSES RETIREMENT TO DIRECTORS
---------------- --------- -------- ---------- -----------
Edward D. Beach............ $2,500 None N/A $166,000(21/39)*
Delayne Dedrick Gold....... $2,500 None N/A $175,308(21/42)*
Robert F. Gunia+........... None None None None
Donald D. Lennox........... $2,500 None N/A $ 90,000(10/22)*
Douglas H. McCorkindale**.. $2,500 None N/A $ 71,208(10/13)*
Mendel A. Melzer+.......... None None None None
Thomas T. Mooney**......... $2,500 None N/A $135,375(18/36)*
Stephen P. Munn............ $2,500 None N/A $ 49,125( 6/8 )*
Richard A. Redeker+........ None None None None
Robin B. Smith**........... $2,500 None N/A $ 89,957(11/20)*
Louis A. Weil, III......... $2,500 None N/A $ 91,250(13/18)*
Clay T. Whitehead.......... $2,500 None N/A $ 38,292( 5/7 )*
- ----------
* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.
** Total compensation from all of the Funds in the Fund Complex for the calendar
year ended December 31, 1996, includes amounts deferred at the election of
Directors under the Funds' deferred compensation plans. Including accrued
interest, total compensation amounted to $71,034, $139,869 and $109,294 for
Messrs. McCorkindale and Mooney and Ms. Smith, respectively.
+ Messrs. Gunia, Melzer and Redeker, who are interested Directors, do not
receive compensation from the Fund or any fund in the Fund Complex.
As of __________, 1997, the Directors and officers of the Fund, as a
group, owned less than 1% of the outstanding shares of the Fund. As of such
date, PMF owned all of the Fund's outstanding shares and controlled the Fund.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management LLC (PMF or
the Manager), Gateway Center Three, Newark, New Jersey 07102. PMF serves as
manager to all of the other investment companies that, together with the Funds,
comprise the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in
the Prospectus of the Fund. As of ________ 31, 1997, PMF managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $___ billion. According to the Investment Company Institute, as
of December 31, 1996, Prudential Mutual Funds was the 15th largest family of
mutual funds in the United States.
PMF is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary
of PMF, serves as the transfer agent for the Prudential Mutual Funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities and other assets. In
connection therewith, PMF is obligated to keep certain books and records of the
Fund. PMF also administers the Fund's
B-14
<PAGE>
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 Prudential Mutual Fund Services LLC, the Fund's
transfer and dividend disbursing agent. The management services of PMF for the
Fund are not exclusive under the terms of the Management Agreement and PMF is
free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a
fee at an annual rate of .60 of 1% of the Fund's average daily net assets. The
fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of a Fund (including the fees of PMF,
but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. No jurisdiction currently limits the
Fund's expenses.
In connection with its management of the corporate affairs of the Fund,
PMF bears the following expenses:
(a) the salaries and expenses of all personnel of the Fund and the
Manager, except the fees and expenses of Directors who are not affiliated
persons of PMF or the Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with
managing the ordinary course of a Fund's business, other than those assumed by a
Fund as described below; and
(c) the fees payable to the Subadviser pursuant to the Subadvisory
Agreement between PMF and The Prudential Investment Corporation, doing business
as Prudential Investments (PI) (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the SEC, and the states under state securities laws,
including the preparation and printing of the Fund's registration statements and
prospectuses for such purposes, (k) allocable communications expenses with
respect to investor services and all expenses of shareholders' and 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 PMF will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act. The Fund's
Management Agreement was approved by the Board of Directors of the Fund,
including all of the Directors who are not parties to the contract or interested
persons of any such party on February 19, 1997, and by the initial shareholder
of the Fund on ________, 1997.
PMF has entered into the Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that PI will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PI is obligated to keep certain books and records
of the Fund. Under the Subadvisory Agreement, PI, subject to the supervision of
PMF, is responsible for managing the assets of the Fund in accordance with its
investment objectives, investment program and policies. PI determines what
securities and other instruments are purchased and sold for the Fund and is
responsible for obtaining and evaluating financial data relevant to the Fund.
PMF continues to have responsibility for all investment advisory services
pursuant to the Management Agreement. Under the Subadvisory Agreement, PI is
reimbursed by PMF for the reasonable costs and expenses incurred by PI in
furnishing those services.
B-15
<PAGE>
The Subadvisory Agreement was approved by the Board of Directors of the
Fund, including all of the Directors who are not parties to the contract or
interested persons of any such party on February 19, 1997, and by the initial
shareholder of that Fund on ________, 1997.
The Subadvisory Agreement provides that it will terminate in the event
of its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PI upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan,
the Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (PSI or the
Distributor) incurs the expenses of distributing the Fund's Class A, Class B and
Class C shares, respectively. Prudential Securities also incurs the expenses of
distributing the Class Z shares under a Distribution Agreement with the Fund,
none of which are reimbursed by or paid for by the Fund. See "How the Fund is
Managed--Distributor" in the Prospectus.
The Class A Plan provides that (i) .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Class B and Class C Plans provide that (i) .25 of 1% of the average daily net
assets of the Class B and Class C shares, respectively, may be paid as a service
fee and (ii) .75 of 1% (not including the service fee) may be paid for
distribution-related expenses with respect to the Class B and Class C shares,
respectively (asset-based sales charge).
The Class A, Class B and Class C Plans will continue in effect from year
to year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
60 days', nor less than 30 days' written notice to any other party to the Plans.
The Plans may not be amended to increase materially the amounts to be spent for
the services described therein without approval by the shareholders of the
applicable class, and all material amendments are required to be approved by the
Board of Directors in the manner described above. Each Plan will automatically
terminate in the event of its assignment. A Fund will not be 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 a Fund by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933. The Distribution Agreement was
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on February 19, 1997.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty
B-16
<PAGE>
of $500,000 per jurisdiction. PSI consented to a censure and to
the payment of a $5,000,000 fine in settling the NASD action. In settling the
above referenced matters, PSI neither admitted nor denied the allegations
asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order
and a Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend solicitation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Texas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. In the case of
Class B shares, interest charges 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 required to be included in the calculation
of the 6.25% limitation. The annual asset-based sales charge with respect to
Class B and Class C shares of the Fund may not exceed .75 of 1%. The 6.25%
limitation applies to a Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities,
futures and options on 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. The term "Manager" as used in
this section includes the Subadviser. Broker-dealers may receive negotiated
brokerage commissions on Fund portfolio transactions, including options and the
purchase and sale of underlying securities upon the exercise of options. On
foreign securities exchanges, 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.
Equity securities traded in the over-the-counter market and bonds,
including convertible bonds, 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. A 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 rules of the SEC. Thus, it will not deal 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 a Fund's order.
Portfolio securities may not be purchased from any underwriting or
selling syndicate of which Prudential Securities, or an affiliate, during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the Fund, will not significantly affect a Fund's
ability to pursue
B-17
<PAGE>
its present investment objective. However, in the future in other circumstances,
a Fund may be at a disadvantage because of this limitation in comparison to
other funds with similar objectives but not subject to such limitations.
In placing orders for portfolio securities of a Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Manager will consider the research and
investment services provided by brokers, dealers or futures commission merchants
who effect or are parties to portfolio transactions of a Fund, the Manager or
the Manager's other clients. Such research and investment services are those
which brokerage houses customarily provide to institutional investors and
include statistical and economic data and research reports on particular
companies and industries. Such services are used by the Manager in connection
with all of its investment activities, and some of such services obtained in
connection with the execution of transactions for a Fund may be used in managing
other investment accounts. Conversely, brokers, dealers or futures commission
merchants furnishing such services may be selected for the execution of
transactions of such other accounts, whose aggregate assets are far larger than
a Fund's, and the services furnished by such brokers, dealers or futures
commission merchants may be used by the Manager in providing investment
management for a Fund. Commission rates are established pursuant to negotiations
with the broker, dealer or futures commission merchant based on the quality and
quantity of execution services provided by the broker in the light of generally
prevailing rates. The Manager's policy is to pay higher commissions to brokers,
other than Prudential Securities, for particular transactions than might be
charged if a different broker had been selected, on occasions when, in the
Manager's opinion, this policy furthers the objective of obtaining best price
and execution. In addition, the Manager is authorized to pay higher commissions
on brokerage transactions for a Fund to brokers other than Prudential Securities
(or any affiliate) in order to secure research and investment services described
above, subject to review by the Fund's Board of Directors from time to time as
to the extent and continuation of this practice. The allocation or orders among
brokers and the commission rates paid are reviewed periodically by the Fund's
Board of Directors. Portfolio securities may not be purchased from any
underwriting or selling syndicate of which Prudential Securities (or any
affiliate), during the existence of the syndicate, is a principal underwriter
(as defined in the Investment Company Act), except in accordance with rules of
the SEC. This limitation, in the opinion of the Fund, will not significantly
affect the Fund's ability to pursue its present investment objective. However,
in the future, in other circumstances, the Fund may be at a disadvantage because
of this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a securities broker or futures commission merchant for the
Fund. In order for Prudential Securities (or any affiliate) to effect any
portfolio transactions for a 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 brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or futures being purchased or sold on an exchange
during a comparable period of time. This standard would allow Prudential
Securities (or any affiliate) to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker or futures commission
merchant in a commensurate arm's-length transaction. Furthermore, the Board of
Directors of the Fund, including a majority of the Directors who are not
"interested" persons, has adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for a Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to a 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 and futures transactions with Prudential
Securities are also subject to such fiduciary standards as may be imposed by
applicable law.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of a Fund may be purchased at a price equal to the next
determined net asset value per share plus a sales charge which, at the election
of the investor, may be imposed either (i) at the time of purchase (Class A
shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z shares
of the Fund are offered to a limited group of investors at net asset value
without any sales charges. See "Shareholder Guide--How to Buy Shares of the
Fund" in the Prospectus of the Fund.
Each class represents an interest in the same assets of a Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting rights
with respect to any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any
B-18
<PAGE>
matter submitted to shareholders in which the interests of one class differ from
the interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold with a maximum sales charge of 5% and Class
B*, Class C* and Class Z shares are sold at net asset value. Using the net asset
value of the Fund at April 30, 1997, the maximum offering price of the Fund's
shares is as follows:
<TABLE>
<CAPTION>
PRUDENTIAL
SMALL-CAP
QUANTITATIVE
FUND, INC
---------
CLASS A
<S> <C>
Net asset value and redemption price per Class A share ........................... $ 10.00
Maximum sales charge (5% of offering price) ...................................... .53
---------
Offering price to public ......................................................... $ 10.53
=========
CLASS B
Net asset value, redemption price and offering price per Class B share*........... $ 10.00
=========
CLASS C
Net asset value, redemption price and offering price per Class C share*........... $ 10.00
=========
CLASS Z
Net asset value, offering price and redemption price per Class Z share ........... $ 10.00
=========
</TABLE>
- ----------
*Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of a Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus of the Fund.
An eligible group of related Fund investors includes any combination of
the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual(a person, entity or group
that holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be controlled
by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charge 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 pension, profit-sharing or other employee benefit plans
qualified under
B-19
<PAGE>
Section 401 of the Internal Revenue Code and deferred compensation and annuity
plans under Sections 457 and 403(b)(7) of the Internal Revenue Code.
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 a
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. The value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities. The value of existing holdings for
purposes of determining the reduced sales charge is calculated using the maximum
offering or price (net asset value plus maximum sales charge) as of the previous
business day. See "How the Fund Values Its Shares" in the Prospectus of the
Fund. The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Rights of Accumulation are
not available to individual participants in any retirement or group plans.
LETTER OF INTENT. Reduced sales charges are available to investors (or
an eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of a Fund and shares of other Prudential Mutual
Funds (Investment Letter of Intent). Retirement and group plans may also qualify
to purchase Class A shares at net asset value by entering into a Letter of
Intent whereby they agree to enroll, within a thirteen-month period, a specified
number of eligible employees or participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of a Fund
and shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment
Letter of Intent, to establish a total investment goal to be achieved by any
number of investments over a thirteen-month period and, in the case of a
Participant Letter of Intent, to establish a minimum eligible employee or
participant goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans),
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to
purchase, nor the Fund to sell, the indicated amount. Similarly, the Participant
Letter of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the Letter
of Intent goal is not achieved within the thirteen-month period, the purchaser
(or the employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. If the goal
is exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charge will,
in the case of an Investment Letter of Intent, be granted subject to
confirmation of the investor's holdings or in the case of a Participant Letter
of Intent, subject to confirmation of the number of eligible employees or
participants in the retirement or group plan. Letters of Intent are not
available to individual participants in any retirement or group plans.
B-20
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charges" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a letter
unable to engage in any substantial from a physician on the physician's
gainful activity by reason of any letterhead stating that the shareholder
medically determinable physical or (or, in the case of a trust, the
mental impairment which can be grantor) is permanently disabled. The
expected to result in death or to be letter must also indicate the date of
of long-continued and indefinite disability.
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the
Custodial Account custodial firm indicating (i) the date
of birth of the shareholder and (ii)
that the shareholder is over age 59 and
is taking a normal distribution--signed
by the shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee
on company letterhead indicating the
amount of the excess and whether or not
taxes have been paid.
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained 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 DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the applicable Fund.
An investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholder will receive credit for any contingent deferred sales charge paid in
connection with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the Exchange Privilege. The
Fund makes available to its shareholders the privilege of exchanging their
shares of a 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 a Fund. All exchanges are made on the
basis of relative net asset value next determined after receipt of an order in
proper form. An exchange will be treated as a redemption and purchase for tax
B-21
<PAGE>
purposes. Shares may be exchanged for shares of another fund only if shares of
such fund may legally be sold under applicable state laws. For retirement and
group plans having a limited menu of Prudential Mutual Funds, the Exchange
Privilege is available for those funds eligible for investment in the particular
program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of a Fund may exchange their Class A shares for
shares of certain other Prudential Mutual Funds, shares of Prudential Government
Securities Trust (Short-Intermediate Term Series) and shares of the money market
funds specified below. No fee or sales load will be imposed upon the exchange.
Shareholders of money market funds who acquired such shares upon exchange of
Class A shares may use the Exchange Privilege only to acquire Class A shares of
the Prudential Mutual Funds participating in the 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 York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of a Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of the 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 date of the initial purchase, rather than the date of the
exchange.
Class B and Class C shares of a Fund may also be exchanged for Class B and
Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption from
such money market fund or after re-exchange into a 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 a 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.
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 of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
B-22
<PAGE>
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)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
25 Years ......................... $ 110 $ 165 $ 220 $ 275
20 Years ......................... 176 264 352 440
15 Years ......................... 296 444 592 740
10 Years ......................... 555 833 1,110 1,388
5 Years ......................... 1,371 2,057 2,742 3,428
</TABLE>
- ----------
(1) Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of a 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. See
"Automatic Savings Accumulation Plan."
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, an investor may
arrange to have a fixed amount automatically invested in shares of a Fund
monthly by authorizing his or her bank account or Prudential Securities Account
(including a Command Account) to be debited to invest specified dollar amounts
in shares of a Fund. The investor's bank must be a member of the Automatic
Clearing House System. Stock certificates are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
Withdrawals of Class B or Class C shares may be subject to a CDSC. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus of the Fund.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
B-23
<PAGE>
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 sales charges applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7)of the Internal Revenue Code of 1986, as amended (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, and the administration,
custodial fees and other details are available from Prudential Securities or the
Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
Individual Retirement Accounts. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- --------- --------
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ----------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a
B-24
<PAGE>
securities exchange and NASDAQ National Market System securities (other than
options on stock and stock indices) are valued at the last sales price on the
day of valuation, or, if there was no sale on such day, the mean between the
last bid and asked prices on such day, as provided by a pricing service.
Corporate bonds (other than convertible debt securities) and U.S. Government
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued on the basis of valuations provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, agency ratings, market transactions in comparable securities
and various relationships between securities in determining value. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, are valued at the mean between the last reported bid and asked
prices provided by principal market makers or independent pricing agents.
Options on stock and stock indices traded on an exchange are valued at the mean
between the most recently quoted bid and asked prices on the respective exchange
and futures contracts and options thereon are valued at their last sales prices
as of the close of the commodities exchange or board of trade. Should an
extraordinary event, which is likely to affect the value of the security, occur
after the close of an exchange on which a portfolio security is traded, such
security will be valued at fair value considering factors determined in good
faith by the investment adviser under procedures established by and under the
general supervision of the Fund's Board of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Board of
Directors not to represent fair value. Short-term securities with remaining
maturities of 60 days or more, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
net asset value at 4:15P.M., New York time, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem Fund shares have been received or days on which changes in the value
of a Fund's portfolio securities do not affect net asset value. In the event the
New York Stock Exchange closes early on any business day, the net asset value of
a Fund's shares shall be determined at a time between such closing and 4:15
P.M., New York time.
Net asset value is calculated separately for each class. The net asset
value of Class B and Class C shares will generally be lower than the net asset
value of Class A shares as a result of the larger distribution-related fee to
which Class B and Class C shares are subject. The net asset value of Class Z
shares will generally be higher than the net asset value of Class A, Class B or
Class C shares because Class Z shares are not subject to any distribution or
service fee. It is expected, however, that the net asset value per share of each
class will tend to converge immediately after the recording of dividends which
will differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify (or intends to elect to qualify) and
intends to remain qualified as a regulated investment company under Subchapter M
of the Internal Revenue Code. This relieves the Fund (but not its shareholders)
from paying federal income tax on income which is distributed to shareholders
and permits net capital gains of the Fund (i.e., the excess of net long-term
capital gains over net short-term capital losses) to be treated as long-term
capital gains of the shareholders, regardless of how long shareholders have held
their shares in the Fund.
Qualification as a regulated investment company requires, among other
things, that (a)at least 90% of the Fund's annual gross income (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, 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 derive less than 30% of
its annual gross income from gains (without reduction for losses) from the sale
or other disposition of securities, options thereon, futures contracts, options
thereon, forward contracts and foreign currencies held for less than three
months (except for foreign currencies directly related to the Fund's business of
investing in securities) (the short-short rule); (c)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 (d)the Fund distribute to its shareholders at
least 90% of its net investment income and net short-term gains (i.e., the
excess of net short-term capital gains over net long-term capital losses) in
each year. These requirements may limit the Fund's ability to engage in or close
out transactions involving futures contracts and options thereon.
B-25
<PAGE>
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an 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 generally 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, conversion transaction and
straddle provisions of the Internal Revenue Code. In addition, debt securities
acquired by the Fund may be subject to original issue discount and market
discount rules.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which the
Fund may invest. See "Investment Objective and Policies." These investments will
generally constitute Section 1256 contracts and will be required to be "marked
to market" for federal income tax purposes at the end of the Fund's taxable
year; that is, treated as having been sold at market value. Except with respect
to certain forward foreign currency exchange contracts, 60% of any gain or loss
recognized on such deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock
and on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending upon the holding period of the option. In
addition, positions which are part of a straddle will be subject to certain wash
sale and short 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. The conversion transaction rules may apply to
certain transactions to treat all or a portion of the gain thereon as ordinary
income rather than as capital gain.
The Fund's ability to hold foreign currencies or engage in hedging
activities may be limited by the 30% short-short rule discussed above.
A "passive foreign investment company" (PFIC) is a foreign corporation
that, in general, meets either of the following tests: (a)at least 75% of its
gross income is passive or (b)an average of at least 50% of its assets produce,
or are held for the production of, passive income. If the Fund acquires and
holds stock in a PFIC beyond the end of the year of its acquisition, the Fund
will be subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain from disposition of the stock
(collectively, PFIC income), plus interest thereon, even if the Fund distributes
the PFIC income as a taxable dividend to its shareholders. The balance of the
PFIC income will be included in the Fund's investment company taxable income
and, accordingly, will not be taxable to it to the extent that income is
distributed to its shareholders. Proposed Treasury regulations provide that the
Fund may make a "mark-to-market" election with respect to any stock it holds of
a PFIC. If the election is in effect, at the end of the Fund's taxable year, the
Fund will recognize the amount of gains, if any, with respect to PFIC stock. No
loss will be recognized on PFIC stock. 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.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or ordinary
loss. Similarly, gains or losses on forward foreign currency exchange contracts
or dispositions of debt securities denominated in a foreign currency
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition also may be
treated as ordinary gain or loss. These gains, referred to under the Internal
Revenue Code as "Section 988" gains or losses, increase or decrease the amount
of the Fund's investment company taxable income available to be distributed to
its shareholders as ordinary income, rather than increasing or decreasing the
amount of the Fund's net capital gain. If Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, or distributions made before
the losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his or her Fund shares.
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 12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from the
B-26
<PAGE>
prior year or the twelve-month period ending on October 31 of such prior year,
respectively. To the extent it does not meet these distribution requirements,
the Fund will be subject to a nondeductible 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.
Any dividends 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. Furthermore, such dividends, although in
effect a return of capital, are subject to federal income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends, including 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. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Interest income, capital gain net income, gain or loss from Section 1256
contracts (described above), dividend income from foreign corporations and
income from other sources will not constitute qualified dividends. Individual
shareholders are not eligible for the dividends-received deduction.
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 meet the requirements of the Internal Revenue Code for "passing-through" to
its shareholders any foreign income taxes paid.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
B-27
<PAGE>
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus of the Fund.
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 at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 investment made at the beginning of the 1, 5 or 10
year periods.
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus of the Fund.
Aggregate total return represents the cumulative change in the value of
an investment in the Fund and is computed according to the following formula:
ERV-P
-----
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods (or
fractional portion thereof) at the end of the 1, 5 or 10
year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-28
<PAGE>
From time to time, the performance of the fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
[CHART]
<TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<CAPTION>
Performance
Comparison of
Different
Types of Investments
Over the Long Term
(1/192612/1994)
Long-Term Govt.
Common Stocks Bonds Inflation
<S> <C> <C> <C>
10.2% 4.8% 3.1%
</TABLE>
- ----------
(1) Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation-1995
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only and is not intended to represent the performance of any particular
investment or fund. Investors cannot invest directly in an index. Past
Performance is not a guarantee of future results.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Fund and cash and in that capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians provide
custodial services for the Fund's foreign assets held outside the United States.
See "How the Fund is Managed-Custodian and Transfer and Dividend Disbursing
Agent" in the Prospectus.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
PMFS is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and related
functions. For these services, PMFS receives an annual fee per shareholder
account of $9.00, a new account set-up fee for each manually established account
of $2.00 and a monthly inactive zero balance account fee per shareholder account
of $.20. PMFS is also reimbursed for its out-of-pocket expenses, including but
not limited to postage, stationery, printing, allocable communication expenses
and other costs.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants, and in that capacity audits
the annual reports of the Fund.
B-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholder and Board of Directors of
Prudential Small-Cap Quantitative Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of Prudential
Small-Cap Quantitative Fund, Inc. (the "Fund") at ________, 1997. This financial
statement is the responsibility of the Fund's management; our responsibility is
to express an opinion on this financial statement based on our audit. We
conducted our audit of this financial statement in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
, 1997
B-30
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
1997
--------
ASSETS
Cash .......................................................... $100,000
Deferred organization costs (Note 1) .......................... 250,000
--------
Total assets .............................................. 350,000
--------
LIABILITIES
Deferred organization costs payable (Note 1) .................. 250,000
--------
Net Assets (Note 1)
Applicable to 10,000 shares of common stock ................. $100,000
========
Calculation of Offering Price
Class A:
Net asset value and redemption price per Class A share ...... $ 10.00
Maximum sales charge (5.0% of offering price) ............... .53
--------
Offering price to public .................................... $ 10.53
========
Class B:
Net asset value, offering price and redemption price per
Class B share ............................................... $ 10.00
========
Class C:
Net asset value, offering price and redemption price per
Class C share ............................................... $ 10.00
========
Class Z:
Net asset value, offering price and redemption price per
Class Z share ............................................... $ 10.00
========
See Notes to Financial Statement.
B-31
<PAGE>
PRUDENTIAL SMALL-CAP QUANTITATIVE FUND, INC.
Notes to Financial Statement
NOTE 1. Prudential Small-Cap Quantitative Fund, Inc. ("the Fund"), which
was incorporated in Maryland on February 4, 1997, is an open-end, diversified
management investment company. The Fund has had no significant operation other
than the issuance of 2,500 shares each of Class A, Class B, Class C and Class Z
common stock for $100,000 on ________, 1997 to Prudential Mutual Fund Management
LLC (PMF). There are 2 billion shares of $.001 par value common stock authorized
divided into four classes, designated Class A, Class B, Class C and Class Z,
each of which consists of 1 billion, 500 million, 300 million and 200 million
authorized shares, respectively.
Costs incurred and expected to be incurred in connection with the
organization and offering of the Fund will be paid initially by PMF and will be
repaid to PMF upon commencement of investment operations. Offering costs will be
deferred and amortized over a period not to exceed 12 months. Organizational
costs will be deferred and amortized over the period of benefit not to exceed 60
months from the date the Fund commences investment operations. If any of the
initial shares of the Fund are redeemed by any holder thereof during the period
of amortization of organization expenses, the redemption proceeds will be
reduced by the pro rata amount of unamortized organization expenses based on the
number of initial shares being redeemed to the number of the initial shares
outstanding.
NOTE 2. AGREEMENTS. The Fund has entered into a management agreement with
PMF. PMF is an indirect wholly-owned subsidiary of The Prudential Insurance
Company of America (Prudential).
The management fee paid PMF will be computed daily and payable monthly, at
an annual rate of .60 to 1% of the average daily net assets of the Fund.
Pursuant to a subadvisory agreement between PMF and The Prudential
Investment Corporation, a wholly-owned subsidiary of Prudential doing business
as Prudential Investments (PI), PI furnishes investment advisory services
pursuant to the management agreement and supervises PI's performance of such
services. PMF pays for the services of PI, the cost of compensation of officers
and employees of the Fund, occupancy and certain clerical and accounting costs
of the Fund. The Fund bears all other costs and expenses.
PMF has agreed that, in any fiscal year, it will reimburse the Fund for
expenses (including the fees of PMF but excluding interest, taxes, brokerage
commissions, distribution fees, litigation and indemnification expenses and
other extraordinary expenses) in excess of the most restrictive expense
limitation imposed by state securities commissions. Such expense reimbursement,
if any, will be estimated and accrued daily and payable monthly.
The Fund has entered into a distribution agreement with Prudential
Securities Incorporated (PSI) for distribution of the Fund's shares.
Pursuant to separate Plans of Distribution (the Class A Plan, the Class B
Plan and the Class C Plan, collectively the "Plans") adopted by the Fund under
Rule 12b-1 of the Investment Company Act of 1940, PSI (also the "Distributor")
incurs the expenses of distributing the Fund's Class A, Class B and Class C
shares. These expenses include commissions and account servicing fees paid to,
or on account of financial advisers of PSI and Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions paid to, or on account of,
other broker-dealers or certain 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
PSI and Prusec associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.
Pursuant to the Class A Plan, the Fund will compensate PSI for its expenses
with respect to Class A shares at an annual rate of up to .30 of 1% of the
average daily net asset value of the Class A shares. PSI has agreed to limit its
distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net asset value of the Class A shares for the fiscal year ending
March 31, 1997.
Pursuant to the Class B and Class C Plans, the Fund compensates PSI for its
distribution-related expenses with respect to the Class B and C shares at an
annual rate of 1% of the average daily net assets of the Class B and C shares.
PSI incurs the expense of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which is paid for or reimbursed by
the Fund.
B-32
<PAGE>
APPENDIX I-GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
I-1
<PAGE>
APPENDIX II-HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
VALUE OF $1.00 INVESTED ON 1/1/26 THROUGH 12/31/96
[CHART]
<TABLE>
<S> <C>
VALUE OF $1.00 INVESTED ON
1/1/26 THROUGH 12/31/96
Small Stocks $4,495.99
Common Stocks $1,370.95
Long-Term Bonds $ 33.73
Treasury Bills $ 13.54
Inflation $ 8.87
</TABLE>
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
<TABLE>
Historical Total Returns of Different Bond Market Sectors
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury
Bonds(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4%
----------------------------------------------------------------------------------------------------
U. S. Government
Mortgage
Securities(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8%
----------------------------------------------------------------------------------------------------
U.S. Investment Grade
Corporate
Bonds(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3%
----------------------------------------------------------------------------------------------------
U.S.
High Yield
Corporate
Bonds(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2%
----------------------------------------------------------------------------------------------------
World
Government
Bonds(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
====================================================================================================
Difference between highest
and lowest return percent 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</TABLE>
(1) Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4) Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5) Salomon Brothers World Government Index (Non U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS (1986-1995) (IN U.S.
DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Hong Kong 23.8%
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Swtizerland 17.1%
France 15.3%
U.K. 15.0%
U.S. 14.8%
Japan 12.8%
Austria 10.9%
Germany 10.7%
</TABLE>
Source: Morgan Stanley Capital International (MSCI). Used with permission.
Morgan Stanley country indices are unmanaged indices which include those stocks
making up the largest two-thirds of each country's Total Stock Market
Capitalization. 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 indices.
This chart shows the growth of a hypothetical $10,000 investment made in
the stocks representing the S&P 500 stock index with and without reinvested
dividends.
[CHART]
1969-1995
Capital Appreciation and Reinvesting Dividends--$186,208
Capital Appreciation Only--$66,913
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All Rights Reserved. This Chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common Stock total return is based on
the Standard & Poor's 500 Stock Index, A market-value-weighted Index made up of
500 of the largest Stocks in the U.S. based upon their Stock Market Value.
Investors cannot invest directly in indices.
WORLD STOCK MAREKT CAPITALIZATION BY REGION
WORLD TOTAL: $9.2 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. 40.8%
Pacific
Basin 28.7%
Europe 28.3%
Canada 2.2%
</TABLE>
Source: Morgan Stanley Capital International, December 1995. Used with
permission. This Chart represents the Capitalization of Major World Stock
Markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The Total Market Capitalization is based on the value of 1579 Companies
in 22 Countries (representing approximately 60% of the aggregate Market Value of
the Stock Exchanges). This Chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.
II-3
<PAGE>
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1975 through December 31, 1995. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed of one-third U.S. stocks (S&P
500), one-third foreign stocks (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK &
BOND INDICES OVER THE PAST 20 YEARS
(12/31/75-12/31/95)*
<S> <C> <C>
Lehman Aggregate EAFE S&P 500
32.6% 69.9% 37.6%
2.9% 23.2% 7.2%
Best Returns Zone
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Index
1/3 Lehman Aggregate Index
</TABLE>
* Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (Lana). Past Performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 Stocks which
provides a broad indication of Stock Price movements. The Morgan Stanley Eafe
Index is an unmanaged index comprised of 20 Overseas Stock Markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued Investment Grade Debt with maturities over one year, including
U.S. Government and Agency Issues, 15 and 30 year fixed-rate Government Agency
Mortgage Securities, Dollar Denominated Sec Registered Corporate and Government
Securities, as well as asset-backed securities. Investors cannot invest directly
in stock or Bond Market indices.
II-4
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1996)
[CHART]
Source: Stocks, Bonds, Bills, and Inflation 1995 yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.s. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-5
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed-Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. Prudential provides auto insurance for more than 1.7 million
cars and insures more than 1.4 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. In July
1995, Institutional Investor ranked Prudential the third largest institutional
money manager of the 300 largest money management organizations in the United
States as of December 31, 1994. As of December 31, 1995, Prudential had more
than $314 billion in assets under management. Prudential Investments (of which
Prudential Mutual Funds is a key part) manages over $190 billion in assets of
institutions and individuals.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1996, Prudential Mutual Fund Management was the fifteenth
largest mutual fund companies in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over $55
billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- --------------
(1) Prudential Mutual Fund Investment Management, a unit of PIC, serves as the
Subadviser to substantially all of the Prudential Mutual Funds. Wellington
Management Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate Fund,
Inc., Jennison Associates Capital Corp. as the subadviser to Prudential Jennison
Series Fund, Inc. and Prudential Active Balanced Fund, a portfolio of Prudential
Drydan Fund, Mercator Asset Management LP as the subadviser to the International
Stock Series, a portfolio of Prudential World Fund, Inc. and BlackRock Financial
Management, Inc. as subadviser to The BlackRock Government Income Trust. There
are multiple subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1994.
III-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
EQUITY FUNDS. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Growth Fund, a growth-style
equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitors the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets-from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers-from Pulp and Paper Forecaster to Women's Wear
Daily-to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
- --------------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage funds.
(6) As of December 31, 1994.
III-2
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas. In the
December 1995 issue of Registered Rep, an industry publication, Prudential
Securities' Financial Advisor training programs received a grade of A- (compared
to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect(SM), a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- -----------
(7) As of December 31, 1994.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research directors,
asking them to evaluate analysts in 76 industry sectors. Scores are produced by
taking the number of votes awarded to an individual analyst and weighting them
based on the size of the voting institution. In total, the magazine sends its
survey to approximately 2,000 institutions and a group of European and Asian
institutions.
III-3
<PAGE>
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
(1) Financial Statements included in the Prospectus constituting Part A of
this Registration Statement:
None.
(2) Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
(a) Statement of Assets and Liabilities.**
(b) Report of Independent Auditors.**
--------------
** To be filed by future pre-effective amendment.
(b) EXHIBITS:
1. (a) Articles of Incorporation.*
2. By-Laws.**
3. Not Applicable.
4. Instruments defining rights of shareholders.**
5. (a) Form of Management Agreement between the Registrant and
Prudential Mutual Fund Management LLC**
(b) Form of Subadvisory Agreement between Prudential Mutual Fund
Management LLC and The Prudential Investment Corporation.**
6. (a) Form of Distribution Agreement between the Registrant and
Prudential Securities Incorporated.**
(b) Selected Dealer Agreement.**
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.**
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services LLC**
10. Opinion of Gardner, Carton & Douglas.**
11. Consent of Independent Accountants.**
12. Not Applicable.
13. Form of Purchase Agreement.**
14. Not Applicable.
15. (a) Form of Distribution and Service Plan for Class A Shares.**
(b) Form of Distribution and Service Plan for Class B Shares.**
(c) Form of Distribution and Service Plan for Class C Shares.**
16. Not applicable.
18. Rule 18f-3 Plan.**
--------------
* Filed herewith.
** To be filed by future pre-effective amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 31, 1997, the Registrant had no shareholders.
ITEM 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may
C-1
<PAGE>
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 6(a) to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant will purchase an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund Management
LLC (PMF) and The Prudential Investment Corporation (PIC), respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either the
Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her 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 of such advance.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management LLC
See "Management of the Fund--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
C-2
<PAGE>
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Brian Storms Officer-in-Charge, Officer-in-Charge, President, Chief Executive Officer and
President, Chief Chief Operating Officer, PMF
Executive Officer and
Chief Operating Officer
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice
and Treasurer President and Treasurer, PMF; Senior Vice President,
Prudential Securities Incorporated (Prudential Securities)
Thomas A. Early Executive Vice President, Executive Vice President, Secretary and General Counsel,
Secretary and General PMF; Vice President and General Counsel, Prudential
Counsel Retirement Services
Susan C. Cote Executive Vice President, Executive Vice President, Chief Financial Officer, PMF
Chief Financial Officer
Neil A. McGuinness Executive Vice President Executive Vice President, PMF
Robert J. Sullivan Executive Vice President Executive Vice President, PMF
</TABLE>
(b) The Prudential Investment Corporation
See "Management of the Fund--Subadviser" in the Prospectus constituting
Part A of this Registration Statement and "Subadviser" in the Statement of
Additional Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive
officers are as set forth below. The address of each person is Prudential Plaza,
Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of Prudential Investments of The
President and Chief Prudential Insurance Company of America (Prudential)
Executive Officer and
Director
Jonathan M. Greene Senior Vice President and President--Investment Management of Prudential Investments of
Director Prudential
John R. Strangfeld Vice President and Director President of Private Asset Management Group of Prudential
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for The BlackRock
Government Income Trust, Command Money Fund, Command Government Fund, Command
Tax-Free Fund, The Global Government Plus Fund, Inc., The Global Total Return
Fund, Inc., Global Utility Fund, Inc., Nicholas Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Allocation Fund, Prudential
California Municipal Fund, Prudential Distressed Securities Fund, Inc.,
Prudential Diversified Bond Fund, Inc., Prudential Dryden Fund, Prudential
Emerging Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity
Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Genesis
Fund, Inc., Prudential Global Limited Maturity Fund, Inc., Prudential Government
Income Fund, Inc., Prudential Government Securities Trust, Prudential High Yield
Fund, Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Jennison Series Fund, Inc.,
Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc.,
Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential
Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Small-Cap Quantitative Fund, Inc., Prudential Small Companies Fund, Inc.,
Prudential Special Money Market Fund, Prudential Structured Maturity Fund, Inc.,
Prudential Tax Free Money Fund, Inc.,
C-3
<PAGE>
Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio Trust. Prudential Securities is also a depositor for the following
unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trust
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below:
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ------------- -------------
<S> <C> <C>
Robert Golden Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Alan D. Hogan Executive Vice President, Chief Administrative Officer and Director None
George A. Murray Executive Vice President and Director None
Leland B. Paton Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff Executive Vice President, Chief Financial Officer and Director None
Vincent T. Pica, II Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons Chief Executive Officer, President and Director None
Lee B. Spencer, Jr. Executive Vice President, Secretary, General Counsel and Director None
- --------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts, 02171, The Prudential Investment Corporation, Prudential
Plaza, 751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway
Center 3, Newark, New Jersey 07102, and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1(b)(5), (6), (7), (9), (10) and (11), 31a-1(f), Rules 31a-1(b)(4) and (11)
and 31a-1(d) will be kept at Gateway Center Three, Newark, New Jersey and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept by
State Street Bank and Trust Company and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "Management of the
Fund--Manager" and "Management of the Fund--Distributor" in the Prospectus and
the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKING
Registrant makes the following undertakings:
The Registrant hereby undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months from
the effective date of Registrant's 1933 Act registration statement.
The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark, and State of New Jersey, on the 1st day of April, 1997.
PRUDENTIAL SMALL-CAP QUANTITATIVE FUND, INC.
By /s/ Richard A. Redeker
------------------------------------
Richard A. Redeker
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
---------- ----- ----
/s/ Robert F. Gunia Director April 1, 1997
-------------------------
Robert F. Gunia
/s/ Edward D. Beach Director April 1, 1997
-------------------------
Edward D. Beach
/s/ Delayne Dedrick Gold Director April 1, 1997
-------------------------
Delayne Dedrick Gold
/s/ Donald D. Lennox Director April 1, 1997
-------------------------
Donald D. Lennox
/s/ Douglas H. McCorkindale Director April 1, 1997
-------------------------
Douglas H. McCorkindale
/s/ Mendel A. Melzer Director April 1, 1997
-------------------------
Mendel A. Melzer
/s/ Thomas T. Mooney Director April 1, 1997
-------------------------
Thomas T. Mooney
/s/ Stephen P. Munn Director April 1, 1997
-------------------------
Stephen P. Munn
/s/ Richard A. Redeker President and Director April 1, 1997
-------------------------
Richard A. Redeker
/s/ Robin B. Smith Director April 1, 1997
-------------------------
Robin B. Smith
/s/ Louis A. Weil, III Director April 1, 1997
-------------------------
Louis A. Weil, III
/s/ Clay T. Whitehead Director April 1, 1997
-------------------------
Clay T. Whitehead
/s/ Grace C. Torres Treasurer and Principal April 1, 1997
------------------------- Financial and
Grace C. Torres Accounting Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1. (a) Articles of Incorporation.*
2. By-Laws.**
3. Not Applicable.
4. Instruments defining rights of shareholders.**
5. (a) Form of Management Agreement between the Registrant and Prudential
Mutual Fund Management LLC.**
(b) Form of Subadvisory Agreement between Prudential Mutual Fund
Management LLC and The Prudential Investment Corporation.**
6. (a) Form of Distribution Agreement between the Registrant and Prudential
Securities Incorporated.**
(b) Selected Dealer Agreement.**
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and Trust
Company.**
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services LLC.**
10. Opinion of Gardner, Carton & Douglas.**
11. Consent of Independent Accountants.**
12. Not Applicable.
13. Form of Purchase Agreement.**
14. Not Applicable.
15. (a) Form of Distribution and Service Plan for Class A Shares.**
(b) Form of Distribution and Service Plan for Class B Shares.**
(c) Form of Distribution and Service Plan for Class C Shares.**
16. Not Applicable.
18. Rule 18f-3 Plan.**
-------------
* Filed herewith.
** To be filed by future pre-effective amendment.
ARTICLES OF INCORPORATION
OF
PRUDENTIAL SMALL-CAP QUANTITATIVE FUND, INC.
I, the incorporator, Shelley L. Clifford, whose post office address is 321
North Clark Street, Suite 3400, Chicago, Illinois 60610, being at least eighteen
years of age, am, and by virtue of the General Laws of the State of Maryland,
authorizing the formation of corporations, forming a corporation.
ARTICLE I.
The name of the corporation (hereinafter called the "Corporation") is
Prudential Small-Cap Quantitative Fund, Inc.
ARTICLE II.
PURPOSES
The purpose for which the Corporation is formed is to act as an open-end
investment company of the management type registered as such with the Securities
and Exchange Commission pursuant to the Investment Company Act of 1940, as
amended (the Investment Company Act) and to exercise and generally to enjoy all
of the powers, rights and privileges granted to, or conferred upon, corporations
by the General Laws of the State of Maryland now or hereinafter in force.
ARTICLE III.
ADDRESS IN MARYLAND
The post office address of the place at which the principal office of the
Corporation in the State of Maryland is located is c/o CT Corporation System, 32
South Street, Baltimore, Maryland 21202.
<PAGE>
The name of the Corporation's resident agent is The Corporation Trust
Incorporated, and its post office address is 32 South Street, Baltimore,
Maryland 21202. Said resident agent is a corporation of the State of Maryland.
ARTICLE IV.
COMMON STOCK
Section 1. The total number of shares of capital stock which the
Corporation shall have authority to issue is 2,000,000,000 shares of the par
value of $.001 per share and of the aggregate par value of $2,000,000 to be
divided initially into four classes, consisting of 1,000,000,000 shares of Class
A Common Stock, 500,000,000 shares of Class B Common Stock, 300,000,000 shares
of Class C Common Stock and 200,000,000 shares of Class Z Common Stock.
(a) Each share of Class A, Class B, Class C and Class Z Common Stock of
the Corporation shall represent the same interest in the Corporation and have
identical voting, dividend, liquidation and other rights, except that
(i) expenses related to the distribution of a class of shares shall be borne
solely by such class; (ii) the bearing of any such expenses solely by shares of
a class shall be appropriately reflected (in the manner determined by the Board
of Directors) in the net asset value, dividends, distribution and liquidation
rights of the shares of such class; (iii) the Class A Common Stock shall be
subject to a front-end sales load and a Rule 12b-1 distribution fee as
determined by the Board of Directors from time to time; (iv) the Class B Common
Stock shall be subject to a contingent deferred sales charge and a Rule 12b-1
distribution fee as determined by the Board of Directors from time to time;
(v) the Class C Common Stock shall be subject to a contingent deferred sales
charge and a Rule 12b-1 distribution fee as determined by the Board of Directors
from time to time; and (vi) the Class Z
2
<PAGE>
Common Stock shall not be subject to a front-end sales load, a contingent
deferred sales charge or a Rule 12b-1 distribution fee. All shares of a
particular class shall represent an equal proportionate interest in that class,
and each share of any particular class shall be equal to each other share of
that class.
(b) Each share of the Class B Common Stock of the Corporation shall be
converted automatically, and without any action or choice on the part of the
holder thereof, into shares (including fractions thereof) of the Class A Common
Stock of the Corporation (computed in the manner hereinafter described), at the
applicable net asset value of each Class, at the time of the calculation of the
net asset value of such Class B Common Stock at such times, which may vary
between shares originally issued for cash and shares purchased through the
automatic reinvestment of dividends and distributions with respect to Class B
Common Stock (each a Conversion Date), determined by the Board of Directors in
accordance with applicable laws, rules, regulations and interpretations of the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. and pursuant to such procedures as may be established from time to
time by the Board of Directors and disclosed in the Corporation's then current
prospectus for such Class A and Class B Common Stock.
(c) The number of shares of the Class A Common Stock of the Corporation
into which a share of the Class B Common Stock is converted pursuant to
Paragraph (1)(b) hereof shall equal the number (including for this purpose
fractions of a share) obtained by dividing the net asset value per share of the
Class B Common Stock for purposes of sales and redemptions thereof at the time
of the calculation of the net asset value on the Conversion Date by the net
asset value per share of the Class A Common Stock for purposes of sales and
redemptions thereof at the time of the calculation of the net asset value on the
Conversion Date.
3
<PAGE>
(d) On the Conversion Date, the shares of the Class B Common Stock of the
Corporation converted into shares of the Class A Common Stock will cease to
accrue dividends and will no longer be outstanding and the rights of the holders
thereof will cease (except the right to receive declared but unpaid dividends to
the Conversion Date).
(e) The Board of Directors shall have full power and authority to adopt
such other terms and conditions concerning the conversion of shares of the Class
B Common Stock to shares of the Class A Common Stock as they deem appropriate;
provided such terms and conditions are not inconsistent with the terms contained
in this Section 1 and subject to any restrictions or requirements under the
Investment Company Act of 1940 and the rules, regulations and interpretations
thereof promulgated or issued by the Securities and Exchange Commission, and
conditions or limitations contained in an order issued by the Securities and
Exchange Commission applicable to the Corporation, or any restrictions or
requirements under the Internal Revenue Code of 1986, as amended, and the rules,
regulations and interpretations promulgated or issued thereunder.
Section 2. The Board of Directors may, in its discretion, classify and
reclassify any unissued shares of the capital stock of the Corporation into one
or more additional or other series or classes by setting or changing in any one
or more respects the designations, conversion or other rights, restrictions,
limitations as to dividends, qualifications or terms or conditions of purchase
or redemption of such shares and pursuant to such classification or
reclassification to increase or decrease the number of authorized shares of any
existing series or class. If additional series are designated by the Board of
Directors, such series of capital stock, and any classes into which such series
may be further divided, shall relate to separate portfolios of investments.
4
<PAGE>
Section 3. Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any series or class
of capital stock, the holders of each series and class of capital stock of the
Corporation shall be entitled to dividends and distributions in such amounts and
at such times as may be determined by the Board of Directors, and the dividends
and distributions paid with respect to the various series or classes of capital
stock may vary among such series or classes. Expenses related to the
distribution of, and other identified expenses that should properly be allocated
to, the shares of a particular series or class of capital stock may be charged
to and borne solely by such series or class and the bearing of expenses solely
by a series or class may be appropriately reflected (in a manner determined by
the Board of Directors) and cause differences in the net asset value
attributable to, and the dividend, redemption and liquidation rights of, the
shares of each such series or class of capital stock.
Section 4. Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any series or class
of capital stock, on each matter submitted to a vote of stockholders, each
holder of a share of capital stock of the Corporation shall be entitled to one
vote for each share standing in such holder's name on the books of the
Corporation, irrespective of the series or class thereof, and all shares of all
series and classes shall vote together as a single class; provided, however,
that (a) as to any matter with respect to which a separate vote of any series or
class is required by the Investment Company Act of 1940, as amended, and in
effect from time to time, or any rules, regulations or orders issued thereunder,
or by the Maryland General Corporation Law, such requirement as to a separate
vote by that series or class shall apply in lieu of a general vote of all series
and classes as described above; (b) in the event that the separate vote
requirements referred to in (a) above apply with respect to
5
<PAGE>
one or more series or classes, then subject to paragraph (c) below, the shares
of all other series and classes not entitled to a separate vote shall vote
together as a single class; and (c) as to any matter which in the judgment of
the Board of Directors (which shall be conclusive) does not affect the interest
of a particular series or class, such series or class shall not be entitled to
any vote and only the holders of shares of the one or more affected series and
classes shall be entitled to vote.
Section 5. Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any series or class
of capital stock, in the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, holders of shares of capital
stock of the Corporation shall be entitled, after payment or provision for
payment of the debts and other liabilities of the Corporation (as such
liabilities may affect one or more of the classes of shares of capital stock of
the Corporation), to share ratably in the remaining net assets of the
Corporation; provided, however, that in the event the capital stock of the
Corporation shall be classified or reclassified into series, holders of any
shares of capital stock within such series shall be entitled to share ratably
out of assets belonging to such series pursuant to the provisions of Section
7(c) of this Article IV.
Section 6. Each share of any class of the capital stock of the
Corporation, and in the event the capital stock of the Corporation shall be
classified or reclassified into series, each share of any class of capital stock
of the Corporation within such series shall be subject to the following
provisions:
(a) The net asset value of each outstanding share of capital stock of the
Corporation (or of a series or class, in the event the capital stock of the
Corporation shall be so classified or reclassified into series) subject to
subsection (b) of this Section 6, shall be the quotient obtained
6
<PAGE>
by dividing the value of the net assets of the Corporation (or the net assets of
the Corporation attributable or belonging to that series or class as designated
by the Board of Directors pursuant to Articles Supplementary) by the total
number of outstanding shares of capital stock of the Corporation (or of such
series or class, in the event the capital stock of the Corporation shall be
classified or reclassified into series). Subject to subsection (b) of this
Section 6, the value of the net assets of the Corporation (or of such series or
class, in the event the capital stock of the Corporation shall be classified or
reclassified into series) shall be determined pursuant to the procedures or
methods (which procedures or methods, in the event the capital stock of the
Corporation shall be classified or reclassified into series, may differ from
series to series or from class to class) prescribed or approved by the Board of
Directors in its discretion, and shall be determined at the time or times (which
time or times may, in the event the capital stock of the Corporation shall be
classified into series or classes, differ from series to series) prescribed or
approved by the Board of Directors in its discretion. In addition, subject to
subsection (b) of this Section 6, the Board of Directors, in its discretion, may
suspend the daily determination of net asset value of any share of any series or
class of capital stock of the Corporation.
(b) The net asset value of each share of the capital stock of the
Corporation or any series or class thereof shall be determined in accordance
with any applicable provision of the Investment Company Act, any applicable
rule, regulation or order of the Securities and Exchange Commission thereunder,
and any applicable rule or regulation made or adopted by any securities
association registered under the Securities Exchange Act of 1934.
(c) All shares now or hereafter authorized shall be subject to redemption
and redeemable at the option of the stockholder pursuant to the applicable
provisions of the Investment Company Act and laws of the State of Maryland,
including any applicable rules and
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regulations thereunder. Each holder of a share of any series or class, upon
request to the Corporation (if such holder's shares are certificated, such
request being accompanied by surrender of the appropriate stock certificate or
certificates in proper form for transfer), shall be entitled to require the
Corporation to redeem all or any part of such shares outstanding in the name of
such holder on the books of the Corporation (or as represented by share
certificates surrendered to the Corporation by such redeeming holder) at a
redemption price per share determined in accordance with subsection (a) of this
Section 6.
(d) Notwithstanding subsection (c) of this Section 6, the Board of
Directors of the Corporation may suspend the right of the holders of shares of
any or all series or classes of capital stock to require the Corporation to
redeem such shares or may suspend any purchase of such shares:
(i) for any period (A) during which the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or (B) during
which trading on the New York Stock Exchange is restricted;
(ii) for any period during which an emergency, as defined by the rules
of the Securities and Exchange Commission or any successor thereto, exists
as a result of which (A) disposal by the Corporation of securities owned by
it and belonging to the affected series of capital stock (or the
Corporation, if the shares of capital stock of the Corporation have not
been classified or reclassified into series) is not reasonably practicable,
or (B) it is not reasonably practicable for the Corporation fairly to
determine the value of the net assets of the affected series of capital
stock; or
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(iii) for such other periods as the Securities and Exchange
Commission or any successor thereto may by order permit for the protection
of the holders of shares of capital stock of the Corporation.
(e) All shares of the capital stock of the Corporation now or hereafter
authorized shall be subject to redemption and redeemable at the option of the
Corporation. The Board of Directors may by resolution from time to time
authorize the Corporation to require the redemption of all or any part of the
outstanding shares of any series or class upon the sending of written notice
thereof to each holder whose shares are to be redeemed and upon such terms and
conditions as the Board of Directors, in its discretion, shall deem advisable,
out of funds legally available therefor, at the net asset value per share of
that series or class determined in accordance with subsections (a) and (b) of
this Section 6 and take all other steps deemed necessary or advisable in
connection therewith.
(f) The Board of Directors may by resolution from time to time authorize
the purchase by the Corporation, either directly or through an agent, of shares
of any series or class of the capital stock of the Corporation upon such terms
and conditions and for such consideration as the Board of Directors, in its
discretion, shall deem advisable out of funds legally available therefor at
prices per share not in excess of the net asset value per share of that series
or class determined in accordance with subsections (a) and (b) of this Section 6
and to take all other steps deemed necessary or advisable in connection
therewith.
(g) Except as otherwise permitted by the Investment Company Act, payment
of the redemption price of shares of any series or class of the capital stock of
the Corporation surrendered to the Corporation for redemption pursuant to the
provisions of subsection (c) of this Section 6 or for purchase by the
Corporation pursuant to the provisions of subsection (e) or (f) of
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this Section 6 shall be made by the Corporation within seven days after
surrender of such shares to the Corporation for such purpose. Any such payment
may be made in whole or in part in portfolio securities or in cash, as the Board
of Directors, in its discretion, shall deem advisable, and no stockholder shall
have the right, other than as determined by the Board of Directors, to have his
or her shares redeemed in portfolio securities.
(h) In the absence of any specification as to the purposes for which
shares are redeemed or repurchased by the Corporation, all shares so redeemed or
repurchased shall be deemed to be acquired for retirement in the sense
contemplated by the laws of the State of Maryland. Shares of any series or
class retired by repurchase or redemption shall thereafter have the status of
authorized but unissued shares of such series or class.
Section 7. In the event the Board of Directors shall authorize the
classification or reclassification of shares into series, unless otherwise
provided by the Board of Directors in the Articles Supplementary creating such
series, the Board of Directors may (but shall not be obligated to) provide that
each series shall have the following powers, preferences and voting or other
special rights, and the qualifications, restrictions and limitations:
(a) All consideration received by the Corporation for the issue or sale of
shares of capital stock of each series, together with all income, earnings,
profits, and proceeds received thereon, including any proceeds derived from the
sale, exchange or liquidation thereof, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to the series with respect to which such assets, payments or
funds were received by the Corporation for all purposes, subject only to the
rights of creditors, and shall be so handled upon the books of account of the
Corporation. Such assets, payments and funds, including any proceeds derived
from the sale, exchange or liquidation thereof, and any
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assets derived from any reinvestment of such proceeds in whatever form the same
may be, are herein referred to as "assets belonging to" such series.
(b) The Board of Directors may from time to time declare and pay dividends
or distributions, in additional shares of capital stock of such series or in
cash, on any or all series of capital stock, the amount of such dividends and
the means of payment being wholly in the discretion of the Board of Directors.
(i) Dividends or distributions on shares of any series shall be paid
only out of earned surplus or other lawfully available assets belonging to
such series.
(ii) Inasmuch as one goal of the Corporation is to qualify as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended, or any successor or comparable statute thereto, and Regulations
promulgated thereunder, and inasmuch as the computation of net income and
gains for federal income tax purposes may vary from the computation thereof
on the books of the Corporation, the Board of Directors shall have the
power, in its discretion, to distribute in any fiscal year as dividends,
including dividends designated in whole or in part as capital gains
distributions, amounts sufficient, in the opinion of the Board of
Directors, to enable the Corporation to qualify as a regulated investment
company and to avoid liability for the Corporation for federal income tax
in respect of that year. In furtherance, and not in limitation of the
foregoing, in the event that a series has a net capital loss for a fiscal
year, and to the extent that the net capital loss offsets net capital gains
from such series, the amount to be deemed available for distribution to
that series with the net capital gain may be reduced by the amount offset.
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(c) In the event of the liquidation or dissolution of the Corporation,
holders of shares of capital stock of each series shall be entitled to receive,
as a series, out of the assets of the Corporation available for distribution to
such holders, but other than general assets not belonging to any particular
series, the assets belonging to such series; and the assets so distributable to
the holders of shares of capital stock of any series shall be distributed,
subject to the provisions of subsection (d) of this Section 7, among such
stockholders in proportion to the number of shares of such series held by them
and recorded on the books of the Corporation, in the event that there are any
general assets not belonging to any particular series and available for
distribution, such distribution shall be made to the holders of all series in
proportion to the net asset value of the respective series determined in
accordance with the charter of the Corporation.
(d) The assets belonging to any series shall be charged with the
liabilities in respect to such series, and shall also be charged with its share
of the general liabilities of the Corporation, in proportion to the asset value
of the respective series determined in accordance with the charter of the
Corporation. The determination of the Board of Directors shall be conclusive as
to the amount of liabilities, including accrued expenses and reserves, as to the
allocation of the same as to a given series, and as to whether the same or
general assets of the Corporation are allocable to one or more classes.
Section 8. Any fractional shares shall carry proportionately all the
rights of a whole share, excepting any right to receive a certificate evidencing
such fractional share, but including, without limitation, the right to vote and
the right to receive dividends.
Section 9. No holder of shares of Common Stock of the Corporation shall,
as such holder, have any pre-emptive right to purchase or subscribe for any
shares of the Common Stock of the Corporation of any series or class which it
may issue or sell (whether out of the number of
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shares authorized by the Articles of Incorporation, or out of any shares of the
Common Stock of the Corporation acquired by it after the issue thereof, or
otherwise).
Section 10. All persons who shall acquire any shares of capital stock of
the Corporation shall acquire the same subject to the provisions of the charter
and By-Laws of the Corporation.
Section 11. Notwithstanding any provision of law requiring action to be
taken or authorized by the affirmative vote of the holders of a designated
proportion greater than a majority of the outstanding shares of all classes or
of the outstanding shares of a particular class or classes, as the case may be,
such action shall be valid and effective if taken or authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all series or classes or of the total number of shares of such series or class
or classes, as the case may be, outstanding and entitled to vote thereupon
pursuant to the provisions of these Articles of Incorporation.
Section 12. The presence in person or by proxy of the holders of record of
one-third of the shares of the Common Stock of the Corporation issued and
outstanding and entitled to vote thereat shall constitute a quorum at all
meetings of the stockholders.
ARTICLE V.
DIRECTORS
The initial number of Directors of the Corporation shall be three, and the names
of those who shall act as such until the first meeting of stockholders and until
their successors are duly elected and qualify are as follows:
Marguerite E.H. Morrison
S. Jane Rose
Ellyn C. Vogin
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The By-Laws of the Corporation may fix the number of directors at no less
than three and may authorize the Board of Directors, by the vote of a majority
of the entire Board of Directors, to increase or decrease the number of
directors within a limit specified in the By-Laws (provided that, if there are
no shares outstanding, the number of directors may be less than three but not
less than one), and to fill the vacancies created by any such increase in the
number of directors. Unless otherwise provided by the By-Laws of the
Corporation, the directors of the Corporation need not be stockholders.
The By-Laws of the Corporation may divide the directors of the Corporation
into classes and prescribe the tenure of office of the several classes; but no
class shall be elected for a period shorter than one year or for a period longer
than five years, and the term of office of at least one class shall expire each
year.
ARTICLE VI.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. The Corporation shall indemnify to the fullest extent permitted
by law (including the Investment Company Act, as currently in effect or as the
same may hereafter be amended, any person made or threatened to be made a party
to any action, suit or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that such person or such person's testator
or intestate is or was a director or officer of the Corporation or serves or
served at the request of the Corporation any other enterprise as a director or
officer. To the fullest extent permitted by law (including the Investment
Company Act), as currently in effect or as the same may hereafter be amended,
expenses incurred by any such person in defending any such action, suit or
proceeding shall be paid or reimbursed by the Corporation promptly upon receipt
by it of an undertaking of such person to repay such expenses if it shall
ultimately be
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determined that such person is not entitled to be indemnified by the
Corporation. The rights provided to any person by this Article VI shall be
enforceable against the Corporation by such person who shall be presumed to have
relied upon it in serving or continuing to serve as a director or officer as
provided above. No amendment of this Article VI shall impair the rights of any
person arising at any time with respect to events occurring prior to such
amendment. For purposes of this Article VI, the term "Corporation" shall
include any predecessor of the Corporation and any constituent corporation
(including any constituent of a constituent) absorbed by the Corporation in a
consolidation or merger; the term "other enterprise" shall include any
corporation, partnership, joint venture, trust or employee benefit plan; service
"at the request of the Corporation" shall include service as a director or
officer of the Corporation which imposes duties on, or involves services by,
such director or officer with respect to an employee benefit plan, its
participants or beneficiaries; any excise taxes assessed on a person with
respect to an employee benefit plan shall be deemed to be indemnifiable
expenses; and action by a person with respect to any employee benefit plan which
such person reasonably believes to be in the interest of the participants and
beneficiaries of such plan shall be deemed to be action not opposed to the best
interests of the Corporation.
Section 2. To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment Company Act, no
director or officer of the Corporation shall be personally liable to the
Corporation or its stockholders for money damages; provided, however, that
nothing herein shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its security holders to
which he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his or her office. No amendment of
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the charter of the Corporation or repeal of any of its provisions shall limit or
eliminate the limitation of liability provided to directors and officers
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
ARTICLE VII.
MISCELLANEOUS
The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and for creating,
defining, limiting and regulating the powers of the Corporation, the directors
and the stockholders.
Section 1. The Board of Directors shall have the management and control of
the property, business and affairs of the Corporation and is hereby vested with
all the powers possessed by the Corporation itself so far as is not inconsistent
with law or these Articles of Incorporation. In furtherance and without
limitation of the foregoing provisions, it is expressly declared that, subject
to these Articles of Incorporation, the Board of Directors shall have power:
(a) To make, alter, amend or repeal from time to time the By-Laws of the
Corporation except as such power may otherwise be limited in the By-Laws.
(b) To issue shares of any series or class of the capital stock of the
Corporation.
(c) To authorize the purchase of shares of any series or class in the open
market or otherwise, at prices not in excess of their net asset value for shares
of that class, series or class within such series determined in accordance with
subsections (a) and (b) of Section 6 of Article IV hereof, provided that the
Corporation has assets legally available for such purpose, and to pay for such
shares in cash, securities or other assets then held or owned by the
Corporation.
(d) To declare and pay dividends and distributions from funds legally
available therefor on shares of such series or class, in such amounts, if any,
and in such manner (including
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declaration by means of a formula or other similar method of determination
whether or not the amount of the dividend or distribution so declared can be
calculated at the time of such declaration) and to the holders of record as of
such date, as the Board of Directors may determine.
(e) To take any and all action necessary or appropriate to maintain a
constant net asset value per share for shares of any class, series or class
within such series.
Section 2. Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted accounting
principles applied by or pursuant to the direction of the Board of Directors or
as otherwise required or permitted by the Securities and Exchange Commission,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of shares, past, present and future, of each series or class, and shares
are issued and sold on the condition and undertaking, evidenced by acceptance of
certificates for such shares by, or confirmation of such shares being held for
the account of, any stockholder, that any and all such determinations shall be
binding as aforesaid.
Nothing in this Section 2 shall be construed to protect any director or
officer of the Corporation against liability to the Corporation or its
stockholders to which such director or officer would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
Section 3. The directors of the Corporation may receive compensation for
their services, subject, however, to such limitations with respect thereto as
may be determined from time to time by the holders of shares of capital stock of
the Corporation.
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Section 4. Except as required by law, the holders of shares of capital
stock of the Corporation shall have only such right to inspect the records,
documents, accounts and books of the Corporation as may be granted by the Board
of Directors of the Corporation.
Section 5. Any vote of the holders of shares of capital stock of the
Corporation authorizing liquidation of the Corporation or proceedings for its
dissolution may authorize the Board of Directors to determine, as provided
herein, or if provision is not made herein, in accordance with generally
accepted accounting principles, which assets are the assets belonging to the
Corporation or any series thereof available for distribution to the holders of
shares of capital stock of the Corporation or any series thereof (pursuant to
the provisions of Section 7 of Article IV hereof) and may divide, or authorize
the Board of Directors to divide, such assets among the stockholders of the
shares of capital stock of the Corporation or any series thereof in such manner
as to ensure that each such holder receives an amount from the proceeds of such
liquidation or dissolution that such holder is entitled to, as determined
pursuant to the provisions of Sections 3 and 7 of Article IV hereof.
ARTICLE VIII.
AMENDMENTS
The Corporation reserves the right from time to time to amend, alter or
repeal any of the provisions of these Articles of Incorporation (including any
amendment that changes the terms of any of the outstanding shares by
classification, reclassification or otherwise), and to add or insert any other
provisions that may, under the statutes of the State of Maryland at the time in
force, be lawfully contained in articles of incorporation, and all rights at any
time conferred upon the stockholders of the Corporation by these Articles of
Incorporation are subject to the provisions of this Article VIII.
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I hereby acknowledge these Articles of Incorporation to be my act, and
affirm that to the best of my knowledge, information and belief, all matters and
facts set forth herein are true in all material respects and that this statement
is made under the penalties of perjury.
February 3, 1997
/s/ SHELLEY L. CLIFFORD
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Shelley L. Clifford
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