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PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
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PROSPECTUS DATED SEPTEMBER 25, 1997
(REVISED AS OF JUNE 1, 1998)
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Prudential Small-Cap Quantum 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. The investment adviser considers
small-cap companies to be those with market capitalizations of less than $1.5
billion. The Fund's portfolio manager will employ computer-driven quantitative
strategies to construct a portfolio designed to maximize expected 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 100 Mulberry Street, Gateway Center Three,
Newark, New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission (the
Commission) in a Statement of Additional Information, dated September 25, 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. The Commission maintains a
Web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference, and other information regarding
the Fund.
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
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AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
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.
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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 SMALL-CAP QUANTUM FUND?
Prudential Small-Cap Quantum 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. The investment adviser considers small-cap
companies to be those with market capitalizations of less than $1.5 billion.
The Fund's portfolio manager will employ computer-driven quantitative
strategies to construct a portfolio designed to maximize expected 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 Investments Fund Management LLC (PIFM or the Manager), is the
manager of the Fund and is compensated for its services at an annual rate of
.60 of 1% of average daily net assets of the Fund. As of August 31, 1997,
PIFM served as manager or administrator to 60 investment companies,
including 40 mutual funds, with aggregate assets of approximately $58.7
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 PIFM. See "How the
Fund is Managed--Manager" at page 12.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Investment Management Services LLC (the Distributor) acts as
the Distributor of the Fund's Class A, Class B, Class C and Class Z shares
and 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. The Distributor incurs the expense
of distributing the Fund's Class Z shares under a Distribution Agreement
with the Fund, none of which is reimbursed by or paid for by the Fund. See
"How the Fund is Managed--Distributor" at page 12.
2
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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 18 and "Shareholder
Guide--Shareholder Services" at page 28.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers) or directly from the Fund
through its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the
Transfer Agent). In each case, sales are made at the net asset value per
share (NAV) next determined after receipt of your purchase order by the
Transfer Agent, a Dealer or the Distributor, plus a sales charge, which may
be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at NAV without any sales charge. Dealers may
charge their customers a separate fee for handling purchase transactions.
See "How the Fund Values its Shares" at page 15 and "Shareholder Guide--How
to Buy Shares of the Fund" at page 18.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 5% of the
offering price.
- 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.
- 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.
- 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 19.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
your Dealer, the Distributor or the Transfer Agent receives your sell order.
The proceeds of redemptions of Class B and Class C shares may be subject to
a CDSC. Dealers may charge their customers a separate fee for handling sale
transactions. See "Shareholder Guide--How to Sell Your Shares" at page 23.
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
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FUND EXPENSES
<TABLE>
<CAPTION>
CLASS C
CLASS A SHARES CLASS B SHARES 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>
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
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>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
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<S> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class A....................................... $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
</TABLE>
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" are estimated for the fiscal year ending March 31, 1998, and
include 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."
+ Dealers may independently charge additional fees for shareholder
transactions or advisory services. 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%.
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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 TOTAL ASSETS) IN EQUITY SECURITIES OF SMALL-CAP U.S. COMPANIES. THE
INVESTMENT ADVISER CONSIDERS SMALL-CAP COMPANIES TO BE THOSE WITH MARKET
CAPITALIZATIONS OF LESS THAN $1.5 BILLION. THE FUND'S PORTFOLIO MANAGER WILL
EMPLOY COMPUTER-DRIVEN QUANTITATIVE STRATEGIES TO CONSTRUCT A PORTFOLIO DESIGNED
TO MAXIMIZE EXPECTED 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 to select stocks and their weightings with the goal of constructing a
portfolio that maximizes expected return while attempting to control risk. The
analysis of individual stocks is based on a multi-factor quantitative stock
valuation model (the QV Model) which was developed and is maintained by
Prudential Securities Incorporated's Quantitative Analysis Group. The QV model
ranks stocks according to three general categories of factors: current
valuation; profitability momentum; and surprise. The QV Model is more fully
described in the QV Model Appendix. The portfolio manager may invest at
different times and in different amounts than recommended by the QV Model as
published by Prudential Securities based on quantitative analysis and market
conditions.
EQUITY SECURITIES
Equity securities are 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). Purchased
options are not considered equity securities for these purposes. The Fund will
not invest more than 5% of total assets in unattached rights and warrants within
the 80% policy. 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 the over-the-counter market.
ADRs are included within the 80% policy.
The Fund intends primarily to purchase securities of companies with market
capitalizations of less than $1.5 billion. Market capitalization is measured at
the time of purchase. If the Fund holds a security of a company whose market
capitalization exceeds $1.5 billion, that security will be sold in a timely
manner.
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, rights, warrants, derivatives and cash. The Fund
may invest up to 20% of its total assets in foreign securities. ADRs are not
considered foreign securities for purposes of the 20% limitation. Investing in
securities of foreign issuers 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
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DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When adverse market or economic conditions dictate a defensive strategy, the
Fund may temporarily invest without limit in high quality 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). Foreign 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 manager may invest in securities other than
recommended by the quantitative model when adverse market or economic conditions
warrant a temporary 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 subject to the 80% policy.
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 20% OF ITS TOTAL ASSETS IN SECURITIES OF FOREIGN
ISSUERS. For purposes of this limitation, ADRs are not deemed to be foreign
securities. Investing in securities of foreign issuers and countries involves
certain considerations and risks which are not typically associated with
investing in securities of domestic companies. Foreign issuers 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 exist 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 containing 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 issuers 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 issuers 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 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.
6
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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 with the Fund's custodian, containing cash or other
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. Short sales against-the-box are not
subject to this 25% limit.
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.
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 Investments Fund
Management LLC pursuant to an order of the Commission. 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
7
<PAGE>
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 other 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 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.
8
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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 or other liquid assets having a value equal to or greater than the
Fund's purchase commitments. The securities so purchased are subject to market
fluctuation and no interest accrues to the purchaser during the period between
purchase and settlement. At the time of delivery of the securities the value may
be more or less than the purchase price and an increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the Fund's net asset
value.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH THE
UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies currently include the use
of options on stock indices and futures contracts and options thereon on
indices. The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Investment Objective
and Policies" and "Taxes, Dividends and Distributions" in the Statement of
Additional Information. New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON FINANCIAL
INDICES THAT ARE TRADED ON U.S. OR FOREIGN SECURITIES EXCHANGES OR IN THE
OVER-THE-COUNTER MARKET TO ENHANCE RETURN OR TO HEDGE THE FUND'S PORTFOLIO. The
Fund may write covered put and call options to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of a security that it owns against a decline in market value and
purchase call options in an effort to protect against an increase in the price
of securities it intends to purchase. The Fund may also purchase put and call
options to offset previously written put and call options of the same series.
See "Investment Objective and Policies--Options on Securities Indices" in the
Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE POSITION SUBJECT TO THE OPTION AT
A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The writer of a call
option, in return for the premium, has the obligation, upon exercise of the
option, to deliver a specified amount of cash to the purchaser upon receipt of
the exercise price. When the Fund writes a call option, the Fund gives up the
potential for gain on the underlying position in excess of the exercise price of
the option during the period that the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE POSITION SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the position at the exercise price. The Fund might, therefore, be
obligated to purchase the underlying position for more than its current market
price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered if, as
long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying securities that comprise the index or (ii) maintains
in a segregated account cash or other liquid assets in an amount equal to or
greater than its obligation under the option. Under the first circumstance, the
Fund's losses are limited because it owns the underlying position; under the
second circumstance, in the case of a written call option, the Fund's losses are
potentially unlimited. See "Investment Objective and Policies--Options on
Securities Indices" in the Statement of Additional Information. There is no
limitation on the amount of call options the Fund may write.
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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 CONTRACT 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 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,
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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 other liquid assets
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.
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.
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HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE ACTIONS
OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, 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.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), 100 MULBERRY
STREET, GATEWAY CENTER THREE, NEWARK, NEW JERSEY 07102-4077, 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. PIFM is organized in New York as a limited
liability company. It is the successor to Prudential Mutual Fund Management,
Inc., which transferred its assets to PIFM in September 1996. See "Manager" in
the Statement of Additional Information.
As of August 31, 1997, PIFM served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $58.7 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM 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 primarily manages institutional portfolios totaling
over $3 billion in assets as of August 31, 1997. Mr. Leib joined Prudential in
1987 as a quantitative analyst.
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company, and are part of Prudential Investments, a business group of Prudential.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY 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 A WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities
Incorporated, One Seaport Plaza, New York, New York 10292, previously served
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<PAGE>
as the exclusive distributor of Fund shares and will serve as a co-distributor
of the Fund for shares sold through its financial advisors until approximately
July 1, 1998. Thereafter, Prudential Investment Management Services LLC will
serve as the exclusive distributor of Fund shares. Prudential Securities
Incorporated is an indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which is reimbursed by or paid for by the Fund. These
expenses include commissions and account servicing fees paid to, or on account
of, 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 the Distributor associated with the sale of the Fund's shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the distribution,
marketing, administrative and other services and activities provided by Dealers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR 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. The Distributor 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 THE DISTRIBUTOR 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 the
Distributor 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. The Distributor 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.
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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 and other persons which distribute
shares of the Fund (including Class Z shares). Such payments may be calculated
by reference to the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has agreed to limit its distribution fee for the Class A shares
as described under "Distributor." Fee waivers and expense subsidies will
increase total return. See "Performance Information" in the Statement of
Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund provided that the commissions, fees or other remuneration
they receive 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 PIFM. Its mailing address is P.O. Box 15035, New
Brunswick, New Jersey 08906.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
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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., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different 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 AVERAGE ANNUAL TOTAL RETURN,
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 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."
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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 NET 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 for securities held between 12
and 18 months is currently 28% and for securities held more than 18 months is
20% and the maximum tax rate for ordinary income is 39.6%. The maximum long-term
capital gains rate for corporate shareholders currently is 35%.
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. With
respect to non-corporate shareholders, gain or loss on shares held more than 18
months will be considered in determing a holder's adjusted net capital gain
subject to a maximum statutory tax rate of 20%.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
WITHHOLDING TAXES. Under the Internal Revenue Code, the Fund is required to
withhold and remit to the U.S. Treasury 31% of dividends, capital gain income
and redemption proceeds, payable on the accounts of those shareholders who fail
to furnish their
16
<PAGE>
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).
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.
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 per share for each
class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attn: Account Maintenance Unit, P.O. Box 15035, New
Brunswick, New Jersey 08906. 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.
IF YOU BUY SHARES ON OR BEFORE THE RECORD DATE (THE DATE THAT DETERMINES WHO
RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY YOU INVESTED AS
A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF DIVIDENDS WHEN
BUYING SHARES OF THE FUND.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON 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 CLASS Z
COMMON STOCK, each of which consists of 500 million authorized 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. 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
17
<PAGE>
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 Commission under
the Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the Commission or may be examined, without charge, at the
office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, THROUGH DEALERS,
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 15035, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the NAV
next determined following receipt of an order in proper form by the Distributor,
your Dealer or the Transfer Agent, 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 NAV without any sales charge. Dealers may charge
their customers a separate fee for handling purchase transactions. Payment may
be made by cash wire, check or through your brokerage account. See "Alternative
Purchase Plan" and "How the Fund Values its Shares."
In order to receive that day's NAV, your order must be received before the
Fund's NAV is computed (currently 4:15 P.M., New York time). If you purchase
shares through your Dealer, the Dealer must receive your order before the Fund's
NAV is computed that day and must transmit the order to the Distributor that
same day for you to receive that day's NAV.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. There is no minimum initial investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
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.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
18
<PAGE>
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 in street name with their Dealer will not receive stock
certificates.
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 placement of the
order.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your Dealer. Any such charge is retained by the Dealer and is not
remitted to the Fund.
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 Quantum Fund, Inc., specifying on the
wire the account number assigned by PFMS and your name and identifying the class
in which you are eligible to invest (Class A, Class B, Class C or Class Z
shares).
If you arrange for receipt by State Street 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 Quantum
Fund, Inc., Class A, Class B, Class C or Class Z shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing federal funds. The minimum amount which may be
invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other Information
------------------------------ -------------------- ------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% (currently Initial sales charge waived or
of 5% of the public offering being charged at a reduced for certain purchases
price rate of .25 of 1%)
CLASS B Maximum contingent deferred 1% Shares convert to Class A
sales charge or CDSC of 5% of shares approximately seven
the lesser of the amount years after purchase
invested or the redemption
proceeds; declines to zero
after six years
CLASS C Maximum CDSC of 1% of the 1% Shares do not convert to
lesser of the amount invested another class
or the redemption proceeds on
redemptions made within one
year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
19
<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. The four classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee (if any) of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or 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.
20
<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:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------------ --------------- --------------- --------------------
<S> <C> <C> <C>
Less than $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
</TABLE>
The Distributor may reallow the entire sales charge to Dealers. Dealers may be
deemed to be underwriters, as that term is defined in the Securities Act. The
Distributor reserves the right, without prior notice to any Dealer, to suspend
or eliminate Dealer concessions or commissions.
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 from its own resources based on a percentage of the net
asset value of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 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 and for
which the Transfer Agent does individual account recordkeeping (Direct Account
Benefit Plans), Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit 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
the Transfer Agent, by the following persons: (a) officers of the Prudential
Mutual Funds (including the Fund), (b) employees of the Distributor and PIFM and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at 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, provided that purchases at NAV are
permitted by such person's employer, (f) investors in Individual Retirement
Accounts, provided the purchase is made with the proceeds of a tax-free,
rollover of assets from a Benefit Plan for which Prudential Investments serves
as the
21
<PAGE>
recordkeeper or administrator, (g) investors previously eligible to purchase
Class A shares at NAV because of their participation in programs sponsored by an
affiliate of the Distributor for certain retirement plan or deferred
compensation plan participants, (h) orders placed by broker-dealers, investment
advisers or financial planners who have entered into an agreement with the
Distributor, who place trades for their own accounts or the accounts of their
clients and who charge a management, consulting or other fee for their services
(e.g., mutual fund "wrap" or asset allocation programs), and (i) orders placed
by clients of broker-dealers, investment advisers or financial planners who
place trades for their own accounts if the accounts are linked to the master
account of such broker-dealer, investment adviser or financial planner on the
books and records of the broker-dealer, investment adviser or financial planner
(e.g., mutual fund "supermarket" programs).
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale, either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
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, a Dealer or the Distributor. Although
there is 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 currently available for purchase by: (i)
pension, profit-sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code, deferred compensation 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 any affiliate of the Distributor 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 an affiliate of the Distributor for whom Class Z shares of the
Prudential Mutual Funds are an available investment option; (iv) Benefit Plans
for which an affiliate of the Distributor serves as recordkeeper and as of
September 20, 1996, (a) were Class Z shareholders of the Prudential Mutual
Funds, or (b) executed a letter of intent to purchase Class Z shares of the
Prudential Mutual Funds; (v) current and former Directors/Trustees of the
Prudential Mutual Funds (including the Fund); and (vi) employees of an affiliate
of the Distributor who participate in an employer-sponsored employee savings
plan. After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, Distributor or one
of their affiliates may pay dealers, financial advisers and other persons who
distribute shares a finders' fee from its own resources based on a percentage of
the net asset value of shares sold by such persons.
22
<PAGE>
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, THE DISTRIBUTOR OR YOUR DEALER. 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 are redeeming your shares
through a Dealer, your Dealer must receive your sell order before the Fund
computes its NAV for that day (I.E., 4:15 P.M., New York time) in order to
receive that day's NAV. Your Dealer will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of the Fund.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER 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 15035, New Brunswick, New
Jersey 08906-5010, the Distributor or to your Dealer.
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.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER 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 Commission,
by order, so permits; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR THE TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE
PURCHASE CHECK BY THE FUND OR THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY
PURCHASING SHARES BY WIRE OR BY CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable 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.
23
<PAGE>
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a NAV 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 your Dealer or the Distributor, at the time the repurchase
privilege is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege will generally not affect the federal tax treatment of
any gain realized upon redemption. However, if the redemption was made within a
30 day period of the repurchase and if the redemption resulted in a loss, some
or all of the loss depending on the amount reinvested, may not be allowed for
federal income tax purposes. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
- ------------------------------ -----------------------------------
<S> <C>
First......................... 5.0%
Second........................ 4.0%
Third......................... 3.0%
Fourth........................ 2.0%
Fifth......................... 1.0%
Sixth......................... 1.0%
Seventh....................... None
</TABLE>
24
<PAGE>
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.
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. Shares purchased
with amounts used to repay a loan from such plans on which a CDSC was not
previously deducted will thereafter be subject to a CDSC without regard to the
time such amounts were previously invested. In the case of a 401(k) plan, the
CDSC will also be waived upon the redemption of shares purchased with amounts
used to repay loans made from the account to the participant and from which a
CDSC was previously deducted.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Transfer Agent either directly or through your Dealer, 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.
25
<PAGE>
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares then in your account. Each time any Eligible Shares in
your account convert to Class A shares, all shares or amounts representing Class
B shares then in your account that were acquired through the automatic
reinvestment of dividends and other distributions will convert to Class A
shares.
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
26
<PAGE>
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.
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.
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 15035, 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 their Dealer that they are eligible
for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
27
<PAGE>
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserve the right to refuse
purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
- 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.
- 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. For additional information about this service, you may
contact the Transfer Agent directly.
- 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 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.
- 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.
- 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 100
Mulberry Street, Gateway Center Three, Newark, New Jersey 07102-4077. In
addition, monthly unaudited financial data are available upon request from the
Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at 100
Mulberry Street, Gateway Center Three, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A. at (732)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
28
<PAGE>
APPENDIX
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 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
THE QV MODEL
Approximately 1,400 stocks with market capitalizations generally between $100
million and $1.5 billion are ranked according to eight fundamental factors from
QV1 (best) through QV5 (worst). Each fifth is given an equal weighting of 20%.
The eight factors are broken into three general categories or "blocks": value,
momentum and surprise. The components of each "block" are as follows.
<TABLE>
<S> <C>
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
</TABLE>
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 re-balanced monthly
based on the results of a multiple regression, which measures each factor's
performance over the prior month (although the Fund is rebalanced quarterly). 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.
THE OPTIMIZATION PROCESS
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 with the objective
A-1
<PAGE>
of maximizing expected return while controlling portfolio risk relative to the
Standard & Poor's Small Cap 600 Index (S&P 600). As part of this quantitative
analysis, a risk/return analysis is performed and the liquidity of the
individual stock selections and sector weightings relative to the S&P 600 are
also considered.
The initial Fund portfolio will be derived from stocks in the QV1 and QV2
quintiles by an optimization process provided by a recognized financial
consulting firm. The optimization process chooses stocks to maximize the
portfolio's expected return while minimizing total portfolio risk relative to
the S&P 600.
The portfolio will be rebalanced at least quarterly. At rebalancing, the
portfolio manager purchases stocks in the QV1 and QV2 quintiles, may hold stocks
in the QV3 quintile and shall sell stocks in the QV4 and QV5 quintiles.
In general, the Fund intends to hold up to 200 stocks with no single-issue
representing more than 2% of the total assets at the time of rebalancing.
PERFORMANCE OF THE SMALL-CAP QUANTUM PILOT ACCOUNT
This table represents the performance of the Small-Cap Quantum Pilot Account
(Pilot Account) using the QV Model portfolio strategy from January 3, 1997
(inception date) through August 31, 1997. The table illustrates the Pilot
Account's performance as measured against the S&P 600. The performance of the
Pilot Account is not the past, present or future performance of the Prudential
Small-Cap Quantum Fund, Inc. With the deduction of estimated total operating
expenses of 1.35% for the Class A shares of the Fund and the deduction of the
front-end sales charge that applies to Class A shares, the cumulative total
return for the same period is 20.70% for the Pilot Account.
CUMULATIVE TOTAL RETURN
<TABLE>
<S> <C>
Pilot Account(1)............................................. 27.06%
S&P 600(2)................................................... 21.80%
</TABLE>
Source: The Prudential Investment Corporation
(1)The Pilot Account, representing approximately $12 million in assets, was
managed by Prudential Investment Corporation. The investment objectives,
policies and techniques (including quarterly re-balancing) of the Pilot
Account are substantially similar to those of the Fund. The performance of
the Pilot Account shown is not the performance of the Fund (which as of
September 25,1997 had not begun operations) and should not be considered
indicative of the Fund's future performance. The future performance of the
Fund may differ from the past performance of the Pilot Account for several
reasons, including because (1) to manage the Fund to comply with federal tax
laws, the investment manager may make investments that differ from the QV
Model, and (2) the investment limitations, diversification requirements and
other restrictions imposed on mutual funds by the Investment Company Act of
1940 and Subchapter M of the Internal Revenue Code, which may adversely
affect performance, do not apply to the Pilot Account.
The performance results shown for the Pilot Account reflect the deduction of
transaction costs and have been adjusted for the estimated total operating
expenses of 1.35% for the Class A shares of the Fund. The results are shown
without the deduction of the 5% front-end sales charge that applies to Class
A shares. The Fund also offers other classes of shares with different
operating expenses and sales load options which do affect performance. The
performance results assume that all dividends and distributions were
reinvested.
(2)The S&P 600 Index is a capital-weighted index of 600 smaller company U.S.
common stocks that cover all industry sectors. The S&P 600 Index is an
unmanaged index and includes the reinvestment of all dividends. Investors
cannot invest directly in an index. Common stocks represent the ownership of
a corporation and fluctuate in value.
* These results are unaudited.
A-2
<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
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
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......................... 12
Manager....................................... 12
Distributor................................... 12
Fee Waivers and Subsidy....................... 14
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend Disbursing
Agent........................................ 14
Year 2000..................................... 14
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..................... 19
How to Sell Your Shares....................... 23
Conversion Feature--Class B Shares............ 26
How to Exchange Your Shares................... 26
Shareholder Services.......................... 28
APPENDIX........................................ A-1
</TABLE>
- -------------------------------------------
MF176P
Class A: 74436N-10-8
Class B: 74436N-20-7
CUSIP Nos.: Class C: 74436N-30-6
Class Z: 74436N-40-5
Prudential Small-cap
Quantum Fund, Inc.
PROSPECTUS
[GRAPHIC]
SEPTEMBER 25, 1997
[REVISED JUNE 1, 1998]
[LOGO] PRUDENTIAL INVESTMENTS
