<PAGE>
As filed with the Securities and Exchange Commission on April 1, 1999
Registration No. 333-24495
811-08167
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 2 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 3 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7525
MARGUERITE E. H. MORRISON, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective
date of the Registration Statement.
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
<TABLE>
<C> <S>
/ / immediately upon filing pursuant to paragraph
(b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph
(a)(1)
/X/ on June 1, 1999, pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph
(a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule
485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment
</TABLE>
------------------------
Title of Securities Being Registered.... Shares of Common Stock, $.001
par value per share.
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- --------------------------------------------------------------------------------
<PAGE>
FUND TYPE:
- -------------------------------------
Stock
INVESTMENT OBJECTIVE:
- -------------------------------------
Long-term capital appreciation
PRUDENTIAL
SMALL-CAP QUANTUM FUND, INC.
[LOGO]
- ---------------------------------------------------------------
PROSPECTUS: JUNE 1, 1999
As with all mutual funds, the Securities and
Exchange Commission has not approved or
disapproved the Fund's shares, nor has the SEC
determined that this prospectus is complete or
accurate. It is a criminal offense to state
otherwise. [LOGO]
<PAGE>
TABLE OF CONTENTS
- -------------------------------------
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 HOW THE FUND INVESTS
6 Investment Objective and Policies
8 Other Investments
9 Derivative Strategies
10 Additional Strategies
11 Investment Risks
14 HOW THE FUND IS MANAGED
14 Board of Directors
14 Manager
14 Investment Adviser
14 Portfolio Manager
14 Distributor
15 Year 2000 Readiness Disclosure
16 FUND DISTRIBUTIONS AND TAX ISSUES
16 Distributions
17 Tax Issues
18 If You Sell or Exchange Your Shares
20 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
20 How to Buy Shares
28 How to Sell Your Shares
32 How to Exchange Your Shares
34 FINANCIAL HIGHLIGHTS
34 Class A and Class B Shares
35 Class C and Class Z Shares
36 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
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PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------
This section highlights key information about the PRUDENTIAL SMALL-CAP QUANTUM
FUND, INC. which we refer to as "the Fund." Additional information follows this
summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is LONG-TERM CAPITAL APPRECIATION, which means we seek
investments whose price will increase over several years. We normally invest at
least 80% of the Fund's total assets in equity-related securities of small-cap
U.S. companies. We consider small-cap companies to be those with market
capitalizations of less than $1.5 billion. We also may use derivatives. While we
make every effort to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since we invest
primarily in equity-related securities, there is the risk that the price of
particular equities we own could go down, or the value of the equity markets or
a sector of them could go down. Stock markets are volatile. Generally, the stock
prices of small-sized companies vary more than the prices of large company
stocks and may present above average risks. This means that when stock prices
decline overall, the Fund may decline more than the Standard & Poor's 500 Stock
Price Index. The Fund's holdings can vary significantly from broad market
indexes and the performance of the Fund can deviate from the performance of
these indexes. In addition, different parts of a market can react differently to
adverse issuer, market, regulatory, political and economic developments.
Since our objective is long-term capital appreciation, the companies that we
invest in generally reinvest their earnings rather than distribute them to
shareholders. As a result, the Fund is not likely to receive significant
dividend income on its portfolio securities. [In addition, the Fund may actively
and frequently trade its portfolio securities.]
- -------------------------------------------------------------------
HOW WE INVEST
We use computer driven quantitative strategies to determine which stocks to buy
and sell to create a portfolio designed to maximize expected returns, but at the
same time, trying to control risk. The quantitative model developed by
Prudential Securities analyzes individual stocks using different factors like
value, momentum and surprise.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
Some of our investment strategies also involve additional risk. The Fund may
use risk management techniques to try to preserve assets or enhance return.
These strategies may present above average risks. Derivatives may not fully
offset the underlying positions and this could result in losses to the Fund that
would not otherwise have occurred.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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2 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The following
bar chart shows the Fund's performance for each full calendar year of operation.
The following bar chart and table demonstrate the risk of investing in the Fund
by showing how the Fund's average annual total returns compare with a stock
index and a group of similar mutual funds. Past performance does not mean that
the Fund will achieve similar results in the future.
ANNUAL RETURNS* (CLASS A SHARES)
[CHART TO COME]
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE
MANAGEMENT FEE WAIVER OR EXPENSE REIMBURSEMENT, THE ANNUAL RETURNS WOULD HAVE
BEEN LOWER, TOO.
AVERAGE ANNUAL RETURNS(1) (AS OF 3-31-99)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
1 YR SINCE INCEPTION
- -----------------------------------------------------------------------
<S> <C> <C>
Class A shares % % (11/10/97)
Class B shares % % (11/10/97)
Class C shares % % (11/10/97)
Class Z shares % % (11/10/97)
S&P Small-Cap 600(2) % %
Lipper Average(3) % %
</TABLE>
1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
WITHOUT THE DISTRIBUTION FEE WAIVER FOR CLASS A SHARES, THE RETURN WOULD
HAVE BEEN LOWER.
2 THE STANDARD & POOR'S SMALL-CAP 600 INDEX (S&P SMALL-CAP)--AN UNMANAGED
CAPITAL-WEIGHTED INDEX OF 600 SMALLER COMPANY U.S. COMMON STOCKS THAT COVER
ALL INDUSTRY SECTORS--GIVES A BROAD LOOK AT HOW SMALL-CAP STOCK PRICES HAVE
PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGES.
THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES.
THE SECURITIES IN THE S&P SMALL-CAP MAY BE VERY DIFFERENT FROM THOSE IN THE
FUND. SOURCE: LIPPER, INC.
3 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN
THE LIPPER SMALL-CAP FUNDS CATEGORY AND DOES NOT INCLUDE THE EFFECT OF ANY
SALES CHARGES. AGAIN, THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE
EFFECT OF SALES CHARGES. SOURCE: LIPPER, INC.
- --------------------------------------------------------------------------------
3
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of the Fund--Class A, B, C and Z. Each
share class has different sales charges--known as loads--and expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Fund."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering
price) 5% None 1% None
Maximum deferred sales
charge (load) (as a
percentage of the lower of
original purchase price or
sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load)
imposed on reinvested
dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees .60% .60% .60% .60%
+ Distribution and service
(12b-1) fees .30%(4) 1.00% 1.00% None
+ Other expenses % % % %
= TOTAL ANNUAL FUND
OPERATING EXPENSES % % % %
- FEE WAIVER OR EXPENSE
REIMBURSEMENT .05% None None None
= NET ANNUAL FUND OPERATING
EXPENSES % % % %
</TABLE>
1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER
PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
4 FOR THE FISCAL YEAR ENDING MARCH 31, 2000, THE DISTRIBUTOR OF THE FUND HAS
CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE FEES FOR CLASS
A SHARES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A
SHARES.
- -------------------------------------------------------------------
4 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. After the first year, the example
does not take into consideration the Distributor's agreement to reduce
distribution and service fees for Class A shares. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Z shares $ $ $ $
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Z shares $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
HOW THE FUND INVESTS
- -------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is LONG-TERM CAPITAL APPRECIATION. This means we
seek investments whose price will increase over several years. While we make
every effort to achieve our objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 80% of the Fund's
total assets in EQUITY-RELATED SECURITIES of SMALL-CAP COMPANIES. We consider
small-cap companies to be those with market capitalizations of less than $1.5
billion. Market capitalization is measured at the time of initial purchase and
may change to reflect industry norms in our discretion. Also, we still consider
a company to be small-cap after we've bought it and it grows, as long as its
capitalization is under $2.5 billion.
Equity-related securities are common stocks, [non-convertible] preferred
stocks, warrants and rights that can be exercised to obtain stock, equity
investments in various types of business ventures, including partnerships and
joint ventures, real estate investment trusts, American Depositary Receipts
(ADRs), and other similar securities.
We may also buy convertible securities. These are securities--like bonds,
corporate notes and preferred stock-- that we can convert into the company's
common stock or some other equity security.
- -------------------------------------------------------------------
OUR STRATEGY
We use a computer program developed by Prudential Securities to rank
approximately 1,500 small-cap stocks with market capitalizations between $[100]
million and $[1.5] billion. We rank using these factors--and these subfactors
<TABLE>
<S> <C>
Value Book/price ratio
Cash flow yield
Expected growth rate
Price/earnings ratio
[Dividend Discount
Model]
Momentum Profitability and
return on
invested capital
Surprise Revision of estimates
Earnings surprise
</TABLE>
We rank the stocks into five "QV" groups based on their scores in the factors
above. Then we use quantitative analysis to determine which stocks and how much
of those stocks we should buy with the objective of maximizing expected return,
and at the same time, controlling risk compared to the S&P Small-Cap 600 Index.
- ---------------------------------------------------------------------------
- -------------------------------------------------------------------
6 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
Under normal circumstances, the Fund may invest up to 20% of its total assets
in:
-- equity securities of companies with market capitalizations of more
than $1.5 billion
-- high quality money market instruments
-- U.S. government or government agency obligations
-- foreign securities
-- warrants and rights
FOREIGN SECURITIES
The Fund can invest up to 20% of total assets in stocks and other equity-related
securities [and high quality money market instruments and other fixed-income
securities] of foreign issuers. For these purposes, we do not consider ADRs and
other similar receipts or shares to be foreign securities for the 20% limit.
MONEY MARKET INSTRUMENTS
The Fund may hold cash or invest in high quality money market instruments,
including commercial paper of a U.S. or foreign company, foreign government
securities, certificates of deposit, bankers acceptances, time deposits of
domestic and foreign banks, and obligations issued or guaranteed by the U.S.
government or its agencies or a foreign government. These obligations may 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.
US GOVERNMENT SECURITIES
The Fund may invest up to 20% of its total assets 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 which means that payment of principal and interest
are guaranteed but market value is not. Some are supported only by the credit of
the issuing agency and depend entirely on their own resources to repay their
debt.
* * *
- --------------------------------------------------------------------------------
7
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover page
of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.
OTHER INVESTMENTS
In addition to the principal strategies, we may also make the following
investments to try to increase the Fund's returns or protect its assets if
market conditions warrant.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in cash or high quality money
market instruments. Investing heavily in these securities limits our ability to
achieve capital appreciation, but can help to preserve the Fund's assets when
the equity markets are unstable.
REPURCHASE AGREEMENTS
The Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.
SHORT SALES
The Fund may make SHORT SALES of a security. This means that we may sell a
security that the Fund does not own when we think the value of the security will
decline. The Fund generally borrows the security to deliver to the buyer in a
short sale. The Fund must then buy the security at its market price when the
borrowed security must be returned to the lender. Short sales involve additional
costs and risks. The Fund must pay the lender interest on the security it
borrows, and the Fund will lose money if the price of the security increases
between the time of the short sale and the date when the Fund replaces the
borrowed security. The Fund may also make SHORT SALES "AGAINST THE BOX." In a
short sale against the box, at the time
- -------------------------------------------------------------------
8 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
of sale, the Fund owns or has the right to acquire the identical security at no
additional cost. When selling short against the box, the Fund gives up the
opportunity for capital appreciation in the security.
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Fund's returns or
protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Fund will not lose money. Derivatives--such as futures,
options, foreign currency forward contracts and options on futures--involve
costs and can be volatile. With derivatives, the investment adviser tries to
predict whether the underlying investment--a security, market index, currency,
interest rate or some other benchmark-- will go up or down at some future date.
We may use derivatives to try to reduce risk or to increase return consistent
with the Fund's overall investment objective. The investment adviser will
consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use may
not match the Fund's underlying holdings.
OPTIONS
The Fund may purchase and sell put and call options on financial indexes traded
on U.S. or foreign securities exchanges or on the over-the-counter market. An
option is the right to buy or sell securities in exchange for a premium.
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may purchase and sell financial futures contracts and related options
on stock indexes and foreign currencies. A futures contract is an agreement to
buy or sell a set quantity of an underlying product at a future date, or to make
or receive a cash payment based on the value of a securities index.
Any derivatives we may use may not match the Fund's underlying holdings. For
more information about these strategies, see the SAI, "Description of the Fund,
Its Investments and Risks--Risk Management and Return Enhancement Strategies."
- --------------------------------------------------------------------------------
9
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
ADDITIONAL STRATEGIES
The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 33 1/3% of the value of its total assets,
including collateral received in the transaction); and HOLDS ILLIQUID SECURITIES
(the Fund may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions on resale, those without a
readily available market within or outside the United States and repurchase
agreements with maturities longer than seven days). The Fund is subject to
certain investment restrictions that are fundamental policies, which means they
cannot be changed without shareholder approval. For more information about these
restrictions, see the SAI.
- -------------------------------------------------------------------
10 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other investments the Fund may make. See, too,
"Description of the Fund, Its Investments and Risks" in the SAI.
INVESTMENT TYPE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
STOCKS OF SMALL-CAP -- Individual stocks -- Historically, stocks
COMPANIES could lose value have outperformed
AT LEAST 80% -- The equity markets other investments
could go down, over the long term
resulting in a -- Generally, economic
decline in value of growth means higher
the Fund's corporate profits,
investments which leads to an
-- Stocks of small-sized increase in stock
companies are more prices, known as
volatile and may capital appreciation
decline more than -- Highly successful
those in the S&P 500 small- cap
Index companies can
-- Small-cap companies outperform larger
are more likely to ones
reinvest earnings -- May be a source of
and not pay dividend income
dividends
-- Changes in interest
rates may affect the
securities of
small-sized
companies more than
the securities of
larger companies
-- Changes in economic
or political
conditions, both
domestic and
international, may
result in a decline
in value of the
Fund's investments
-- Companies that pay
dividends may not do
so if they don't
have profits or
adequate cash flow
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
FOREIGN SECURITIES -- Foreign markets, -- Investors can
UP TO 20% economies and participate in
political systems foreign markets and
may not be as stable companies operating
as in the U.S., in those markets
particularly those -- Changing value of
in developing foreign currencies.
countries -- Opportunities for
-- Currency risk-- diversification
changing value of
foreign currencies
-- May be less liquid
than U.S. stocks
and bonds
-- Differences in
foreign laws,
accounting standards
and public
information, custody
and settlement
practices
-- Year 2000 conversion
may be more of a
problem for some
foreign issuers
- --------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Fund could make
UP TO 20% futures, options and money and protect
foreign currency against losses if
forward contracts the investment
may not fully offset analysis proves
the underlying correct
positions and this -- Derivatives that
could result in involve leverage
losses to the Fund could generate
that would not have substantial gains at
otherwise occurred low cost
-- Derivatives used for -- One way to manage the
risk management may Fund's risk/return
not have the balance is to lock
intended effects and in the value of an
may result in losses investment ahead of
or missed time
opportunities
-- The other party to a
derivatives contract
could default
-- Derivatives that
involve leverage
could magnify losses
-- Certain types of
derivatives involve
costs to the Fund
that can reduce
returns
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
12 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
U.S. GOVERNMENT -- Not all are insured or -- May preserve the Fund's
SECURITIES guaranteed by the assets
government but only by -- Principal and interest
UP TO 20% the issuing agency may be guaranteed by
-- Limits potential for the issuing government
capital appreciation
-- See interest rate risk
- ------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to -- May offer a more
value precisely attractive yield or
UP TO 15% OF NET ASSETS -- May be difficult to sell potential for growth
at the time or price than more widely traded
desired. securities
- ------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for -- May preserve the Fund's
capital appreciation assets
UP TO 20% OR 100% ON A -- See credit risk and
TEMPORARY BASIS market risk
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
HOW THE FUND IS MANAGED
- -------------------------------------
BOARD OF DIRECTORS
The Board of Directors oversees the actions of the Manager, investment adviser
and Distributor and decides on general policies. The Board also oversees the
Fund's officers who conduct and supervise the daily business operations of the
Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended March 31, 1999, the Fund paid PIFM management fees of .60% of the Fund's
average net assets.
As of April 30, 1999, PIFM served as the Manager to all of the Prudential
Mutual Funds, and as Manager or administrator to 22 closed-end investment
companies, with aggregate assets of approximately $ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
PORTFOLIO MANAGER
JOHN LIEB, CFA, a Vice President of Prudential Investments, has managed the Fund
since it began in November 1997. He manages the Fund and another quantitative
strategy portfolio with the help of a team. John joined Prudential in 1987 as a
quantitative analyst.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays
- -------------------------------------------------------------------
14 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------
the expenses of distributing the Fund's Class A, B, C and Z shares and provides
certain shareholder support services. The Fund pays distribution and other fees
to PIMS as compensation for its services for each class of shares other than
Class Z. These fees--known as 12b-1 fees--are shown in the "Fees and Expenses"
table.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
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. The Fund and its Board receive, and have
received since early 1998, satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the services providers (or other securities
market participants) will successfully complete the necessary changes in a
timely manner or that there will be no adverse impact on the Fund. Moreover, the
Fund at this time has not considered retaining alternative service providers or
directly undertaken efforts to achieve year 2000 readiness, the latter of which
would involve substantial expenses without an assurance of success.
Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Fund.
- --------------------------------------------------------------------------------
15
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- -------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to shareholders
typically twice a year. For example, if the Fund owns ACME Corp. stock and the
stock pays a dividend, the Fund will pay out a portion of this dividend to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from the Fund will be taxed as ordinary income,
whether or not they are reinvested in the Fund.
The Fund also distributes realized net CAPITAL GAINS to shareholders--
typically once a year--which are generated when the Fund sells its assets for a
profit. For example, if the Fund bought 100 shares of ACME Corp. stock for a
total of $1,000 and more than one year later sold the shares for a total of
$1,500, the Fund has net long-term capital gains of $500, which it will pass on
to shareholders (assuming the Fund's total gains are greater than any losses it
may have). Capital gains are taxed differently depending on how long the Fund
holds the security--if a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at ordinary income
rates of up to 39.6%. Different rates apply to corporate shareholders.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker you will receive
a credit to your account. Either way, the distributions
- -------------------------------------------------------------------
16 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
may be subject to taxes, unless your shares are held in a qualified tax-deferred
plan or account. For more information about automatic reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Fund as part of a qualified tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified tax-deferred plan or
account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your distributions and sale
proceeds. If you are subject to backup withholding, we will withhold and pay to
the U.S. Treasury 31% of your distributions. Dividends of net investment income
and short-term capital gains paid to a nonresident foreign shareholder generally
will be subject to a U.S. withholding tax of 30%. This rate may be lower,
depending on any tax treaty the U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well since you bought shares one day and
soon thereafter received a distribution. That is not so because
- --------------------------------------------------------------------------------
17
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
when dividends are paid out, the value of each share of the Fund decreases by
the amount of the dividend and the market changes (if any) to reflect the
payout. The distribution you receive makes up for the decrease in share value.
However, the timing of your purchase does mean that part of your investment came
back to you as taxable income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or
- -------------------------------------------------------------------
RECEIPTS FROM SALE --> +$ CAPITAL GAIN
(taxes owed)
$ OR
RECEIPTS FROM SALE --> -$ CAPITAL LOSS
(offset against gain)
- -------------------------------------------------------------------
- -------------------------------------------------------------------
18 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
exchange--Fund shares, as well as the amount of any gain or loss on each
transaction. For tax advice, please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
- --------------------------------------------------------------------------------
19
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- -------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
the varying distribution fees
-- The different sales charges that apply to each share class-- Class
A's front-end sales charge vs. Class B's CDSC vs. Class C's
- -------------------------------------------------------------------
20 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
low front-end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges
-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
-- Whether you qualify to purchase Class Z shares
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial sales 5% of the None 1% of the None
charge public offering public offering
price price
Contingent Deferred None If sold 1% on sales None
Sales Charge (CDSC)(2) during: made within 18
Year 1 5% months of
Year 2 4% purchase(2)
Year 3 3%
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1% None
service (12b-1) fees (.25 of 1%
shown as a percentage currently)
of average net
assets(3)
</TABLE>
1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM
INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC
INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES-- CONTINGENT DEFERRED SALES CHARGE (CDSC)." CLASS C SHARES
BOUGHT BEFORE NOVEMBER 2, 1998, HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
3 THESE DISTRIBUTION FEES ARE PAID FROM THE FUND'S ASSETS ON A CONTINUOUS
BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR INVESTMENT AND
MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES. THE SERVICE FEE
FOR CLASS A, CLASS B AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE
FOR CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING THE .25 OF 1% SERVICE
FEE) AND IS .75 OF 1% FOR CLASS B AND CLASS C SHARES.
- --------------------------------------------------------------------------------
21
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales
charge by increasing the amount of your investment. This table shows you
how the sales charge decreases as the amount of your investment
increases.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
- -----------------------------------------------------------------------------------
<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 million and above* None None None
</TABLE>
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES.
To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of related investors
-- Buy the Class A shares of two or more Prudential mutual funds at the
same time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the
applicable sales charge (note: you must notify the Transfer Agent if
you qualify for Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares
in the Fund and other Prudential mutual funds within 13 months.
BENEFIT PLANS. Benefit Plans can avoid Class A's initial sales charge if 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
under the exchange privilege) or 250 eligible employees or
- -------------------------------------------------------------------
22 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
participants. For these purposes, a Benefit Plan is a pension, profit-sharing or
other employee benefit plan qualified under Section 401 of the Internal Revenue
Code, a deferred compensation or annuity plan under Sections 403(b) and 457 of
the Internal Revenue Code, a "rabbi" trust, or a nonqualified deferred
compensation plan sponsored by an employer that has a tax-qualified benefit plan
with Prudential. Class A shares may also be purchased without a sales charge by
participants who are repaying loans from Benefit Plans where Prudential (or its
affiliates) provides administrative or recordkeeping services, sponsors the
product or provides account services.
Certain Prudential retirement programs--such as PruArray Association Benefit
Plans and PruArray Savings Programs--may also be exempt from Class A's sales
charge. For more information, see the SAI or contact your financial adviser. In
addition, waivers are available to investors in certain programs sponsored by
brokers, investment advisers and financial planners who have agreements with
Prudential Investments Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades and charges its clients a management, consulting
or other fee for its services
-- Mutual fund "supermarket" programs where the sponsor links its
customers' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
OTHER TYPES OF INVESTORS. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, Prudential
mutual funds, the subadvisers of the Prudential mutual funds and clients of
brokers that have entered into a selected dealer agreement with the Distributor.
To qualify for a reduction or waiver of the sales charge, you must notify the
Transfer Agent or your broker at the time of purchase. For more information, see
the SAI, "Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver
of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares may also be purchased
without an initial sales charge by participants who are repaying
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
loans from Benefit Plans where Prudential (or its affiliates) provides
administrative or recordkeeping services, sponsors the product or provides
account services.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived for
purchases of Class C shares by both qualified and nonqualified retirement and
deferred compensation plans participating in a PruArray Plan and other plans if
Prudential also provides administrative or recordkeeping services.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one of
the following:
-- Purchase your shares through an account at Prudential Securities
-- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
-- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
-- Any Benefit Plan as defined above, and certain nonqualified plans,
provided the Benefit Plan--in combination with other plans sponsored
by the same employer or group of related employers--has at least $50
million in defined contribution assets
-- Participants in any fee-based program or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and the Fund as an available option
- -------------------------------------------------------------------
24 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
-- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option
-- Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services, and as of September 20,
1996, were either Class Z shareholders of the Prudential mutual funds
or executed a letter of intent to purchase Class Z shares of the
Prudential mutual funds
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
-- Employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan
-- Prudential with an investment of $10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested dividends
and other distributions. Since the 12b-1 fees for Class A shares are lower than
for Class B shares, converting to Class A shares lowers your Fund expenses.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV-- is
determined by a simple calculation: it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the price of mutual
funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. We do
not determine the NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of the Fund's
portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
- -------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. stock in
its portfolio and the price of ACME stock goes up, while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of Fund XYZ
will increase.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
26 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial adviser will help you
determine which retirement plan best meets your needs. Complete instructions
about how to establish and maintain your plan and how to open accounts for you
and your employees will be included in the retirement plan kit you receive in
the mail.
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
charges and is not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York Time to
process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
- -------------------------------------------------------------------
28 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust and if you hold your shares directly with the Transfer Agent, you will
need to have the signature on your sell order guaranteed by a financial
institution. For more information, see the SAI, "Purchase, Redemption and
Pricing of Fund Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares-- which is applied to
shares sold within 18 months of purchase (or one year for Class C shares if
purchased before November 2, 1998). For both Class B and Class C shares, the
CDSC is calculated based on the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy (with rights of survivorship), provided the shares were
purchased before the death or disability
-- To provide for certain distributions--made without IRS penalty-- from
a tax-deferred retirement plan, IRA or Section 403(b) custodial
account
-- On certain sales from a Systematic Withdrawal Plan
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B Shares."
WAIVER OF THE CDSC--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in a PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions from Benefit Plans sponsored by
- -------------------------------------------------------------------
30 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
Prudential and its affiliates to the extent that the redemption proceeds are
invested in The Guaranteed Investment Account (a group annuity insurance product
sponsored by Prudential), the Guaranteed Insulated Separate Account (a separate
account offered by Prudential) and shares of The Stable Value Fund (an
unaffiliated bank collective fund).
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which the
broker provides administrative or recordkeeping services.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA, or some
other tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate numbers of shares
to reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase, or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding period for CDSC
liability.
- -------------------------------------------------------------------
32 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The Fund may
notify a market timer of rejection of an exchange purchase order after the day
the order is placed. If the Fund allows a market timer to trade Fund shares, it
may require the market timer to enter into a written agreement to follow certain
procedures and limitations.
- --------------------------------------------------------------------------------
33
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and reports of independent
accountants which appear in the annual report and the SAI and are available upon
request. Additional performance information for each share class is contained in
the annual report, which you can receive at no charge.
CLASS A AND CLASS B SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
CLASS A AND CLASS B SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Class A Class B
PER SHARE OPERATING PERFORMANCE 1999(1) 1998(1) 1999(1) 1998(1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ $10.00 $ $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .02 (.01)
Net realized and unrealized gain
(loss) on investment transactions .94 .94
TOTAL FROM INVESTMENT OPERATIONS .96 .93
- ------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions in excess of net
investment income (.01) --
NET ASSET VALUE, END OF PERIOD $ $10.95 $ $10.93
TOTAL RETURN(2) % 9.60% % 9.31%
- ------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $ $115,621 $ $196,671
Average net assets (000) $ $106,453 $ $170,484
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees % 1.22%(3) % 1.97 %(3)
Expenses, excluding distribution
fees % 0.97%(3) % 0.97 %(3)
Net investment income (loss) % .47%(3) % (.29)%(3)
Portfolio turnover % 39% % 39 %
</TABLE>
1 INFORMATION SHOWN IS FOR THE PERIOD 11-10-97 (WHEN SHARES WERE FIRST
OFFERED) THROUGH 3-31-98.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN A FULL YEAR ARE NOT
ANNUALIZED.
3 ANNUALIZED.
- -------------------------------------------------------------------
34 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS C AND CLASS Z SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
CLASS C AND CLASS Z SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Class C Class Z
PER SHARE OPERATING PERFORMANCE 1999(1) 1998(1) 1999(1) 1998(1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ $10.00 $ $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.01) .02
Net realized and unrealized gain
(loss) on investment transactions .94 .95
TOTAL FROM INVESTMENT OPERATIONS .93 .97
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions in excess of net
investment income -- (.01)
NET ASSET VALUE, END OF PERIOD $ $10.93 $ $10.96
TOTAL RETURN(2) % 9.31% % 9.74%
- -----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998(1) 1999 1998(1)
- -----------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $ $36,628 $ $4,039
Average net assets (000) $ $34,000 $ $2,709
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees % 1.97 %(3) % 0.97%(3)
Expenses, excluding distribution
fees % 0.97 %(3) % 0.97%(3)
Net investment income (loss) % (.29)%(3) % .51%(3)
Portfolio turnover % 39 % % 39%
</TABLE>
1 INFORMATION SHOWN IS FOR THE PERIOD 11-10-97 (WHEN SHARES WERE FIRST
OFFERED) THROUGH 3-31-98.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
3 ANNUALIZED.
- --------------------------------------------------------------------------------
35
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Please read the prospectus carefully before you invest or
send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH
& INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL UTILITY FUND, INC.
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
PRUDENTIAL DEVELOPING MARKETS EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY FUND
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
GLOBAL SERIES
INTERNATIONAL STOCK SERIES
GLOBAL UTILITY FUND, INC.
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
LIMITED MATURITY PORTFOLIO
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
- -------------------------------------------------------------------
36 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. [LOGO] (800) 225-1852
<PAGE>
- -------------------------------------
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
SHORT-INTERMEDIATE TERM SERIES
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
MASSACHUSETTS MONEY MARKET SERIES
NEW JERSEY MONEY MARKET SERIES
NEW YORK MONEY MARKET SERIES
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
INSTITUTIONAL MONEY MARKET SERIES
- --------------------------------------------------------------------------------
37
<PAGE>
FOR MORE INFORMATION:
- ---------------------------------------------------------------------------
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- ------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- --------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call 1(800) SEC-0330.)
Via the Internet:
http://www.sec.gov
- --------------------------------
CUSIP Numbers:
Class A: 74436N-10-8
Class B: 74436N-20-7
Class C: 74436N-30-6
Class Z: 74436N-40-5
Investment Company Act File No:
811-08167
MF184A [LOGO] Printed on Recycled Paper
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE 1, 1999
Prudential Small-Cap Quantum Fund, Inc. (the Fund) is a diversified,
open-end, management investment company. The investment objective of the Fund is
long-term capital appreciation. The Fund seeks to achieve this objective by
investing primarily in equity-related securities of small-cap U.S. companies.
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 "Description of the Fund, Its Investments and Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Fund dated June 1, 1999, a copy
of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Fund History....................................................................................... B-2
Description of the Fund, Its Investments and Risks................................................. B-2
Investment Restrictions............................................................................ B-13
Management of the Fund............................................................................. B-15
Control Persons and Principal Holders of Securities................................................ B-18
Investment Advisory and Other Services............................................................. B-18
Brokerage Allocation and Other Practices........................................................... B-22
Capital Shares, Other Securities and Organization.................................................. B-24
Purchase, Redemption and Pricing of Fund Shares.................................................... B-25
Shareholder Investment Account..................................................................... B-34
Net Asset Value.................................................................................... B-38
Taxes, Dividends and Distributions................................................................. B-39
Performance Information............................................................................ B-41
Financial Statements............................................................................... B-44
Report of Independent Accountants.................................................................. B-
Appendix I--General Investment Information......................................................... I-1
Appendix II--Historical Performance Data........................................................... II-1
Appendix III--Information Relating to Prudential................................................... III-1
</TABLE>
- --------------------------------------------------------------------------------
MF176B
<PAGE>
FUND HISTORY
The Fund was incorporated in Maryland on February 4, 1997.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Fund is a diversified, open-end, management
investment company.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's investment
objective is long-term capital appreciation.
While the principal investment policies and strategies for seeking to
achieve this objective are described in the Fund's prospectus, the Fund may from
time to time also use the securities, instruments, policies and strategies
described below in seeking to achieve its objective. The Fund may not be
successful in achieving its objective and you could lose money.
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 1,500 stocks with market capitalizations to approximate those
used in the Standard & Poor's Small-Cap 600 Index (S&P Small-Cap 600) 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
(but may be re-balanced more frequently) 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 qualities to get a QV Rank.
THE OPTIMIZATION PROCESS
The Fund's portfolio manager, Mr. Lieb will use the QV rankings provided by
the Prudential Securities Quantitative Analysis Group. Mr. Lieb and his team
will then apply quantitative analysis to determine stock selections and
weightings with the objective
B-2
<PAGE>
of maximizing expected return while controlling portfolio risk relative to the
S&P Small-Cap 600. As a 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 Small-Cap 600 are also considered.
The Fund portfolio will be derived from stocks in the QV1, QV2, and possibly
QV3 quintiles by an optimization process provided by financial consulting firms.
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 although adjustments to
the portfolio may be made more often and in between the quarterly re-balancing.
At rebalancing, the portfolio manager purchases stocks in the QV1 and QV2
quintiles, may hold stocks in the QV3 quintile and may sell stocks in the QV4
and QV5 quintiles. Stocks may be held or sold for other considerations,
including risk reduction, to reduce volatility and for sector representation.
EQUITY AND EQUITY-RELATED SECURITIES
Equity-related securities include common stocks, [nonconvertible] preferred
stocks, securities convertible into or exchangeable for common or preferred
stock, equity investments in partnerships, joint ventures and other forms of
non-corporate investment, real estate investment trusts, American Depositary
Receipts (ADRs), American Depositary Shares (ADSs) and warrants and rights
exercisable for equity securities.
AMERICAN DEPOSITARY RECEIPTS AND AMERICAN DEPOSITARY SHARES. ADRs and ADSs
are U.S. dollar-denominated certificates or shares 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.
Generally, ADRs and ADSs are in registered form. There are no fees imposed on
the purchase or sale of ADRs and ADSs when purchased from the issuing bank or
trust company in the initial underwriting, although the issuing bank or trust
company may impose charges for the collection of dividends and the conversion of
ADRs and ADSs into the underlying securities. Investment in ADRs and ADSs has
certain advantages over direct investment in the underlying foreign securities
since: (1) ADRs and ADSs are U.S. dollar-denominated investments that are
registered domestically, easily transferable, and for which market quotations
are readily available; and (2) issuers whose securities are represented by ADRs
and ADSs are usually subject to auditing, accounting, and financial reporting
standards comparable to those of domestic issuers.
WARRANTS AND RIGHTS. A warrant or right entitles the holder to purchase
equity securities at a specific price for a specific period of time. A warrant
gives the holder thereof the right to subscribe by a specified date to a stated
number of shares of stock of the issuer at a fixed price. Warrants tend to be
more volatile than the underlying stock, and if, at a warrant's expiration date
the stock is trading at a price below the price set in the warrant, the warrant
will expire worthless. Conversely, if at the expiration date, the underlying
stock is trading at a price higher than the price set in the warrant, the Fund
can acquire the stock at a price below its market value. Rights are similar to
warrants but normally have a shorter duration and are distributed directly by
the issuer to shareholders. Rights and warrants have no voting rights, receive
no dividends and have no rights with respect to the corporation issuing them.
CONVERTIBLE SECURITIES. A convertible security is typically a bond,
debenture, corporate note, preferred stock or other similar security that may be
converted at a stated price within a specified period of time into a specified
number of shares of common stock or other equity securities of the same or a
different issuer. The Fund will only invest in investment-grade convertible
securities. Convertible securities are generally senior to common stocks in a
corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock. Convertible securities may
also include preferred stocks which technically are equity securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (that is, its value as a fixed-income security)
or its "conversion value" (that is, its value upon conversion into its
underlying stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the underlying stock. The price of a
convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the underlying
stock declines. While no securities investment is without some risk, investments
in convertible securities generally entail less risk than investments in the
common stock of the same issuer.
In recent years, convertibles have been developed which combine higher or
lower current income with options and other features. The Fund may invest in
these types of convertible securities.
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U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund is permitted to invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by agencies of the
U.S. government or instrumentalities of the U.S. government. These obligations,
including those which are guaranteed by Federal agencies or instrumentalities,
may or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association (GNMA), the Farmers
Home Administration and the Small Business Administration are backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest which are not backed by the full faith and credit of the United States
include obligations such as those issued by the Federal Home Loan Bank, the
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association, the Student Loan Marketing Association, Resolution Funding
Corporation and the Tennessee Valley Authority, each of which has the right to
borrow from the U.S. Treasury to meet its obligations, and obligations of the
Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency. FHLMC investments may include
collateralized mortgage obligations.
Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by the Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are commonly
referred to as Treasury strips.
SPECIAL CONSIDERATIONS. U.S. government securities are considered among the
most creditworthy of fixed-income investments. The yields available from U.S.
government securities are generally lower than the yields available from
corporate debt securities. The values of U.S. government securities (like those
of fixed-income securities generally) will change as interest rates fluctuate.
During periods of falling U.S. interest rates, the values of outstanding
long-term U.S. government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of those fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. government securities
will not affect investment income from those securities, they will affect the
net asset value (NAV) of the Fund.
FOREIGN SECURITIES
The Fund is permitted to invest up to 20% of its total assets in securities
of foreign issuers. ADRs and ADSs are not considered foreign securities within
this limitation. In many instances, foreign securities may provide higher yields
but may be subject to greater fluctuations in price than securities of domestic
issuers which have similar maturities and quality. Under certain market
conditions these investments may be less liquid and more volatile than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its instrumentalities or agencies.
In addition, the costs attributable to foreign investing are higher than the
costs of domestic investing.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of income
the Fund is required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred. The Fund may, but need
not, enter into forward foreign currency exchange contracts, options on foreign
currencies and futures contracts on foreign currencies and related options, for
hedging purposes, including locking-in the U.S. dollar price of the purchase or
sale of securities denominated in a foreign currency; locking-in the U.S. dollar
equivalent of dividends to be paid on such securities which are held by the
Fund; and protecting the U.S. dollar value of such securities which are held by
the Fund.
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<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN
SECURITIES. Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political, economic or
social instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to U.S. companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States, and, for certain foreign countries, there is a
possibility of expropriation, confiscatory taxation or diplomatic developments
which could affect investment in those countries and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods. Finally, in the event of a default of any such foreign debt
obligations, it may be more difficult for the Fund to obtain, or to enforce a
judgment against, the issuers of such securities.
If the security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between currencies. The Fund may enter
into foreign currency forward contracts for the purchase or sale of foreign
currency for hedging purposes. See "Risk Management and Return Enhancement
Strategies" below.
The costs attributable to foreign investing are higher than the costs of
domestic investing. For example, the cost of maintaining custody of foreign
securities generally exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing are frequently higher than
those attributable to domestic investing. Foreign investment income may be
subject to foreign withholding or other government taxes that could reduce the
return to the Fund on those securities. Tax treaties between the United States
and certain foreign countries may, however, reduce or eliminate the amount of
foreign tax to which the Fund would be subject.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES. On January 1, 1999, 11 of the 15 member states of the European
Monetary Union introduced the "euro" as a common currency. During a three-year
transitional period, the euro will coexist with each participating state's
currency and, on July 1, 2002, the euro is expected to become the sole currency
of the participating states. During the transition period, the Fund will treat
the euro as a separate currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that may occur at
the time of the conversion, such as accrual periods, holiday conventions,
indices, and other features may require the realization of a gain or loss by the
Fund as determined under existing law.
The Fund's Manager has taken steps:(1) that it believes will reasonably
address euro-related changes to enable the Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Fund's other service providers to address the
conversion. The Fund has not borne any expense relating to these actions.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund also may engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to enhance
return. The Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. These strategies currently include the use
of options, foreign currency forward contracts and futures contracts, and
options on such contracts. The Fund's ability to use these strategies may be
limited by various factors, such as market conditions, regulatory limits and tax
considerations, and there can be no assurance that any of those strategies will
succeed. If new financial products and risk management techniques are developed,
the Fund may use them to the extent consistent with its investment objective and
policies.
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<PAGE>
OPTIONS ON EQUITY SECURITIES AND SECURITIES INDICES
The Fund may also purchase and sell put and call options on equity
securities and securities indices traded on U.S. or foreign securities exchanges
or traded in the over-the-counter markets. Options on securities indices are
similar to options on securities except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple (the multiplier). The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike for equity securities options, all settlements
are in cash, and gain or loss depends on price movements in the securities
market generally (or in a particular industry or segment of the market) rather
than price movements in individual securities.
RISKS OF TRANSACTIONS IN OPTIONS
Writing options involves the risk that there will be no market in which to
effect a closing transaction. An option position may be closed out only on an
exchange which provides a secondary market for an option of the same series.
Although the Fund will generally write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at any
particular time, and for some options no secondary market on an exchange may
exist. If the Fund as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise. The Fund, and thus investors, may lose money through any
unsuccessful use of these strategies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (6) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders. The Fund intends to purchase and sell only those options which are
cleared by clearinghouses whose facilities are considered to be adequate to
handle the volume of options transactions.
RISKS OF OPTIONS ON INDICES
The Fund's purchase and sale of options on indices will be subject to risks
described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with stock options.
Because the value of an index option depends on changes in the index and not
a particular stock, successful use of options or indices is subject to the
investment adviser's ability to predict changes in the stock market or a
particular industry. This requires different skills than in predicting
performance of individual stocks.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which could
result in substantial losses to the Fund. It is the Fund's policy to purchase or
write options only on indices which include a number of stocks sufficient to
minimize the likelihood of a trading halt in the index.
Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively illiquid. The
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid secondary market. It is not certain
that this market will develop in all index option contracts. The Fund will not
purchase or sell any index option contract unless and until, in the investment
adviser's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the risk in
connection with options on stocks.
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<PAGE>
SPECIAL RISKS OF WRITING CALLS ON INDICES
Because exercises of index options are settled in cash, a call writer such
as the Fund cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. However, the Fund will write call options on indices only
under the circumstances described above.
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of the Fund's
portfolio. It is also possible that the index may rise when the Fund's portfolio
of stocks does not rise. If this occurred, the Fund would experience a loss on
the call which is not offset by an increase in the value of its portfolio and
might also experience a loss in its portfolio. However, because the value of a
diversified portfolio will, over time, tend to move in the same direction as the
market, movements in the value of the Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if the Fund fails to anticipate an
exercise, it may have to borrow (in amounts not exceeding 20% of the Fund's
total assets) pending settlement of the sale of securities in its portfolio and
would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the price of such securities might decline before they can be sold.
This timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index may decline between the close of trading on the
date the exercise notice is filed with the clearing corporation and the close of
trading on the date the Fund exercises the call it holds or the time the Fund
sells the call which, in either case, would occur no earlier than the day
following the day the exercise notice was filed.
SPECIAL RISKS OF PURCHASING PUTS AND CALLS ON INDICES. If the Fund holds an
index option and exercises it before final determination of the closing index
value for that day, it runs the risk that the level of the underlying index may
change before closing. If such a change causes the exercised option to fall
out-of-the-money, the Fund will be required to pay the difference between the
closing index value and the exercise price of the option (times the applicable
multiple) to the assigned writer. Although the Fund may be able to minimize this
risk by withholding exercise instructions until just before the daily cut off
time or by selling rather than exercising an option when the index level is
close to the exercise price, it may not be possible to eliminate this risk
entirely because the cut off times for index options may be earlier than those
fixed for other types of options and may occur before definitive closing index
values are announced.
ADDITIONAL RISKS OF PURCHASING OTC OPTIONS. OTC options are subject to
certain risks not present with exchange traded options. It is not possible to
effect a closing transaction in OTC options in the same manner as listed options
because a clearing corporation is not interposed between the buyer and seller of
the option. In order to terminate the obligation represented by an OTC option,
the holder must agree to the termination of the OTC option and may be unable or
unwilling to do so on terms acceptable to the writer. In any event, a
cancellation, if agreed to, may require the writer to pay a premium to the
counterparty. Although it does not eliminate counterparty risk, the Fund may be
able to eliminate the market risk of an option it has written by writing or
purchasing an offsetting position with the same or another counterparty.
However, the Fund would remain exposed to each counterparty's credit risk on the
call or put option until such option is exercised or expires. There is no
guarantee that the Fund will be able to write put or call options, as the case
may be, that will effectively offset an existing position.
OTC options are issued in privately negotiated transactions exempt from
registration under the Securities Act of 1933 and, as a result, are generally
subject to substantial legal and contractual limitations on sale. As a result,
there is no secondary market for OTC options and the staff of the Securities and
Exchange Commission (the Commission) has taken the position that OTC options
held by an investment company, as well as securities used to cover OTC options
written by one, are illiquid securities, unless the Fund and its counterparty
have provided for the Fund at its option to unwind the option. Such provisions
ordinarily involve the payment by the Fund to the counterparty to compensate it
for the economic loss caused by an early termination. In the absence of a
negotiated unwind provision, the Fund may be unable to terminate its obligation
under a written option or to enter into an offsetting transaction eliminating
its market risk.
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There are currently legal and regulatory limitations on the Fund's purchase
or sale of OTC options. These limitations are not fundamental policies of the
Fund and the Fund's obligation to comply with them could be changed without
approval of the Fund's shareholders in the event of modification or elimination
of such laws or regulations in the future.
There can be no assurance that the Fund's use of OTC options will be
successful and the Fund may incur losses in connection with the purchase and
sale of OTC options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
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. These futures
contracts and options thereon will be on stock indices and foreign currencies.
The Fund, and thus its investors, may lose money through any unsuccessful use of
these strategies.
A stock index futures contract is an agreement to purchase or sell 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.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator," subject to compliance with certain conditions. The
exemption is conditioned upon the Fund's purchasing and selling futures
contracts and options thereon for BONA FIDE hedging transactions, except that
the Fund may purchase and sell futures contracts and options thereon for any
other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the market value of the Fund's total assets.
Although there are no other limits applicable to futures contracts, the value of
all futures contracts sold will not exceed the total market value of the Fund's
portfolio.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures contracts as a
hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the prices of equity securities or a currency or
group of currencies, the price of a futures contract may move more or less than
the price of the equity securities or currencies being hedged. Therefore, a
correct forecast of equity prices, currency rates, market trends or
international political trends by the investment adviser may still not result in
a successful hedging transaction.
Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market or an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance that
it will be possible, at any particular time, to close a futures position. In the
event the Fund could not close a futures position and the value of such position
declined, the Fund would be required to continue to make daily cash payments of
variation margin. However, in the event a futures contract has been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, there is no guarantee the price movements of the securities
will, in fact, correlate with the price movements in the futures contracts and
thus provide an offset to losses on a futures contract. Currently, futures
contracts are available on the Australian Dollar, British Pound, Canadian
Dollar, Japanese Yen and Swiss Franc.
The Fund will use stock index futures and currency futures and options on
futures in a manner consistent with CFTC regulations. The Fund may also enter
into futures or related options contracts for return enhancement and risk
management purposes if the aggregate initial margin and option premiums do not
exceed 5% of the market value of the Fund's total assets.
Futures contracts and related options are generally subject to segregation
requirements of the Commission and the coverage requirements of the CFTC. 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 may place and maintain cash,
securities and similar investments with a futures commissions merchant in
amounts necessary to effect the Fund's transactions in exchange-traded futures
contracts and options thereon, provided certain conditions are satisfied.
Successful use of futures contracts and options thereon by the Fund is also
subject to the ability of the Fund's manager or subadviser to forecast movements
in the direction of the market and interest rates and other factors affecting
equity securities and currencies generally. The correlation between movements in
the price of a futures contract and movements in the price of the securities
being hedged is imperfect and the risk from imperfect correlation increases as
the composition of the Fund's portfolio diverges from the composition of the
relevant index. For example, if the Fund has hedged against the possibility of
an increase in the price of securities in its portfolio and the price of such
securities increases instead, the Fund will lose part or all of the benefit of
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the increased value of its securities because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash, to meet daily variation margin requirements, it may need to
sell securities to meet such requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous to do
so.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets. In addition, certain futures exchanges or boards of
trade have 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.
POSITION LIMITS. Transactions by the Fund in futures contracts and options
will be subject to limitations, if any, established by each of the exchanges,
boards of trade or other trading facilities (including NASDAQ) governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more accounts or
through one or more brokers. Thus, the number of futures contracts and options
which the Fund may write or purchase may be affected by the futures contracts
and options written or purchased by other investment advisory clients of the
investment adviser. An exchange, board of trade or other trading facility may
order the liquidations of positions found to be in excess of these limits, and
it may impose certain other sanctions.
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may enter into foreign currency forward contracts to protect the
value of its portfolio against future changes in the level of currency exchange
rates. The Fund may enter into such contracts on a spot (that is, cash) basis at
the rate then prevailing in the currency exchange market or on a forward basis,
by entering into a forward contract to purchase or sell currency. A forward
contract on foreign currency is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days agreed upon by
the parties from the date of the contract at a price set on the date of the
contract.
The Fund's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although there
are no limits on the number of forward contracts which the Fund may enter into,
the Fund may not position hedge (including cross hedges) with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of forward currency) of the
securities being hedged.
RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may enter into foreign currency forward contracts in several
circumstances. When the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when the Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transaction, the Fund may be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the foreign currency during the period between the date on which
the security is purchased or sold, or on which the dividend or interest payment
is declared, and the date on which such payments are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. If the Fund enters into a
position hedging transaction, the transaction will be "covered" by the position
being hedged, or the Fund's Custodian will segregate cash or other liquid assets
(less the value of the covering positions, if any) in an amount equal
B-9
<PAGE>
to the value of the Fund's total assets committed to the consummation of such
forward contracts. If the value of the segregated assets declines, additional
cash or other liquid assets will be segregated so that the value will, at all
times, equal the amount of the Fund's net commitment with respect to such
contract.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transactions costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
the investment adviser's predictions of movements in the direction of the
securities, foreign currency or interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of these strategies
include (1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities
being hedged; (3) the fact that the skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the risk that the counterparty may be unable to complete the transaction;
and (6) the possible inability of the Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate assets in
connection with hedging transactions.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The Fund does not currently intend to invest in repurchase agreements
whose maturities exceed one year. The resale price is in excess of the purchase
price, reflecting an agreed-upon rate of return effective for the period of time
the Fund's money is invested in the repurchase agreement. The Fund's repurchase
agreements will at all times be fully collateralized by U.S. government
obligations in an amount at least equal to the resale price. The instruments
held as collateral are valued daily, and if the value of 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 will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's Directors. The investment
adviser will monitor the creditworthiness of such parties under the general
supervision of the Directors. In the event of a default or bankruptcy by a
seller, the Fund will promptly seek to liquidate the collateral.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the Commission. On a daily basis, any uninvested cash balances of
the Fund may be aggregated with those of such investment companies and invested
in one or more repurchase agreements. Each fund participates in the income
earned or accrued in the joint account based on the percentage of its
investment.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33 1/3% of the value of
the Fund's total assets and that the loans are callable at any time by the Fund.
The loans must at all times be secured by cash or other liquid assets or secured
by an irrevocable letter of credit in favor of the Fund in an amount equal to at
least 100%, determined daily, of the market value of the loaned securities. The
collateral is segregated 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
B-10
<PAGE>
borrower. The advantage of such loans is that the Fund continues to receive
payments in lieu of the interest and dividends on the loaned securities, while
at the same time earning interest either directly from the borrower or on the
collateral which will be invested in short-term obligations.
A loan may be terminated by the borrower or Fund at any time. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases loss of rights in the collateral should the borrower
of the securities fail financially. However, these loans of portfolio securities
will only be made to firms determined to be creditworthy pursuant to procedures
approved by the Board of Directors of the Fund. On termination of the loan, the
borrower is required to return the securities to the Fund, and any gain or loss
in the market price during the loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan. The Fund may pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities or
may share the interest earned on collateral with the borrower.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions. 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 (within 3 days) to
reduce its borrowings. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. The Fund will not purchase portfolio securities when borrowings
exceed 5% of the value of its total assets.
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. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD).
B-11
<PAGE>
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Directors. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. The investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Directors. In reaching liquidity decisions, the investment adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (for example, the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (a) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (b) it must not be "traded
flat" (that is, without accrued interest) or in default as to principal or
interest.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, RIETs do not have to pay income taxes if they meet certain
requirements of the Internal Revenue Code of 1986, as amended (Internal Revenue
Code). To qualify, a REIT must distribute at least 85% 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 that 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.
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 accrued 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 segregate
with the Fund's custodian cash or other liquid assets, at such a level that (i)
the amount segregated plus the amount deposited with the broker as collateral
will equal the current value of the security sold short and (ii) the amount
segregated 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) segregated 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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund's custodian will segregate cash or other liquid assets having a value equal
to or greater than the Fund's purchase commitments. The securities so purchased
are subject to market fluctuation and no interest accrues to the purchaser
during the period between purchase and settlement. At the time of delivery of
the securities, the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
B-12
<PAGE>
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
non-affiliated investment companies. The Fund [expects to invest less than 5% in
securities of other investment companies]. If the Fund does invest in securities
of other investment companies, shareholders of the Fund may be subject to
duplicate management and advisory fees. See "Investment Restrictions."
SEGREGATED ASSETS
The Fund will segregate with its Custodian, State Street Bank and Trust
Company (State Street), cash, U.S. government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets equal in value to its obligations in respect of potentially leveraged
transactions. These include forward contracts, when-issued and delayed delivery
securities, futures contracts, written options and options on futures contracts
(unless otherwise covered). If collateralized or otherwise covered, in
accordance with Commission guidelines, these will not be deemed to be senior
securities. The assets segregated will be marked-to-market daily.
(d) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When 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 above) and cash (foreign currencies or U.S. dollars).
These instruments will be U.S. dollar denominated or denominated in a foreign
currency. Such investments may be subject to certain risks, including future
political and economic developments, the possible imposition of withholding
taxes on interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions.
In addition, the portfolio manager may invest in securities other than as
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 subject to the 80% policy.]
(e) PORTFOLIO TURNOVER
[As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, and the Fund's portfolio
turnover rate may exceed 100%, but is not expected to exceed 200%.] The
portfolio turnover rate is generally the percentage computed by dividing the
lesser of portfolio purchases or sales (excluding all securities, including
options, whose maturities or expiration date at acquisition were one year or
less) by the monthly average value of the long-term portfolio. High portfolio
turnover (100% or more) involves correspondingly greater brokerage commissions
and other transaction costs, which are borne directly by the Fund. In addition,
high portfolio turnover may also mean that a proportionately greater amount of
distributions to shareholders will be taxed as ordinary income rather than
long-term capital gains compared to investment companies with lower portfolio
turnover. See "Brokerage Allocation and Other Practices" and "Taxes, Dividends
and Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means with respect to the Fund, the lesser of (1) 67% of the shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (2) more than 50% of the
outstanding voting shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a security
on margin.
B-13
<PAGE>
2. Make short sales of securities or maintain a short position if, when
added together, more than 25% of the value of the Fund's net assets would be (i)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to this limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 20% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 20% of
the value of its total assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
futures contracts and options thereon and with respect to the writing of options
and obligations of the Fund to Directors pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets subject to this
restriction.
4. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result: (i) with respect to 75% of the
Fund's total assets, more than 5% of the Fund's total assets (determined at the
time of investment) would then be invested in securities of a single issuer, or
(ii) 25% or more of the Fund's total assets (determined at the time of the
investment) would be invested in a single industry.
5. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell securities which are secured by real estate, securities of
companies which invest or deal in real estate and publicly traded securities of
real estate investment trusts. The Fund may not purchase interests in real
estate limited partnerships which are not readily marketable.
6. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon, and forward
foreign currency exchange contracts.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other non-affiliated investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which the Fund will not hold more than 3% of the outstanding
voting securities of any one investment company, will not have invested more
than 5% of its total assets in any one investment company and will not have
invested more than 10% of its total assets (determined at the time of
investment) in such securities of one or more investment companies, or except as
part of a merger, consolidation or other acquisition.
10. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3 of the Fund's total assets.
11. Purchase more than 10% of all outstanding voting securities of any one
issuer.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
B-14
<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST 5 YEARS
- ---------------------------------- ---------------------------- ----------------------------------------------------------
<S> <C> <C>
Edward D. Beach (74) Director President and Director of BMC Fund, Inc., a closed-end
investment company; formerly, Vice Chairman of Broyhill
Furniture Industries, Inc.; Certified Public Accountant;
Secretary and Treasurer of Broyhill Family Foundation,
Inc.; Member of the Board of Trustees of Mars Hill
College and Director or Trustee of 44 funds within the
Prudential Mutual Funds.
Delayne Dedrick Gold (60) Director Marketing and Management Consultant and Director or
Trustee of 44 funds within the Prudential Mutual Funds.
*Robert F. Gunia (52) Acting President and Vice President (since September 1997) of The Prudential
Director Insurance Company of America (Prudential); Executive Vice
President and Treasurer (since December 1996) of
Prudential Investments Fund Management LLC (PIFM); Senior
Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential Securities); formerly
Chief Administrative Officer (July 1990-September 1996),
Director (January 1989-September 1996) and Executive Vice
President, Treasurer and Chief Financial Officer (June
1987-September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Director (since May
1989) of The Asia Pacific Fund, Inc. and Director or
Trustee of 44 other funds within the Prudential Mutual
Funds.
Douglas H. McCorkindale (59) Director Vice Chairman (since March 1984) and President (since
September 1997) of Gannett Co. Inc. (publishing and
media); Director of Gannett Co. Inc., Frontier
Corporation and Continental Airlines, Inc. and Director
or Trustee of 33 other funds within the Prudential Mutual
Funds.
Thomas T. Mooney (57) Director President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; Trustee of
Center for Governmental Research, Inc.; Director of Blue
Cross of Rochester, The Business Council of New York
State, Monroe County Water Authority, Rochester Jobs,
Inc., Monroe County Industrial Development Corporation,
Northeast Midwest Institute; President, Director and
Treasurer of First Financial Fund, Inc. and The High
Yield Plus Fund, Inc. and Director or Trustee of 33 other
funds within the Prudential Mutual Funds.
Stephen P. Munn (55) Director Chairman (since January 1994), Director and President
(since 1988) and Chief Executive Officer (1988-December
1993) of Carlisle Companies Incorporated (manufacturer of
industrial products) and Director or Trustee of 18 funds
within the Prudential Mutual Funds.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST 5 YEARS
- ---------------------------------- ---------------------------- ----------------------------------------------------------
<S> <C> <C>
*Richard A. Redeker (55) President and Formerly President, Chief Executive Officer and Director
Director (October 1993-September 1996) of Prudential Mutual Fund
Management, Inc., Executive Vice President, Director and
Member of the Operating Committee (October 1993-September
1996) of Prudential Securities; Director (October
1993-September 1996) of Prudential Securities Group,
Inc.; Executive Vice President (January 1994-September
1996) of The Prudential Investment Corporation; Director
(January 1994-September 1996) of Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund Services,
Inc.; Senior Executive Vice President and Director
(September 1978-September 1993) of Kemper Financial
Services, Inc. and Director or Trustee of 30 funds within
the Prudential Mutual Funds.
Robin B. Smith (59) Director Chairman and Chief Executive Officer (since August 1996),
formerly President and Chief Executive Officer (January
1988-August 1996) and President and Chief Operating
Officer (September 1981-December 1988) of Publishers
Clearing House; Director of BellSouth Corporation, Texaco
Inc., Springs Industries Inc. and Kmart Corporation and
Director or Trustee of 32 funds with the Prudential
Mutual Funds.
Louis A. Weil, III (57) Director Chairman (since January 1999), President and Chief
Executive Officer (since January 1996) and Director
(since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996), Publisher and
Chief Executive Officer (August 1991-December 1995) of
Phoenix Newspapers, Inc.; formerly Publisher (May
1989-March 1991) of Time Magazine; President, Publisher &
Chief Executive Officer (February 1986-August 1989) of
The Detroit News and member of the Advisory Board, Chase
Manhattan Bank-Westchester and Director or Trustee of 30
funds within the Prudential Mutual Funds.
Clay T. Whitehead (60) Director President (since May 1983) of National Exchange Inc. (new
business development firm) and Director or Trustee of 18
funds within the Prudential Mutual Funds.
Grace C. Torres (39) Treasurer and Principal First Vice President (since December 1996) of PIFM; First
Financial and Accounting Vice President (since March 1993) of Prudential
Officer Securities; formerly First Vice President (March
1994-September 1996) of Prudential Mutual Fund
Management, Inc. and Vice President (July 1989-March
1994) of Bankers Trust Corporation.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST 5 YEARS
- ---------------------------------- ---------------------------- ----------------------------------------------------------
<S> <C> <C>
Marguerite E. H. Morrison (42) Secretary Vice President and Associate General Counsel (since
December 1996) of PIFM; Vice President and Associate
General Counsel (since September 1997) of Prudential
Securities; formerly Vice President and Associate General
Counsel (June 1991-September 1996) of Prudential Mutual
Fund Management, Inc.
Stephen M. Ungerman (45) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments
and the Private Asset Group of The Prudential Insurance
Company of America (Prudential); formerly First Vice
President (February 1993-September 1996) of Prudential
Mutual Fund Management, Inc. and Senior Tax Manager
(1981-January 1993) of Price Waterhouse LLP.
</TABLE>
- ------------------------
* "Interested" Director, as defined in the Investment Company Act, by reason
of affiliation with Prudential Securities, Prudential or PIFM.
** Unless otherwise indicated, the address of the Directors and officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," oversee such actions and decide on general policy.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors of Prudential
Mutual Funds who were age 68 or older as of December 31, 1993. Under this
phase-in provision, Mr. Beach is scheduled to retire on December 31, 1999.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Directors of the Fund who are affiliated persons of the
Manager. The Fund pays each of its Directors who is not an affiliated person of
the Manager or investment adviser annual compensation of $2,000 in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Director may change as a result of the introduction of additional funds on the
boards of which the Director will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills
at the beginning of each calendar quarter or, pursuant to an SEC exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Fund's obligation to make payments of deferred Directors' fees,
together with interest thereon, is a general obligation of the Fund.
The following table sets forth the estimated aggregate compensation paid by
the Fund for the fiscal year ended March 31, 1999 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's Board and the boards of all other investment
companies managed by PIFM (Fund Complex) for the calendar year ended December
31, 1998.
B-17
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1998
COMPENSATION
AGGREGATE FROM FUND
COMPENSATION COMPLEX PAID
NAME OF DIRECTOR FROM FUND TO DIRECTORS
- --------------------------------------------------------------------------------------- ------------- ------------------
<S> <C> <C>
Edward D. Beach........................................................................ $ 2,000 $ 135,000(44/71)*
Delayne Dedrick Gold................................................................... 2,000 $ 135,000(44/71)*
Robert F. Gunia+....................................................................... None None
Douglas H. McCorkindale**.............................................................. 2,000 $ 70,000(23/40)*
Thomas T. Mooney**..................................................................... 2,000 $ 115,000(35/70)*
Stephen P. Munn........................................................................ 2,000 $ 45,000(18/24)*
Richard A. Redeker+.................................................................... None None
Robin B. Smith**....................................................................... 2,000 $ 90,000(32/41)*
Louis A. Weil, III..................................................................... 2,000 $ 90,000(30/54)*
Clay T. Whitehead...................................................................... 2,000 $ 45,000(18/24)*
</TABLE>
- ------------------------
* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1998, includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,145, $119,740
and $116,225 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.
+ Directors who are "interested", do not receive compensation from the Fund or
any fund in the Fund Complex. Mr. Redeker is no longer an interested
Director.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or contingent deferred
sales charge to a limited group of investors. As of May , 1999, the Directors
and officers of the Fund, as a group, owned less than 1% of the outstanding
shares of the Fund.
As of May , 1999, beneficial owners, directly or indirectly, of more than
5% of any class of shares of the Fund were:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS CLASS (% OF CLASS)
- --------------------------------------------------------------- ---------------------------- ----- ------------------
<S> <C> <C> <C>
</TABLE>
As of May , 1999, Prudential Securities was the record holder for other
beneficial owners of Class A shares (approximately % of such shares
outstanding), Class B shares (approximately % of such shares
outstanding), Class C shares (approximately % of such shares
outstanding) and Class Z shares (approximately % of such shares
outstanding) of the Fund. In the event of any meetings of shareholders,
Prudential Securities will forward, or cause the forwarding of proxy materials
to beneficial owners for which it is the record holder.
INVESTMENT ADVISORY AND OTHER SERVICES
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential Mutual Funds. See "How the
Fund is Managed--Manager" in the Prospectus of the Fund. As of April 30, 1999,
PIFM managed and/or administered open-end and closed-end management investment
companies with assets of approximately $ billion. According to the Investment
Company Institute, as of December 31, 1998, the Prudential Mutual Funds were the
18th largest family of mutual funds in the United States.
B-18
<PAGE>
PIFM is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). Prudential Mutual Fund
Services LLC (PMFS or the Transfer Agent), a wholly owned subsidiary of PIFM,
serves as the transfer agent for the Prudential Mutual Funds and, in addition,
provides customer service, recordkeeping and management and administration
services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM also administers the Fund's business affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's custodian (the Custodian), and
PMFS, the Fund's transfer and dividend disbursing agent. The management services
of PIFM for the Fund are not exclusive under the terms of the Management
Agreement and PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .60 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly.
In connection with its management of the corporate affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all personnel of the Fund and the Manager,
except the fees and expenses of Directors who are not affiliated persons of PIFM
or the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of a Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI or the investment adviser) pursuant
to the subadvisory agreement between PIFM and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Fund and of pricing the Fund's shares, (d) the charges and expenses of legal
counsel and independent accountants for the Fund, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Fund in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade associations of which the Fund
may be a member, (h) the cost of stock certificates representing shares of the
Fund, (i) the cost of fidelity and liability insurance, (j) certain organization
expenses of the Fund and the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the SEC and the
states, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
For the year ended March 31, 1999 and the fiscal period ended March 31,
1998, PIFM received management fees of $ and $726,972, respectively.
PIFM has entered into the Subadvisory Agreement with PI (the Subadviser) a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PI will furnish investment advisory services in connection with the management
of the Fund. In connection therewith, PI is obligated to keep certain books and
records of the Fund. Under the Subadvisory Agreement, the Subadviser, subject to
the supervision of PIFM, is responsible for managing the assets of the Fund in
accordance with its investment objectives, investment program and policies. The
Subadviser determines what securities and other instruments are purchased and
sold for the Fund and is responsible for obtaining and evaluating financial data
relevant to the Fund. PIFM continues
B-19
<PAGE>
to have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises its performance of such services. PI is
reimbursed by PIFM for the reasonable costs and expenses incurred by PI in
furnishing those services.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or PI upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities) was the Fund's distributor. PIMS
and Prudential Securities are subsidiaries of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares, respectively. The
Distributor also incurs the expenses of distributing the Class Z shares under
the Distribution Agreement with the Fund, none of which are reimbursed by or
paid for by the Fund.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of brokers or financial institutions which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of .30 of 1% of the average daily net assets of the Class A shares. The
Class A Plan provides that (1) .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and the maintenance of
shareholder accounts (service fee) and (2) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. The Distributor has
contractually limited its distribution-related fees payable under the Class A
Plan to .25 of 1% of the average daily net assets of the Class A shares through
March 31, 2000.
For the fiscal year ended March 31, 1999, the Distributor and Prudential
Securities collectively received payments of $ , under the Class A Plan and
spent approximately $ in distributing the Class A shares. This amount was
primarily expended for payment of account servicing fees to financial advisers
and other persons who sell Class A shares. For the fiscal year ended March 31,
1999, the Distributor and Prudential Securities collectively also received
approximately $ in initial sales charges.
CLASS B AND CLASS B PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of 1% of the average daily net
assets of each of the Class B and Class C shares. The Class B and Class C Plans
provide that (1) .25 of 1% of the average daily net assets of the Class B and
Class C shares, respectively, may be paid as a service fee and (2) .75 of 1%
(not including the service fee) may be paid for distribution-related expenses
with respect to the Class B and Class C shares, respectively (asset-based sales
charge). The service fee (.25 of 1% of average daily net assets) is used to pay
for personal service and/or the maintenance of shareholder accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders.
CLASS B PLAN. For the fiscal year ended March 31, 1999, the Distributor and
Prudential Securities collectively received $ from the Fund under the Class
B Plan and spent approximately $ in distributing the Fund's Class B shares.
It is estimated that of the latter total amount approximately % ($ ) was
spent on printing and mailing of prospectuses to
B-20
<PAGE>
other than current shareholders; % ($ ) was spent on compensation to
broker-dealers for commissions to representatives and other expenses, including
an allocation on account of overhead and other branch office
distribution-related expenses incurred for distribution of Fund shares; and %
($ ) on the aggregate of (1) payments of commissions and account servicing
fees to financial advisers % or $ ) and (2) an allocation on account of
overhead and other branch office distribution-related expenses ( % or
$ ). The term "overhead and other branch office distribution-related
expenses" represents (a) the expenses of operating Prudential Securities and
Pruco Securities Corporation's (Prusec's) branch offices in connection with the
sale of Fund shares, including lease costs, the salaries and employee benefits
of operations and sales support personnel, utility costs, communications costs
and the costs of stationery and supplies, (b) the costs of client sales
seminars, (c) expenses of mutual fund sales coordinators to promote the sale of
Fund shares and (d) other incidental expenses relating to branch promotion of
Fund sales.
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class B shares. For the fiscal year ended March 31, 1999, the
Distributor and Prudential Securities collectively received approximately
$ in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended March 31, 1999, the Distributor and
Prudential Securities collectively received $ under the Class C Plan and
spent approximately $ in distributing Class C shares. It is estimated that
of the latter total amount approximately % ($ ) was spent on printing
and mailing of prospectuses to other than current shareholders; % ($ )
on compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation of overhead and other branch office
distribution-related expenses incurred for distribution of Fund shares; and %
($ ) on the aggregate of (1) payments of commissions and account servicing
fees to financial advisers % $ ) and (2) an allocation on account of
overhead and other branch office distribution-related expenses ( % $ ).
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. For the fiscal year ended March 31, 1999, the
Distributor and Prudential Securities collectively received approximately
$ in contingent deferred sales charges attributable to Class C shares. For
the fiscal year ended March 31, 1999, the Distributor received approximately
$ in initial sales charges attributable to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund are allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B and Class C shares of
the Fund other than expenses allocable to a particular class. The distribution
fee and sales charge of one class will not be used to subsidize the sale of
another class.
The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority of the Directors who are
not interested persons of the Fund and who have no direct or indirect financial
interest in the Class A, Class B, or Class C Plan or in any agreement related to
the Plans (the Rule 12b-1 Directors), at a meeting called for the purpose of
voting on such continuance. A Plan may be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Directors or by the vote of
the holders of a majority of the outstanding shares of the applicable class of
the Fund on not more than 60 days', nor less than 30 days' written notice to any
other party to the Plan. The Plans may not be amended to increase materially the
amounts to be spent for the services described therein without approval by the
shareholders of the applicable class, and all material amendments are required
to be approved by the Board of Directors in the manner described above. Each
Plan will automatically terminate in the event of its assignment. The Fund will
not be obligated to pay expenses incurred under any Plan if it is terminated or
not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report will include an itemization
of the distribution expenses and the purposes of such expenditures. In addition,
as long as the Plans remain in effect, the selection and nomination of Rule
12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager or one of its affiliates, may
make payments to dealers (including Prudential Securities) and other persons
which distribute shares of the Fund (including Class Z shares). Such payments
may be calculated by reference to the net asset value of securities sold by such
persons or otherwise.
B-21
<PAGE>
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for the Class A shares as described above. Fee waivers and subsidies will
increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charge
on unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not required to be included in the calculation
of the 6.25% limitation. The annual asset-based sales charge on of the Fund may
not exceed .75 of 1% per class. The 6.25% limitation applies to each class of
the Fund rather than on a per shareholder basis. If aggregate sales charges were
to exceed 6.25% of total gross sales of any class, all sales charges on shares
of that class would be suspended.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Fund and cash and in that capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians provide
custodial services for the Fund's foreign assets held outside the United States.
PMFS, Raritan Plaza One, Edison, New Jersey 06837, serves as the transfer
and dividend disbursing agent of the Fund, PMFS is a wholly-owned subsidiary of
PIFM. PMFS provides customary transfer agency services to the Fund, including
the handling of shareholder communications, the processing of shareholder
transactions, the maintenance of shareholder account records, payment of
dividends and distributions and related functions. For these services, PMFS
receives an annual fee per shareholder account of $9.50, a new account set-up
fee of $2.00 for each manually established account and a monthly inactive zero
balance account fee of $.20 per shareholder account. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communication expenses and other costs.
LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants, and in that capacity audits
the annual report of the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in this
section includes the Subadviser. Broker-dealers may receive negotiated brokerage
commissions on Fund portfolio transactions, including options and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with
Prudential Securities or any affiliate in any transaction in which Prudential
Securities or any affiliate acts as principal, except in accordance with rules
of the Commission. Thus, it will not deal in the over-the-counter market with
Prudential Securities acting as market maker, and it will not execute a
negotiated trade with Prudential Securities if execution involves Prudential
Securities' acting as principal with respect to any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, or an affiliate, during the existence
of the syndicate, is a principal underwriter (as defined in the Investment
Company Act), except in
B-22
<PAGE>
accordance with rules of the Commission. This limitation, in the opinion of the
Fund, will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of price and
execution. The Manager seeks to effect each transaction at a price and
commission that provides the most favorable total cost or proceeds reasonably
attainable in the circumstances. The factors that the Manager may consider in
selecting a particular broker, dealer or futures commission merchant (firms) are
the Manager's knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the portfolio transaction; the
size of the transaction; the desired timing of the trade; the activity existing
and expected in the market for the particular transaction; confidentiality; the
execution, clearance and settlement capabilities of the firms; the availability
of research and research related services provided through such firms; the
Manager's knowledge of the financial stability of the firms; the Manager's
knowledge of actual or apparent operational problems of firms; and the amount of
capital, if any, that would be contributed by firms executing the transaction.
Given these factors, the Fund may pay transaction costs in excess of that which
another firm might have charged for effecting the same transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or services,
such as research reports, research compilations, statistical and economic data,
computer databases, quotation equipment and services, research oriented computer
software, hardware and services, reports concerning the performance of accounts,
valuations of securities, investment related periodicals, investment seminars
and other economic services and consultants. Such services are used in
connection with some or all of the Manager's investment activities; some of such
services, obtained in connection with the execution of transactions for one
investment account may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct sufficient
commissions to them to ensure the continued receipt of those services that the
Manager believes provide a benefit to the Fund and its other clients. The
Manager makes a good faith determination that the research and/or service is
reasonable in light of the type of service provided and the price and execution
of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to aggregate the transactions in order to obtain
the most favorable price of lower brokerage commissions and efficient execution.
In such event, allocation of the transactions, as well as the expenses incurred
in the transaction, will be made by the Manager in the manner it considers to be
most equitable and consistent with its fiduciary obligations to its clients. The
allocation of orders among firms and the commission rates paid are reviewed
periodically by the Fund's Directors. Portfolio securities may not be purchased
from any underwriting or selling syndicate of which Prudential Securities or any
affiliate, during the existence of the syndicate, is a principal underwriter (as
defined in the Investment Company Act), except in accordance with rules of the
Commission. This limitation, in the opinion of the Fund, will not significantly
affect the Fund's ability to pursue its present investment objective. However,
in the future in other circumstances, the Fund may be at a disadvantage because
of this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other firms in connection with
comparable transactions involving similar securities or futures being purchased
or sold on an exchange or board of trade during a comparable period of time.
This standard would allow Prudential Securities (or any affiliate) to receive no
more than the remuneration which would be expected to be received by an
unaffiliated firm in a commensurate arm's-length transaction. Furthermore, the
Board of Directors of the Fund, including a majority of the non-interested
Directors have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to Prudential Securities (or
any affiliate) are consistent with the foregoing standard. In accordance with
Section 11(a) of the Securities Exchange Act of 1934, as amended, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund during
the applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable law.
B-23
<PAGE>
The table below sets forth information concerning the payment of commissions
by the Fund, including commissions paid to Prudential Securities,
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED PERIOD ENDED
MARCH 31, MARCH 31,
1999 1998
------------- -------------
<S> <C> <C>
Total brokerage commissions paid by the Fund.......................... $ $
Total brokerage commissions paid to Prudential Securities and its
foreign affiliates.................................................. $ $
Percentage of total brokerage commissions paid to Prudential
Securities and its foreign affiliates............................... % %
</TABLE>
The Fund effected approximately % of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended March 31, 1999. Of the total brokerage commissions paid
during that period, (or %) were paid to firms which provide research,
statistical or other services to PI. PIFM has not separately identified a
portion of such brokerage commissions as applicable to the provision of such
research, statistical or other services.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act),
and their parents at March 31, 1999. As of March 31, 1999, the Fund held
securities of in the aggregate amount of $ .
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 2 billion shares of common stock, $.001 per
share divided into four classes, designated Class A, Class B, Class C and Class
Z shares, initially all of one series. Each class of common stock represents an
interest in the same assets of the Fund and is identical in all respects except
that (1) each class is subject to different sales charges and distribution
and/or service fees (except for Class Z shares, which are not subject to any
sales charges and distribution and/or service fees), which may affect
performance, (2) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (3) each class has a
different exchange privilege, (4) only Class B shares have a conversion feature
and (5) Class Z shares are offered exclusively for sale to a limited group of
investors. In accordance with the Fund's Articles of Incorporation, the
Directors may authorize the creation of additional series and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. The voting rights of the
shareholders of a series or class can be modified only the majority vote of
shareholders of that series or class.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share of
each class is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of the Fund is
entitled to its portion of all of the Fund's assets after all debt and expenses
of the Fund have been paid. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon the vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business.
Under the Articles of Incorporation, the Directors may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. All consideration received by
the Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Under the Investment Company Act, shareholders of any
additional series of shares would normally have to approve the adoption of any
advisory contract relating to such series and of any changes in the investment
policies related therein. The Directors do not intend to authorize the creation
of additional series at the present time.
B-24
<PAGE>
The Directors have the power to alter the number and the terms of office of
the Directors and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Directors have been elected by the
shareholders of the Fund. The voting rights of shareholders are not cumulative,
so that holders of more than 50 percent of the shares voting can, if they
choose, elect all Directors being selected, while the holders of the remaining
shares would be unable to elect any Directors.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares). Class Z
shares of the Fund are offered to a limited group of investors at NAV without
any sales charges. See "How to Buy, Sell and Exchange Shares of the Fund" in the
Prospectus.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. 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 PMFS and your name and identifying the class
in which you are eligible to invest (Class A, Class B, Class C or Class Z
shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.
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.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to: (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold with a maximum sales charge of 5%, Class C*
shares are sold with a 1% sales charge and Class B* and Class Z shares are sold
at NAV. Using the NAV of the Fund at March 31, 1999, the maximum offering price
of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share............ $
Maximum sales charge (5% of offering price).......................
------
Maximum offering price............................................ $
------
------
CLASS B
Net asset value, redemption price and offering price to public per
Class B share*................................................... $
------
------
CLASS C
Net asset value and redemption price per Class C share*........... $
Sales charge (1% of offering price)............................... $
------
Offering price to public.......................................... $
------
------
CLASS Z
Net asset value, offering price and redemption price per Class Z
share............................................................ $
------
------
</TABLE>
-------------------
* Class B and Class C shares are subject to a contingent
deferred sales charge on certain redemptions.
B-25
<PAGE>
SELECTING A PURCHASE ALTERNATIVE
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 4 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 longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and 5 years in the case of Class
C shares for the higher cumulative annual distribution-related fee on those
shares plus, in the case of Class C shares, the 1% initial sales charge to
exceed the initial sales charge plus the cumulative annual distribution-related
fees on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
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, deferred compensation
or annuity plans under Sections 401(a), 401(b) and 457 of the Internal Revenue
Code, "rabbi" trusts and non-qualified deferred compensation plans that are
sponsored by any employer that has a tax-qualified plan with Prudential
(collectively, Benefit Plans), provided that the Benefit Plan has existing
assets of at least $1 million invested in shares of Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the exchange
privilege) or 250 eligible employees or participants. In the case of Benefit
Plans whose accounts are held directly with the Transfer Agent or Prudential
Securities and for which the Transfer Agent or Prudential Securities does
individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential, Prudential Securities or its subsidiaries
(Prudential Securities or Subsidiary Prototype Benefit Plans), Class A shares
may be purchased at NAV by participants who are repaying loans made from such
plans to the participant.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential provides
administrative or recordkeeping services, provided that (1) the plan has at
least $1 million in existing assets or 250 eligible employees and (2) the Fund
is an available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code and plans that participate in the
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray Plan). All Benefit Plans of a company (or affiliated companies under
common control) for which Prudential serves as plan administrator or
recordkeeper are aggregated in meeting the $1 million threshold, provided that
Prudential has been notified in advance of the entitlement to the waiver of the
sales charge based on the aggregated assets. The term "existing assets" includes
stock issued by a plan sponsor, shares of Prudential Mutual Funds and shares of
certain unaffiliated mutual funds that participate in the PruArray Plan
(Participating Funds). "Existing assets" also include monies invested in The
Guaranteed Investment Account (GIA), a group annuity insurance product issued by
Prudential, the Guaranteed Insulated Separate Account, a separate account
offered by Prudential, and units of The Stable Value Fund (SVF), an unaffiliated
B-26
<PAGE>
bank collective fund. Class A shares may also be purchased at NAV by plans that
have monies invested in GIA and SVF, provided (1) the purchase is made with the
proceeds of a redemption from either GIA or SVF and (2) Class A shares are an
investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are members
of a common trade, professional or membership association (Association) that
participate in a PruArray Plan provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified Plan(s) or non-qualified
plans so long as the employers in the Association (1) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (2) maintain their accounts with the Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (1) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (2) spouses
of employees who open an IRA account with the Transfer Agent. The program is
offered to companies that have at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray 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 Distributor or the Transfer Agent, by:
- officers of the Prudential Mutual Funds (including the Fund),
- employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent,
- employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,
- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service
with Prudential or one of its subsidiaries,
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer,
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase,
- investors in Individual Retirement Accounts, provided the purchase is made
in a directed rollover to such Individual Retirement Account or with the
proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential provides administrative or recordkeeping services and further
provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution,
- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services (for example,
mutual fund "wrap" or asset allocation programs), and
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket programs").
For an investor to obtain any reduction or waiver of the initial sales
charge, 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 broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charge is imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
B-27
<PAGE>
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the
Fund--Reducing or Waiving Class A's Initial Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual,
- the individual's spouse, their children and their parents,
- the individual's and spouse's Individual Retirement Account (IRA),
- any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners),
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children,
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse, and
- one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. The value of shares held directly with the Transfer Agent
and through your broker will not be aggregated to determine the reduced sales
charge. The value of existing holdings for purposes of determining the reduced
sales charge is calculated using the maximum offering price (NAV plus maximum
sales charge) as of the previous business day. The Distributor or the Transfer
Agent must be notified at the time of purchase that the investor is entitled to
a reduced sales charge. The reduced sales charge will be granted subject to
confirmation of the investor's holdings. Rights of Accumulation are not
available to individual participants in any retirement or group plans.
LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at NAV by entering into a Letter of Intent
whereby they agree to enroll, within a thirteen-month period, a specified number
of eligible employees or participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent,
Prudential or its affiliates and through your broker will not be aggregated to
determine the reduced sales charge.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor
B-28
<PAGE>
will be responsible for paying any applicable sales charge. The effective date
of an Investment Letter of Intent (except in the case of retirement and group
plans), may be back-dated up to 90 days, in order that any investments made
during this 90-day period, valued at the purchaser's cost, can be applied to the
fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of Shares--
Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential, Prudential Securities or its subsidiaries
(Prudential Securities or Subsidiary Prototype Benefit Plans), Class C shares
may be purchased at NAV by participants who are repaying the loans made from
such plans to the participant.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified retirement
and deferred compensation plans participating in a PruArray Plan and other plans
for which Prudential provides administrative or recordkeeping services.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (2) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Prusec; and (3) investors purchasing shares
through other brokers. This waiver is not available to investors who purchase
shares directly from the Transfer Agent. You must notify the Transfer Agent
directly or through your broker if you are entitled to this waiver and provide
the Transfer Agent with such supporting documents as it may deem appropriate.
B-29
<PAGE>
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by the
following categories of investors:
- pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue
Code and non-qualified plans for which the Fund is an available option
(collectively, Benefit Plans), provided such Benefit Plans (in combination
with other plans sponsored by the same employer or group of related
employers) have at least $50 million in defined contribution assets,
- participants in any fee-based program or trust program sponsored by an
affiliate of the Distributor which includes mutual funds as investment
options and for which the Fund is an available option,
- 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,
- Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996, (1)
were Class Z shareholders of the Prudential Mutual Funds or (2) executed a
letter of intent to purchase Class Z shares of the Prudential Mutual
Funds,
- [the Prudential Securities Cash Balance Pension Plan, an employee defined
benefit plan sponsored by Prudential Securities,]
- current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund),
- employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan, and
- Prudential with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finder's fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
Class Z shares of the Fund may also be purchased by certain savings,
retirement and deferred compensation plans, qualified or non-qualified under the
Internal Revenue Code, provided that (1) the plan purchases shares of the Fund
pursuant to an investment management agreement with The Prudential Insurance
Company of America or its affiliates, (2) the Fund is an available investment
option under the agreement and (3) the plan will participate in the PruArray and
SmartPath Programs (benefit plan recordkeeping services) sponsored by PMFS.
These plans include pension, profit-sharing, stock-bonus or other employee
benefit plans under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for that day (that is,
4:15 P.M., New York time) in order to receive that day's NAV. Your broker will
be responsible for furnishing all necessary documentation to the Distributor and
may charge you for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence of
authority acceptable to the Transfer Agent must be
B-30
<PAGE>
submitted before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, and your shares
are held directly with the Transfer Agent, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices. In the case of redemptions
from a PruArray Plan, if the proceeds of the redemption are invested in another
investment option of the plan in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (4) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.
REDEMPTION IN KIND. If the Directors determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a PRO RATA basis.) You must notify the Transfer Agent,
either directly or through the Distributor or your broker, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales Charge"
below. Exercise of the repurchase privilege will generally not affect federal
tax treatment of any gain realized upon redemption. However, if the redemption
was made within a 30 day period of the repurchase and if the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, may not
be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase (one year in the case of shares bought
before November 2, 1998) will be subject to a 1% CDSC. The CDSC will be deducted
from the redemption proceeds and reduce the amount paid to 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 18 months, in the case of Class C shares (one year for Class C shares
purchased before
B-31
<PAGE>
November 2, 1998). A CDSC will be applied on the lesser of the original purchase
price or the current value of the shares being redeemed. Increases in the value
of your shares or shares acquired through reinvestment of dividends or
distributions are not subject to a CDSC. The amount of any CDSC will be paid to
and retained by the Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE 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>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years and 18 months
for Class C shares (one year for Class C shares bought before November 2, 1998);
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at rate of 4% (the applicable rate in the second year after purchase)
for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder 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), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 or a periodic distribution based on life
expectancy;
(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and
(4) 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.
B-32
<PAGE>
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 (that is, following
voluntary or involuntary termination of employment or following retirement).
Under no circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan, unless such redemptions otherwise
qualify for a waiver as described above. In the case of Direct Account and
Prudential Securities or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential Mutual Funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable Value
Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or, in
the case of a trust, a copy of the grantor's death
certificate, plus a copy of the trust agreement
identifying the grantor.
Disability--An individual will be A copy of the Social Security Administration award
considered disabled if he or she is letter or a letter from a physician on the
unable to engage in any substantial physician's letterhead stating that the shareholder
gainful activity by reason of any (or, in the case of a trust, the grantor) is
medically determinable physical or permanently disabled. The letter must also indicate
mental impairment which can be expected the date of disability.
to result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the custodial
Custodial Account firm indicating (i) the date of birth of the
shareholder and (ii) that the shareholder is over
age 59 and is taking a normal distribution--signed
by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the
plan administrator/ trustee on company letterhead
indicating the amount of the excess and whether or
not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in a PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to the
extent that the redemption proceeds are invested in The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account and units of The Stable Value
Fund.
B-33
<PAGE>
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a broker not affiliated with Prudential and for
which the broker provides administrative or recordkeeping services.
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 purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A than Class B shares
converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than five full business days
prior to the record date to have subsequent dividends or distributions sent in
cash rather than reinvested. In the case of recently purchased shares for which
B-34
<PAGE>
registration instructions have not been received on the record date, cash
payment will be made directly to the broker. Any shareholder who receives a cash
payment representing a dividend or distribution may reinvest such dividend or
distribution at NAV by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the NAV
per share next determined after receipt of the check or proceeds by the Transfer
Agent. Such shareholder will receive credit for any CDSC paid in connection with
the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. For retirement and group plans having a limited menu of Prudential
Mutual Funds, the exchange privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
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. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Funds
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
shares of certain other Prudential Mutual Funds, shares of Prudential Government
Securities Trust (Short-Intermediate Term Series) and shares of the money market
funds specified below. No fee or sales load will be imposed upon the exchange.
Shareholders of money market funds who acquired such shares upon exchange of
Class A shares may use the exchange privilege only to acquire Class A shares of
the Prudential Mutual Funds participating in the exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
B-35
<PAGE>
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by the
fund in which shares were initially purchased and the purchase date will be
deemed to be the date of the initial purchase, rather than the date of the
exchange.
Class B and Class C shares of the Fund may also be exchanged for Class B and
Class C shares, respectively, of Prudential Special Money Market Fund, Inc.
without imposition of any CDSC at the time of exchange. Upon subsequent
redemption from such money market fund or after re-exchange into the Fund, such
shares will be subject to the CDSC calculated without regard to the time such
shares were held in the money market fund. In order to minimize the period of
time in which shares are subject to a CDSC, shares exchanged out of the money
market fund will be exchanged on the basis of their remaining holding periods,
with the longest remaining holding periods being transferred first. In measuring
the time period shares are held in a money market fund and "tolled" for purposes
of calculating the CDSC holding period, exchanges are deemed to have been made
on the last day of the month. Thus, if shares are exchanged into the Fund from a
money market fund during the month (and are held in the Fund at the end of the
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on 60 days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
B-36
<PAGE>
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years............................................................ $ 110 $ 165 $ 220 $ 275
20 Years............................................................ 176 264 352 440
15 Years............................................................ 296 444 592 740
10 Years............................................................ 555 833 1,110 1,388
5 Years............................................................ 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Investment Plan."
- ------------------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The investor's
bank must be a member of the Automatic Clearing House System. Stock certificates
are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan.
The Transfer Agent, the Distributor or your broker, acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (1) the purchase of Class
A shares and (2) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly if used in connection with a retirement plan.
B-37
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7)of the Internal Revenue Code of 1986, as amended (the Internal Revenue
Code) are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, and the administration,
custodial fees and other details are available from the Distributor or the
Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ------------- -------- --------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- ------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as, to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial adviser
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Fund will compute its NAV at 4:15 P.M., New York time, on each day the New York
Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Fund shares have been received or days on which changes
in the value of the Fund's portfolio securities do not affect NAV. In the event
the New York Stock Exchange closes early on any business day, the NAV of a
Fund's shares shall be determined at a time between such closing and 4:15 P.M.,
New York time. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
B-38
<PAGE>
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sales price on such exchange system on the day of valuation, or, if there
was no sale on such day, the mean between the last bid and asked prices on such
day, or at the bid price on such day in the absence of an asked price. Corporate
bonds (other than convertible debt securities) and U.S. Government securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued on the basis
of valuations provided by an independent pricing agent or principal market maker
which uses information with respect to transactions in bonds, quotations from
bond dealers, agency ratings, market transactions in comparable securities and
various relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of trading on the applicable commodities exchange or
board of trade or, if there was no sale on the applicable commodities exchange
or board of trade on such day, at the mean between the most recently quoted bid
and asked prices on such exchange or board of trade. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
current rate obtained from a recognized bank or dealer, and foreign currency
forward contracts are valued at the current cost of covering or offsetting such
contracts. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors), does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or the
Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, Subadviser, Board of
Directors or Valuation Committee to materially affect the value of the security.
Short-term debt securities are valued at cost, with interest accrued or discount
amortized to the date of maturity, if their original maturity was 60 days or
less, unless this is determined by the Board of Directors not to represent fair
value. Short-term securities with remaining maturities of more than 60 days, for
which market quotations are readily available, are valued at their current
market quotations as supplied by an independent pricing agent or principal
market maker.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of Class A, Class B
or Class C shares because Class Z shares are not subject to any distribution or
service fee. [It is expected, however, that the NAV per share of each class will
tend to converge immediately after the recording of dividends, if any, which
will differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes].
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income tax
on income and capital gains which are distributed to shareholders and permits
net capital gains of the Fund (I.E., the excess of net long-term capital gains
over net short-term capital losses) to be treated as long-term capital gains of
the shareholders, regardless of how long shareholders have held their shares in
the Fund. Net capital gains of the Fund which are available for distribution to
shareholders will be computed by taking into account any capital loss
carryforward of the Fund.
Qualification of the Fund as a regulated investment company requires, among
other things, that (a) the Fund derive at least 90% of the Fund's annual gross
income (without reduction for losses from the sale or other disposition of
securities or foreign currencies) from interest, dividends, payments with
respect to securities loans and gains from the sale or other disposition of
securities or options thereon or foreign currencies, or other income (including
but not limited to gains from options, futures or forward contracts) derived
with respect to its business of investing in such securities or currencies; (b)
the Fund diversify its
B-39
<PAGE>
holdings so that, at the end of each quarter of the taxable year (i) at least
50% of the value of the Fund's assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the value of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government securities); and (c) the Fund distribute to its shareholders at
least 90% of its net investment income and net short-term gains (I.E., the
excess of net short-term capital gains over net long-term capital losses) in
each year.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Fund on securities lapses or
is terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize short-term capital
gain or loss. If securities are sold by the Fund pursuant to the exercise of a
call option written by it, the Fund will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. Certain of the Fund's transactions may be subject to wash
sale, short sale, constructive sale, anti-conversion and straddle provisions of
the Internal Revenue Code. In addition, debt securities acquired by the Fund may
be subject to original issue discount and market discount rules.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and foreign currency forward exchange contracts in which the
Fund may invest. See "Description of the Fund, Its Investments and Risks." These
investments will generally constitute Section 1256 contracts and will be
required to be "marked to market" for federal income tax purposes at the end of
the Fund's taxable year; that is, treated as having been sold at market value.
Except with respect to certain foreign currency forward contracts, 60% of any
gain or loss recognized on such deemed sales and on actual dispositions will be
treated as long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending upon the holding period of the option. In
addition, positions which are part of a "straddle" will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a "straddle," the Fund may be required to defer the
recognition of losses on positions it holds to the extent of any unrecognized
gain on offsetting positions held by the Fund.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on foreign currency
forward contracts or dispositions of debt securities denominated in a foreign
currency attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition also
are treated as ordinary gain or loss. These gains, referred to under the
Internal Revenue Code as "Section 988" gains or losses, increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary dividend, reducing each
shareholder's basis in his or her Fund shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of the
Fund, the investor should carefully consider the impact of dividends, or capital
gains distributions, which are expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
B-40
<PAGE>
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Net capital gain dividends paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividends and capital
gain distributions which are effectively connected with a U.S. trade or business
of the foreign shareholder.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital gain
net income, gain or loss from Section 1256 contracts (described above) and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are not eligible for the dividends-received deduction.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares and lower
on Class A shares in relation to Class Z shares. The per share distributions of
net capital gains, if any, will be paid in the same amount for Class A, Class B,
Class C and Class Z shares. See "Net Asset Value."
The Fund is required to distribute 98% of its ordinary gains in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
twelve months ended on October 31 of such calendar year. In addition, the Fund
must distribute during the calendar year all undistributed ordinary income and
undistributed capital gain net income from the prior calendar year or the
twelve-month period ending on October 31 of such prior calendar year,
respectively. To the extent it does not meet these distribution requirements,
the Fund will be subject to a nondeductible 4% excise tax on the undistributed
amount. For purposes of this excise tax, income on which the Fund pays income
tax is treated as distributed.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations that, in general, meet either
of the following tests: (a) at least 75% of its gross income is passive or (b)
an average of at least 50% of its assets produce, or are held for the production
of, passive income. If the Fund acquires and holds stock in a PFIC beyond the
end of the year of its acquisition, the Fund will be subject to federal income
tax on portion of any "excess distribution" received on the stock or of any gain
from disposition of the stock (collectively, PFIC income), plus interest
thereon, even if the Fund distributes the PFIC income as a taxable dividend to
its shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders. The Fund may make a
"mark-to-market" election with respect to any marketable stock it holds of a
PFIC. If the election is in effect, at the end of the Fund's taxable year, the
Fund will recognize the amount of gains, if any, as ordinary income with respect
to PFIC stock. No loss will be recognized on PFIC stock, except to the extent of
gains recognized in prior years. Alternatively, the Fund, if it meets certain
requirements, may elect to treat any PFIC in which it invests as a "qualified
electing fund," in which case, in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its PRO
RATA share of the qualified electing fund's annual ordinary earnings and net
capital gain, even if they are not distributed to the Fund; those amounts would
be subject to the distribution requirements applicable to the Fund described
above.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary. The Fund does not expect
to meet the requirements of the Internal Revenue Code for "passing-through" to
its shareholders any foreign income taxes paid.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.
B-41
<PAGE>
Average annual total return is computed according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
Below are the average annual total returns for the Fund's share classes for
the periods ended March 31, 1999.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
--------- --------- --------- -------------------
<S> <C> <C> <C> <C>
Class A % N/A N/A % (11-10-97)
Class B N/A N/A (11-10-97)
Class C N/A N/A (11-10-97)
Class Z N/A N/A (11-10-97)
</TABLE>
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus of the Fund.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
Below are the aggregate total returns for the Fund's share classes for the
periods ended March 31, 1999.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
--------- --------- --------- -------------------
<S> <C> <C> <C> <C>
Class A % N/A N/A % (11-10-97)
Class B N/A N/A (11-10-97)
Class C N/A N/A (11-10-97)
Class Z N/A N/A (11-10-97)
</TABLE>
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. The yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
6
YIELD=2[(a-b+1) -1]
---
cd
<TABLE>
<C> <S>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund's 30-day yields for the 30 days ended March 31, 1999 were %, %,
% and % for the Class A, Class B, Class C and Class Z shares, respectively.
B-42
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERFORMANCE
COMPARISON OF
DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(1/1926-12/31/1998)
<S> <C> <C>
Common Stocks Long-Term Govt. Bonds Inflation
11.2% 5.3% 3.1%
</TABLE>
- ------------------------
(1)SOURCE: IBBOTSON ASSOCIATES. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only and is not intended to represent the performance of any particular
investment or fund. Investors cannot invest directly in an index. Past
performance is not a guarantee of future results.
B-43
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF PRUDENTIAL SMALL-CAP QUANTUM
MARCH 31, 1998 FUND, INC.
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ---------------------------------------------------------------------
LONG-TERM INVESTMENTS--96.9%
COMMON STOCKS
- ---------------------------------------------------------------------
BASIC INDUSTRY--13.7%
20,100 Alaska Air Group, Inc.(a) $ 1,089,169
121,100 AMCOL International Corp. 1,831,637
58,100 Applied Industrial Technologies,
Inc. 1,565,069
60,800 Barnes Group, Inc. 2,025,400
74,900 BE Aerospace, Inc.(a) 2,106,562
97,100 Blount International, Inc. 2,888,725
38,300 Carbide/Graphite Group, Inc.(a) 1,149,000
58,100 Chemed Corp. 2,382,100
38,200 Circle International Group, Inc. 1,012,300
21,400 Cleveland-Cliffs, Inc. 1,150,250
44,100 Commercial Intertech Corp. 1,052,888
19,800 Hadco Corp.(a) 784,575
112,400 IMCO Recycling, Inc. 1,952,950
51,400 Innovex, Inc. 1,252,875
53,900 Kaydon Corp. 2,203,162
35,800 Lone Star Industries, Inc. 2,485,862
40,100 M.S. Carriers, Inc.(a) 1,358,388
52,300 Maverick Tube Corp.(a) 925,056
50,100 Medusa Corp. 3,062,362
11,600 NACCO Industries, Inc. 1,554,400
52,200 Republic Group, Inc. 1,063,575
35,500 Texas Industries, Inc. 2,052,344
32,200 Tredegar Industries, Inc. 2,332,487
67,600 USFreightways Corp. 2,433,600
83,700 WD-40 Co. 2,547,619
63,900 Wellman, Inc. 1,381,837
46,900 Wolverine Tube, Inc.(a) 1,881,862
57,600 Zeigler Coal Holding Co. 986,400
------------
48,512,454
- ---------------------------------------------------------------------
BUSINESS SERVICES--2.2%
42,200 Abacus Direct Corp.(a) 2,204,950
96,300 Dames & Moore Group 1,281,994
56,100 Hooper Holmes, Inc. 1,199,138
44,600 Merrill Corporation 981,200
67,200 TMP Worldwide, Inc.(a) 2,142,000
------------
7,809,282
- ---------------------------------------------------------------------
CAPITAL SPENDING--3.0%
59,100 Anixter International, Inc.(a) 1,089,656
33,800 DT Industries, Inc. 1,297,075
60,100 Flowserve Corp. 1,960,762
72,300 Graco, Inc. 2,191,594
49,000 Halter Marine Group, Inc.(a) 777,875
55,700 Manitowoc Co., Inc. 2,151,412
48,450 World Fuel Services Corp. 1,065,900
------------
10,534,274
- ---------------------------------------------------------------------
CONSUMER CYCLICAL--6.2%
29,600 Arvin Industries, Inc. 1,211,750
61,400 Carlisle Companies, Inc. 3,016,275
85,700 Champion Enterprises, Inc.(a) 2,287,119
53,500 D. R. Horton, Inc. 1,136,875
64,900 Intermet Corp. 1,460,250
77,600 Kaufman & Broad Home Corp. 2,526,850
60,200 La-Z-Boy, Inc. 3,006,237
45,500 MascoTech, Inc. 1,049,344
64,500 Myers Industries, Inc. 1,346,438
36,400 Standard Products Co. 1,198,925
51,300 Superior Industries International,
Inc. 1,702,519
90,700 Wynn's International, Inc. 2,063,425
------------
22,006,007
- ---------------------------------------------------------------------
CONSUMER SERVICES--16.6%
113,300 ADVO, Inc.(a) 3,129,912
14,600 Anchor Gaming(a) 1,084,050
51,200 Applebee's International, Inc. 1,184,000
184,700 Arctic Cat, Inc. 1,720,019
158,000 Books-A-Million, Inc.(a) 918,375
131,000 Buffets, Inc.(a) 1,801,250
</TABLE>
- ---------------------------------------------------------------------
See Notes to Financial Statements. B-44
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF PRUDENTIAL SMALL-CAP QUANTUM
MARCH 31, 1998 FUND, INC.
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ---------------------------------------------------------------------
CONSUMER SERVICES (CONT'D.)
58,100 Cannondale Corp.(a) $ 962,281
31,100 CapStar Hotel Co.(a) 1,078,781
70,600 Claire's Stores, Inc. 1,619,387
54,400 Dress Barn, Inc.(a) 1,564,000
69,400 Eagle Hardware & Garden, Inc.(a) 1,223,175
84,000 EZCORP, Inc.(a) 997,500
150,700 Foodmaker, Inc.(a) 2,919,812
45,500 Franklin Covey Co.(a) 1,106,219
130,400 Genesco, Inc.(a) 2,363,500
36,500 Goody's Family Clothing, Inc.(a) 1,615,125
116,000 Grand Casinos, Inc.(a) 1,979,250
81,800 Guilford Mills, Inc. 2,413,100
110,200 Guitar Center, Inc.(a) 2,603,475
88,400 Justin Industries 1,243,125
75,100 Kellwood Co. 2,318,712
53,700 Linens 'N Things, Inc.(a) 2,950,144
110,600 Luby's Cafeterias, Inc. 2,101,400
120,600 Macrovision Corp.(a) 2,216,025
93,600 Mohawk Industries, Inc.(a) 2,948,400
91,200 Nash-Finch Co. 1,812,600
76,500 Nautica Enterprises, Inc.(a) 2,352,375
45,800 North Face, Inc.(a) 1,110,650
45,600 Pomeroy Computer Resources, Inc.(a) 1,074,450
95,900 Rawlings Sporting Goods Co., Inc.(a) 1,306,638
71,300 Russ Berrie & Co., Inc. 2,161,281
65,500 Syms Corp.(a) 925,188
27,200 Timberland Co.(a) 1,944,800
------------
58,748,999
- ---------------------------------------------------------------------
CONSUMER STAPLES--3.3%
51,300 Canandaigua Brands, Inc.(a) 2,930,512
146,600 DIMON, Inc. 2,446,388
64,300 Nutramax Products, Inc.(a) 807,769
94,600 Smithfield Foods, Inc.(a) 3,263,700
58,500 Swisher International Group, Inc.(a) 760,500
50,100 Windmere-Durable Holdings, Inc.(a) 1,302,600
------------
11,511,469
- ---------------------------------------------------------------------
ENERGY--6.6%
73,900 Atmos Energy Corp. 2,189,287
38,100 Atwood Oceanics, Inc.(a) 2,059,781
33,500 Cliffs Drilling Co.(a) 1,383,969
50,200 Eastern Enterprises, Inc. 2,158,600
109,400 Key Energy Group, Inc.(a) 1,784,588
56,900 New Jersey Resources Corp. 2,229,769
88,100 Patterson Energy, Inc.(a) 1,013,150
83,600 Piedmont Natural Gas Co., Inc. 2,905,100
62,500 Pool Energy Services Co.(a) 1,460,938
96,700 Pride International, Inc.(a) 2,308,712
40,500 Trico Marine Services, Inc.(a) 853,031
27,700 Veritas DGC, Inc.(a) 1,400,581
74,000 Vintage Petroleum, Inc. 1,554,000
------------
23,301,506
- ---------------------------------------------------------------------
FINANCE--15.0%
104,400 ALLIED Group, Inc. 3,366,900
63,800 American Heritage Life Investment Corp. 1,315,875
68,700 AMRESCO, Inc.(a) 2,249,925
43,600 Arthur J. Gallagher & Co. 1,888,425
23,800 Community First Bankshares, Inc. 1,213,800
68,500 Delta Financial Corp.(a) 1,185,906
39,600 E*TRADE Group, Inc.(a) 987,525
43,230 Fidelity National Financial, Inc. 1,588,703
52,050 First American Financial Corp. 3,331,200
50,100 FirstBank Puerto Rico 2,307,731
96,100 Foremost Corp. of America 2,354,450
37,100 HUBCO, Inc. 1,421,394
35,300 IPC Holdings Ltd., ADR (Bermuda) 1,138,425
38,000 Jefferies Group, Inc. 2,147,000
67,600 John Alden Financial Corp. 1,457,625
30,100 Legg Mason, Inc. 1,785,306
91,800 Orion Capital Corp. 5,020,312
79,200 Raymond James Financial, Inc. 3,450,150
155,400 Rollins Truck Leasing Corp. 2,146,462
70,000 Selective Insurance Group, Inc. 1,881,250
79,600 TR Financial Corp. 2,766,100
52,300 Webster Financial Corp. 3,634,850
</TABLE>
- ---------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF PRUDENTIAL SMALL-CAP QUANTUM
MARCH 31, 1998 FUND, INC.
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ---------------------------------------------------------------------
FINANCE (CONT'D.)
69,400 Westcorp $ 1,162,450
50,800 XTRA Corp. 3,276,600
------------
53,078,364
- ---------------------------------------------------------------------
HEALTHCARE--6.3%
46,500 ADAC Laboratories(a) 1,075,313
69,100 Atria Communities, Inc.(a) 1,330,175
184,100 BioSource International, Inc.(a) 1,185,144
42,300 Cooper Cos., Inc.(a) 1,795,106
25,000 ESC Medical Systems Ltd., ADR
(Israel)(a) 878,125
60,500 FPA Medical Management, Inc.(a) 933,969
64,200 Integrated Health Services, Inc. 2,523,863
55,000 Mariner Health Group, Inc.(a) 941,875
91,700 Maxxim Medical, Inc.(a) 2,630,644
85,100 PMR Corp.(a) 1,340,325
214,700 Roberts Pharmaceutical Corp.(a) 3,059,475
46,000 Sabratek Corp.(a) 1,610,000
21,600 Theragenics Corp.(a) 1,375,650
55,300 VISX, Inc.(a) 1,382,500
------------
22,062,164
- ---------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS--1.8%
71,100 Capstead Mortgage Corp. 1,404,225
88,800 JP Realty, Inc. 2,253,300
89,800 Macerich Co. 2,671,550
------------
6,329,075
- ---------------------------------------------------------------------
TECHNOLOGY--15.2%
71,100 Advanced Digital Information
Corp.(a) 1,119,825
70,100 Aliant Communications, Inc. 2,383,400
83,600 Alpha Industries, Inc.(a) 1,290,575
24,600 Aspect Development, Inc.(a) 1,349,925
31,900 Avid Technology, Inc.(a) 1,311,888
68,200 Benchmark Electronics, Inc.(a) 1,624,012
78,500 C-Cube Microsystems, Inc.(a) 1,462,062
25,200 CIBER, Inc.(a) 1,762,425
44,400 Coherent, Inc.(a) 1,073,925
70,700 Dallas Semiconductor Corp. 2,377,287
87,600 Digital Microwave Corp.(a) 1,292,100
46,900 DII Group, Inc.(a) 1,008,350
46,900 Documentum, Inc.(a) 2,538,462
75,500 Emulex Corp.(a) 688,938
32,700 General Binding Corp. 1,064,794
36,300 GenRad, Inc.(a) 1,127,569
31,800 Harbinger Corp.(a) 1,200,450
48,300 Harmon Industries, Inc. 984,113
48,100 Inacom Corp.(a) 1,328,762
66,200 Input/Output, Inc.(a) 1,547,425
32,900 Integrated Circuit Systems, Inc.(a) 688,844
42,200 Kemet Corp.(a) 783,338
99,700 Larscom, Inc.(a) 825,641
30,700 Mastech Corp.(a) 1,564,741
75,900 Optical Coating Laboratory, Inc. 977,213
60,100 Park Electrochemical Corp. 1,551,331
100,700 Pioneer-Standard Electronics, Inc. 1,233,575
61,400 Rainbow Technologies, Inc.(a) 1,581,050
27,000 Sanmina Corp.(a) 1,888,312
38,700 Structural Dynamics Research
Corp.(a) 962,663
50,000 Symantec Corp.(a) 1,346,875
100,200 SymmetriCom, Inc.(a) 713,925
28,000 Technitrol, Inc. 1,097,250
19,400 United Stationers, Inc.(a) 1,199,163
72,500 Unitrode Corp.(a) 1,350,312
87,300 Vanstar Corp.(a) 1,091,250
38,000 Vantive Corp.(a) 1,389,375
87,600 VLSI Technology, Inc.(a) 1,642,500
26,900 Whittman-Hart, Inc.(a) 1,217,225
47,000 XcelleNet, Inc.(a) 890,063
40,000 Xylan Corp.(a) 975,000
------------
53,505,933
- ---------------------------------------------------------------------
UTILITIES--7.0%
31,300 Aquarion Co. 1,015,294
60,900 Central Hudson Gas & Electric 2,656,762
90,300 Central Louisiana Electric Company,
Inc. 3,092,775
77,800 Commonwealth Energy System 3,102,275
31,900 Connecticut Energy Corp. 980,925
128,000 Energen Corp. 2,816,000
</TABLE>
- ---------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF PRUDENTIAL SMALL-CAP QUANTUM
MARCH 31, 1998 FUND, INC.
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ---------------------------------------------------------------------
UTILITIES (CONT'D.)
56,100 Indiana Energy, Inc. $ 1,707,544
64,300 Madison Gas & Electric Co. 1,398,525
30,900 Otter Tail Power Co. 1,162,613
19,800 Pacific Gateway Exchange, Inc.(a) 1,133,550
40,000 Premiere Technologies, Inc.(a) 1,385,000
55,800 Sierra Pacific Resources 2,095,987
32,500 Southern California Water Co. 845,000
24,300 WICOR, Inc. 1,175,513
------------
24,567,763
Total long-term investments
(cost $315,048,618) 341,967,290
------------
PRINCIPAL
AMOUNT
(000)
- ---------
SHORT-TERM INVESTMENT--3.0%
REPURCHASE AGREEMENT
- ---------------------------------------------------------------------
$ 10,590 Joint Repurchase Agreement Account,
5.95%, 4/1/98
(cost $10,590,000; Note 5) 10,590,000
------------
- ---------------------------------------------------------------------
TOTAL INVESTMENTS--99.9%
(cost $325,638,618; Note 4) 352,557,290
Other assets in excess of
liabilities--0.1% 401,957
------------
Net Assets--100% $352,959,247
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS MARCH 31, 1998
----------------
<S> <C>
Investments, at value (cost $325,638,618).................................................................. $ 352,557,290
Cash....................................................................................................... 3,608
Receivable for Fund shares sold............................................................................ 1,178,355
Dividends and interest receivable.......................................................................... 190,334
Prepaid registration fees.................................................................................. 177,859
Deferred organizational costs.............................................................................. 144,257
--------------
Total assets............................................................................................ 354,251,703
--------------
LIABILITIES
Payable for Fund shares reacquired......................................................................... 778,514
Distribution fee payable................................................................................... 215,316
Management fee payable..................................................................................... 174,175
Accrued expenses........................................................................................... 124,451
--------------
Total liabilities....................................................................................... 1,292,456
--------------
NET ASSETS................................................................................................. $ 352,959,247
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................................... $ 32,268
Paid-in capital in excess of par........................................................................ 321,886,640
--------------
321,918,908
Accumulated net realized gain on investments............................................................ 4,121,667
Net unrealized appreciation on investments.............................................................. 26,918,672
--------------
Net assets, March 31, 1998................................................................................. $ 352,959,247
--------------
--------------
Class A:
Net asset value and redemption price per share
($115,620,841 DIVIDED BY 10,556,196 shares of common stock issued and outstanding)................... $10.95
Maximum sales charge (5% of offering price)............................................................. .58
--------------
Maximum offering price to public........................................................................ $11.53
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($196,670,835 DIVIDED BY 17,992,721 shares of common stock issued and outstanding)................... $10.93
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($36,628,050 DIVIDED BY 3,350,920 shares of common stock issued and outstanding)..................... $10.93
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($4,039,521 DIVIDED BY 368,612 shares of common stock issued and outstanding)........................ $10.96
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------
- --------------------------------------------------------------
<TABLE>
<CAPTION>
November 10, 1997(a)
Through
NET INVESTMENT INCOME March 31, 1998
--------------------
<S> <C>
Income
Dividends (net of foreign witholding
taxes of $752)................... $ 1,520,000
Interest............................ 521,019
--------------------
Total income..................... 2,041,019
--------------------
Expenses
Management fee...................... 726,972
Distribution fee--Class A........... 102,807
Distribution fee--Class B........... 658,582
Distribution fee--Class C........... 131,344
Registration fees................... 188,000
Transfer agent's fees and
expenses......................... 115,000
Reports to shareholders............. 45,000
Custodian's fees and expenses....... 45,000
Audit fees and expenses............. 25,000
Legal fees and expenses............. 15,000
Amortization of deferred
organizational expenses.......... 9,928
Directors' fees and expenses........ 9,000
Miscellaneous....................... 1,268
--------------------
Total expenses................... 2,072,901
--------------------
Net investment loss.................... (31,882)
--------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on:
Investment transactions............. 4,186,668
Financial futures contracts......... 4,565
--------------------
4,191,233
--------------------
Net change in unrealized appreciation
on investments...................... 26,918,672
--------------------
Net gain on investments................ 31,109,905
--------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.............. $ 31,078,023
--------------------
--------------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------
- --------------------------------------------------------------
<TABLE>
<CAPTION>
November 10, 1997(A)
INCREASE (DECREASE) IN Through
NET ASSETS March 31, 1998
--------------------
<S> <C>
Operations
Net investment loss.................. $ (31,882)
Net realized gain on investments..... 4,191,233
Net change in unrealized appreciation
on investments.................... 26,918,672
--------------------
Net increase in net assets resulting
from operations................... 31,078,023
--------------------
Distributions in excess of net
investment income (Note 1)
Class A.............................. (97,677)
Class B.............................. (16,994)
Class C.............................. (3,484)
Class Z.............................. (3,733)
--------------------
(121,888)
--------------------
Fund share transactions (Note 6)
Net proceeds from shares sold........ 349,199,926
Net asset value of shares issued in
reinvestment of distributions..... 118,604
Cost of shares reacquired............ (27,415,418)
--------------------
Net increase in net assets from Fund
share transactions................ 321,903,112
--------------------
Total increase.......................... 352,859,247
NET ASSETS
Beginning of period..................... 100,000
--------------------
End of period........................... $352,959,247
--------------------
--------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prudential Small-Cap Quantum Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund was incorporated in Maryland on February 4,
1997. The Fund issued 2,500 shares each of Class A, Class B, Class C and
Class Z common stock for $100,000 on August 1, 1997 to Prudential Investments
Fund Management LLC ("PIFM"). Investment operations commenced on November 10,
1997. The investment objective of the Fund is long-term capital appreciation
by investing primarily in equity securities of small-cap U.S. companies.
- ------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITIES VALUATION: Securities listed on a securities exchange and Nasdaq
National Market System securities are valued at the last sales price on the
day of valuation, or, if there was no sale on such day, the mean between the
last bid and asked prices on such day, as provided by a pricing service.
Corporate bonds and U.S. Government securities are valued on the basis of
valuations provided by a pricing service or principle market makers. Options
traded on an exchange are valued at the mean between the most recently quoted
bid and asked prices on the respective exchange, and futures contracts and
options thereon are valued at their last sales prices as of the close of
trading on the applicable commodities exchange. Any security for which a
reliable market quotation is unavailable is valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying collateral securities, the value of which
exceeds the principal amount of the repurchase transaction including accrued
interest. To the extent that any repurchase transaction exceeds one business
day, the value of the collateral is marked-to-market on a daily basis to
ensure the adequacy of the collateral. If the seller defaults and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the
Fund may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities transactions
are recorded on the trade date. Realized gains and losses on sales of
investments are calculated on the identified cost basis. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the
accrual basis. Expenses are recorded on the accrual basis which may require
the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of
the day.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures
contract, the Fund is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount.
This amount is known as the "initial margin." Subsequent payments, known as
"variation margin," are made or received by the Fund each day, depending on
the daily fluctuations in the value of the underlying security. Such
variation margin is recorded for financial statement purposes on a daily
basis as unrealized gain or loss. When the contract expires or is closed, the
gain or loss is realized and is presented in the statement of operations as
net realized gain (loss) on financial futures contracts.
The Fund invests in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Fund intends to purchase,
against fluctuations in value. Under a variety of circumstances, the Fund may
not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts and the
underlying assets.
DIVIDENDS AND DISTRIBUTIONS: The Fund expects to pay dividends of net
investment income and distributions of net realized capital, if any,
annually. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
TAXES: It is the Fund's policy to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its taxable net income and net capital gains, if any, to its
shareholders. Therefore, no federal income tax provision is required.
- --------------------------------------------------------------------------------
B-50
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
DEFERRED ORGANIZATION EXPENSES: Approximately $154,000 of expenses were
incurred in connection with the organization of the Fund. These costs have
been deferred and are being amortized ratably over a period of 60 months from
the date the Fund commenced investment operations.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with "Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies."
The effect of applying this statement was to decrease accumulated net
investment loss by $153,770, decrease accumulated net realized gain on
investments by $69,566 and decrease paid in capital in excess of par by
$84,204 due to distributions paid from net investment income to satisfy
excise tax requirements which was subsequently offset by net investment
losses and certain expenses not deductible for tax purposes. Net investment
loss, net realized gains and net assets were not affected by this investment.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund
Management LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility
for all investment advisory services and supervises the subadviser's
performance of such services. PIFM has entered into a subadvisory agreement
with The Prudential Investment Corporation ("PIC"), doing business as
Prudential Investments ("PI," the Subadviser or the investment adviser); PIC
furnishes investment advisory services in connection with the management of
the Fund. PIFM pays for the cost of the subadviser's services, the
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an
annual rate of .60 of 1% of the average daily net assets of the Fund.
The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the "Class A, B and C Plans"), regardless of expenses
actually incurred by them. The distribution fees for Class A, B and C shares
are accrued daily and payable monthly. No distribution or service fees are
paid to PSI as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Class A, Class B and Class C Plans were .25%, 1% and 1%,
respectively, of the average daily net assets of Class A, Class B and Class C
shares for the period ended March 31, 1998.
PSI has advised the Fund that it has received approximately $4,295,000 in
front-end sales charges resulting from sales of Class A shares during the
period ended March 31, 1998. From these fees, PSI paid such sales charges,
which in turn paid commissions to salespersons and incurred other
distribution costs.
PSI advised the Fund that for the period ended March 31, 1998, it received
approximately $160,800 and $23,500 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM and PIC are wholly owned subsidiaries of The Prudential Insurance
Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), has a credit agreement (the "Agreement") with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000. Interest
on any such borrowings outstanding will be at market rates. The purpose of
the Agreement is to serve as an alternative source of funding for capital
share redemptions. The Fund did not borrow any amounts pursuant to the
Agreement during the period ended March 31, 1998. The Funds pay a commitment
fee at an annual rate of .055 of 1% on the unused portion of the credit
facility. The commitment fee is accrued and paid quarterly on a pro rata
basis by the Funds. The Agreement expired on December 30, 1997 and has been
extended through December 29, 1998 under the same terms.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent. During the period ended March 31,
1998, the Fund incurred fees of approximately $108,000 for the services of
PMFS. As of March 31, 1998, approximately $24,100 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to nonaffiliates.
- --------------------------------------------------------------------------------
B-51
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the period ended March 31, 1998 were $428,860,955 and
$117,950,485, respectively.
The federal income tax basis of the Fund's investments at March 31, 1998 was
substantially the same as for financial reporting purposes and, accordingly,
net unrealized appreciation for federal income tax purposes was $26,918,672
(gross unrealized appreciation--$38,500,013; gross unrealized
depreciation--$11,581,341).
- ------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. As of
March 31, 1998, the Fund has a .83% undivided interest in the repurchase
agreements in the joint account. The undivided interest for the Fund
represents $10,590,000 principal amount. As of such date, the repurchase
agreements in the joint account and the value of the collateral therefore
were as follows:
Credit Suisse First Boston Corp., 6.00%, in the principal amount of
$388,000,000, repurchase price $388,064,667, due 4/1/98. The value of the
collateral including accrued interest is $402,989,454.
Morgan Stanley, Dean Witter, Discover & Co., 5.94%, in the principal amount
of $125,000,000, repurchase price $125,020,625, due 4/1/98. The value of the
collateral including accrued interest is $127,500,925.
Salomon Smith Barney, 5.93%, in the principal amount of $388,000,000,
repurchase price $388,063,912, due 4/1/98. The value of the collateral
including accrued interest is $396,440,446.
SBC Warburg Dillon Read, Inc., 5.92%, in the principal amount of
$263,000,000, repurchase price $263,043,249, due 4/1/98. The value of the
collateral including accrued interest is $268,277,527.
UBS Securities, Inc., 5.95%, in the principal amount of $106,691,000,
repurchase price $106,708,634, due 4/1/98. The value of the collateral
including accrued interest is $108,827,671.
- ------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 5%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is
also available for shareholders who qualified to purchase Class A shares at
net asset value. Class Z shares are not subject to any sales charge and are
offered exclusively for sale to a limited group of investors.
There are 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.
As of March 31, 1998 Prudential owned 2,520 Class A shares, 2,520 Class B
shares, 2,520 Class C shares and 2,510 Class Z shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
- ------------------------------------- ---------- ------------
<S> <C> <C>
November 10, 1997(a) through
March 31, 1998:
Shares sold.......................... 11,854,211 $118,541,655
Shares issued in reinvestment of
distributions...................... 9,833 95,083
Shares reacquired.................... (1,310,348) (13,297,055)
---------- ------------
Net increase in shares outstanding... 10,553,696 $105,339,683
---------- ------------
---------- ------------
CLASS B
- -------------------------------------
November 10, 1997(a) through
March 31, 1998:
Shares sold.......................... 18,843,085 $188,337,566
Shares issued in reinvestment of
distributions...................... 1,695 16,395
Shares reacquired.................... (854,559) (8,722,973)
---------- ------------
Net increase in shares outstanding... 17,990,221 $179,630,988
---------- ------------
---------- ------------
CLASS C
- -------------------------------------
November 10, 1997(a) through
March 31, 1998:
Shares sold.......................... 3,713,146 $ 37,077,480
Shares issued in reinvestment of
dividends.......................... 354 3,426
Shares reacquired.................... (365,080) (3,723,232)
---------- ------------
Net increase in shares outstanding... 3,348,420 $ 33,357,674
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-52
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Z SHARES AMOUNT
- ------------------------------------- ---------- ------------
<S> <C> <C>
November 10, 1997(a) through
March 31, 1998:
Shares sold.......................... 528,277 $ 5,243,225
Shares issued in reinvestment of
distributions...................... 383 3,700
Shares reacquired.................... (162,548) (1,672,158)
---------- ------------
Net increase in shares outstanding... 366,112 $ 3,574,767
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
B-53
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
------------ ------------ ------------ ------------
November 10, November 10, November 10, November 10,
1997(a) 1997(a) 1997(a) 1997(a)
Through Through Through Through
March 31, March 31, March 31, March 31,
1998 1998 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 10.00 $ 10.00 $ 10.00 $10.00
------------ ------------ ------ -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)........................... .02 (.01) (.01) .02
Net realized and unrealized gain on investment
transactions........................................ .94 .94 .94 .95
------------ ------------ ------ -----
Total from investment operations.................... .96 .93 .93 .97
------------ ------------ ------ -----
LESS DISTRIBUTIONS
Distributions in excess of net investment income....... (.01) -- -- (.01)
------------ ------------ ------ -----
Net asset value, end of period......................... $ 10.95 $ 10.93 $ 10.93 $10.96
------------ ------------ ------ -----
------------ ------------ ------ -----
TOTAL RETURN(c):....................................... 9.60% 9.31% 9.31% 9.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $115,621 $196,671 $ 36,628 $4,039
Average net assets (000)............................... $106,453 $170,484 $ 34,000 $2,709
Ratios to average net assets(b):
Expenses, including distribution fees............... 1.22% 1.97% 1.97% 0.97%
Expenses, excluding distribution fees............... 0.97% 0.97% 0.97% 0.97%
Net investment income (loss)........................ .47% (.29)% (.29)% .51%
Portfolio turnover rate................................ 39% 39% 39% 39%
Average commission rate paid per share................. $ .0445 $ .0445 $ .0445 $.0445
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Small-Cap Quantum Fund, Inc.
LLP
1177 Avenue of the Americas
New York, New York
May 14, 1998
- -------------------------------------------------------------------------------
B-55
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF
SEPTEMBER 30, 1998 (UNAUDITED) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.5%
COMMON STOCKS
- ------------------------------------------------------------------------
BASIC INDUSTRIES--9.8%
45,300 AAR Corp. $ 889,012
21,600 Alaska Air Group, Inc. 735,750
105,500 AMCOL International Corp. 1,200,062
44,900 Applied Industrial Technologies,
Inc. 732,431
63,800 Barnes Group, Inc. 1,834,250
74,900 BE Aerospace, Inc.(a) 1,647,800
80,400 Building Materials Holdings Corp. 1,055,250
38,300 Carbide/Graphite Group, Inc. 426,088
21,400 Cleveland-Cliffs, Inc. 834,600
30,700 Coach USA, Inc. 757,906
44,100 Commercial Intertech Corp. 813,094
79,900 CTS Corp. 2,357,050
62,400 Innovex, Inc. 756,600
88,700 JLG Industries, Inc. 1,413,656
9,300 Lone Star Industries, Inc. 555,675
40,100 M.S. Carriers, Inc. 796,988
12,500 NACCO Industries, Inc. 1,250,000
64,000 Oregon Steel Mills, Inc. 752,000
52,200 Republic Group, Inc. 694,913
34,800 Skywest, Inc. 665,550
35,500 Texas Industries, Inc. 891,937
67,600 US Freightways Corp. 1,343,550
56,800 Wolverine Tube, Inc.(a) 1,196,350
------------
23,600,512
- ------------------------------------------------------------------------
BUSINESS SERVICES--2.2%
116,000 Bowne & Co., Inc. 1,964,750
50,900 Merrill Corporation 798,493
88,700 Norrell Corp. 1,330,500
29,000 Staffmark, Inc.(a) 529,250
19,100 TMP Worldwide, Inc.(a) 626,719
------------
5,249,712
- ------------------------------------------------------------------------
CAPITAL SPENDING--4.5%
36,500 Anixter International, Inc. 568,031
33,800 DT Industries, Inc. 574,600
38,200 Flowserve Corp. 773,550
49,000 Halter Marine Group, Inc. 557,375
51,300 Juno Lighting, Inc. 1,147,838
55,700 Manitowoc Co., Inc. 1,677,963
76,650 Smith AO Corp. 1,504,256
31,200 SPS Technologies, Inc.(a) 1,452,750
69,500 Thomas Industries, Inc. 1,489,906
43,200 Varlen Corp. 1,198,800
------------
10,945,069
- ------------------------------------------------------------------------
CONSUMER CYCLICAL--6.3%
39,200 Arvin Industries, Inc. 1,460,200
66,300 Champion Enterprises, Inc. 1,541,475
88,300 D.R. Horton, Inc. 1,412,800
228,500 Fedders Corp. 1,171,062
67,400 Intermet Corp. 855,138
77,600 Kaufman & Broad Home Corp. 1,818,750
60,900 Lennar Corp. 1,358,831
77,800 Lo Jack Corp.(a) 836,350
45,500 MascoTech, Inc. 819,000
69,000 Myers Industries, Inc. 1,587,000
35,200 Pulaski Furniture Corp. 792,000
58,900 Standard Pacific Corp. 831,963
41,200 Standard Products Co. 721,000
------------
15,205,569
- ------------------------------------------------------------------------
CONSUMER SERVICES--19.8%
113,300 ADVO, Inc. 2,768,769
19,100 Anchor Gaming 1,093,475
87,800 Applebee's International, Inc. 1,832,825
184,700 Arctic Cat, Inc. 1,650,756
121,400 Brightpoint, Inc. 933,263
94,600 Buffets, Inc. 1,022,863
78,900 Cato Corp. 917,213
67,300 Chicos Fas, Inc. 1,085,213
54,100 Claire Stores, Inc. 973,800
63,900 CPI Corp. 1,513,631
69,700 Discount Auto Parts, Inc. 1,677,156
54,400 Dress Barn, Inc.(a) 659,600
32,900 Ethan Allen Interiors, Inc. 1,192,625
138,700 Foodmaker, Inc. 2,175,856
56,800 Footstar, Inc. 1,288,650
39,000 Galey & Lord, Inc. 465,563
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-56
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF
SEPTEMBER 30, 1998 (UNAUDITED) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------------------
CONSUMER SERVICES (CONT'D.)
130,400 Genesco, Inc.(a) $ 709,050
116,000 Grand Casinos, Inc. 920,750
99,900 Group 1 Automotive, Inc. 1,498,500
77,400 Guilford Mills, Inc. 1,151,325
64,800 Justin Industries, Inc. 996,300
75,100 Kellwood Co. 2,018,312
57,600 Landry's Seafood Restaurant, Inc.(a) 388,800
110,600 Luby's Cafeterias, Inc. 1,783,425
83,600 Musicland Stores Corp.(a) 1,034,550
103,800 Nash Finch Co. 1,524,562
76,500 Nautica Enterprises, Inc. 1,429,594
45,800 North Face, Inc. 595,400
55,800 OshKosh B'Gosh, Inc. 1,157,850
42,100 Pillowtex Corp. 1,236,687
65,800 Pomeroy Computer Resources 1,093,925
69,200 Russ Berrie & Co., Inc. 1,319,125
102,000 Ryan's Family Steak Houses, Inc.(a) 1,217,625
110,500 Shuffle Master, Inc. 939,250
66,000 Sonic Automatic, Inc.(a) 1,307,625
25,900 Timberland Co. 945,350
29,200 Travel Services International,
Inc.(a) 396,025
78,300 Winnebago Ind, Inc. 880,875
80,600 Wolverine World Wide, Inc. 876,525
43,100 Zale Corp. 1,104,437
------------
47,777,125
- ------------------------------------------------------------------------
CONSUMER STAPLES--4.2%
51,600 Canandaigua Brands, Inc. 2,038,200
149,800 Chiquita Brands International, Inc. 1,582,262
146,600 DIMON, Inc. 1,548,463
35,600 Earthgrains Co. 1,101,375
51,900 Herbalife International, Inc.
(Class "A" Stock) 480,075
68,400 Schweitzer-Mauduit International,
Inc. 1,487,700
97,500 Smithfields Foods, Inc. 1,724,531
45,100 Windmere Durable Holdings, Inc. 253,688
------------
10,216,294
- ------------------------------------------------------------------------
ENERGY--5.0%
22,800 Atwood Oceanics, Inc. 474,525
33,500 Cliffs Drilling Company 661,625
86,500 Key Energy Group, Inc. 805,531
56,900 New Jersey Resources Corp. 2,027,063
89,500 Piedmont Natural Gas Co., Inc. 3,031,812
62,500 Pool Energy Services Co.(a) 570,313
96,700 Pride International, Inc.(a) 773,600
37,600 Trico Marine Services, Inc. 260,850
99,300 UGI Corp. 2,296,312
74,600 Varco International, Inc. 624,775
27,700 Veritas DGC, Inc. 462,244
------------
11,988,650
- ------------------------------------------------------------------------
FINANCE--18.0%
70,000 Allied Capital Corporation 1,242,500
45,100 Americredit Corp. 1,099,313
83,500 Amerus Life Holdings, Inc.
(Class "A" Stock) 1,831,781
68,700 AMRESCO, Inc.(a) 515,250
78,700 Arthur J. Gallagher & Co. 3,246,375
35,000 Banknorth Group, Inc. 1,023,750
36,700 Budget Group Incorporated 837,219
38,600 CMAC Investment Corp. 1,679,100
36,500 Cullen/Frost Bankers, Inc. 1,761,125
22,600 Delphi Financial Group, Inc.(a) 889,875
68,500 Delta Financial Corp.(a) 466,656
101,400 Downey Financial Corp. 2,414,587
37,800 Enhance Financial Services Group,
Inc. 1,117,463
80,330 Fidelity National Financial, Inc. 2,716,158
156,150 First American Financial Corp. 4,996,800
13,900 First Sierra Financial, Inc. 125,969
68,700 Foremost Corp. of America 1,258,069
94,000 Frontier Insurance Group, Inc. 1,245,500
70,864 HUBCO, Inc. 1,798,174
58,650 INSpire Insurance Solutions, Inc. 1,385,606
35,300 IPC Holdings Ltd., ADR (Bermuda) 811,900
52,300 Jefferies Group, Inc. 1,385,950
36,100 Leasing Solutions, Inc. 988,238
118,000 Morgan Keegan, Inc. 2,087,125
62,900 Raymond James Financial, Inc. 1,320,900
105,800 Selective Insurance Group, Inc. 2,023,425
35,000 Stewart Information Services Corp. 2,016,875
205,100 World Acceptance Corp. 1,153,687
------------
43,439,370
- ------------------------------------------------------------------------
HEALTH CARE--6.8%
57,300 Alpharma, Inc. 1,504,125
83,300 Ameripath, Inc. 1,239,087
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF
SEPTEMBER 30, 1998 (UNAUDITED) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------------------
HEALTH CARE (CONT'D.)
184,100 BioSource International, Inc. $ 575,313
51,000 Cooper Cos., Inc. 898,875
55,900 Empi, Inc. 894,400
56,600 ESC Medical Systems Ltd., ADR
(Israel)(a) 397,969
97,500 Genesis Health Ventures, Inc. 1,194,375
133,100 Integrated Health Services, Inc. 2,237,744
53,600 Mentor Corp. 609,700
84,200 PhyCor, Inc.(a) 421,000
127,600 Prime Medical Services, Inc.(a) 1,036,750
33,100 Quadramed Corp. 666,138
67,200 RehabCare Corp. 806,400
75,800 Sierra Health Services, Inc.(a) 1,492,312
55,400 Sola International, Inc.(a) 993,737
60,900 Wesley Jessen Visioncare, Inc. 1,294,125
------------
16,262,050
- ------------------------------------------------------------------------
TECHNOLOGY--13.2%
62,800 Advanced Digital Information Corp. 502,400
83,600 Alpha Industries, Inc.(a) 950,950
33,100 Apex Pc Solutions, Inc. 649,588
29,800 Avid Technology, Inc.(a) 709,613
168,800 Box Hill Systems Corp. 1,487,550
78,500 C-Cube Microsystems, Inc. 1,373,750
27,900 Computer Horizons Corp. 695,756
44,500 Concord Communications, Inc. 1,768,875
34,400 Flextronics International Ltd. 1,219,050
35,600 Gilat Satellite Networks Ltd. 1,602,000
48,300 Harmon Industries, Inc. 1,062,600
48,100 Inacom Corp.(a) 907,887
110,000 Input/Output, Inc. 873,125
72,000 Integrated Circuit Systems, Inc. 717,750
122,400 Invision Technologies, Inc. 726,750
73,800 Kellstrom Industries, Inc.(a) 1,023,975
68,500 Mail-Well, Inc. 586,531
41,900 Mapics, Inc. 924,419
48,700 Mastech Corp.(a) 1,171,844
68,100 MicroTouch Systems, Inc.(a) 851,250
59,900 MRV Communications Inc.(a) 370,631
56,600 Norstan, Inc.(a) 990,500
72,300 Optical Coating Lab, Inc. 1,296,881
65,800 Park Electrochemical Corp. 896,525
127,800 Pioneer-Standard Electronics, Inc. 806,738
63,400 Platinum Software Corp. 649,850
72,500 Plexus Corp.(a) 1,404,687
49,700 Systems & Computer Technology Corp. 639,888
40,100 Tech-Sym Corp.(a) 917,287
73,800 Technitrol, Inc. 1,476,000
38,800 United Stationers, Inc. 926,350
117,000 Vivid Technologies, Inc.(a) 829,969
51,000 Xylan Corp.(a) 675,750
------------
31,686,719
- ------------------------------------------------------------------------
UTILITIES--7.7%
90,300 Cleco Corp. 3,041,981
44,900 Conectiv, Inc. 1,024,281
34,300 Connecticut Energy Corp. 926,100
62,100 Eastern Utilities Associates 1,622,363
138,500 Energen Corp. 2,631,500
62,600 Madison Gas & Electric Co. 1,439,800
27,900 Otter Tail Power Co. 1,039,275
19,800 Pacific Gateway Exchange, Inc.(a) 732,600
55,800 Sierra Pacific Resources 2,165,737
75,700 United Illuminating Co. 3,955,325
------------
18,578,962
Total long-term investments
(cost $304,446,180) 234,950,032
------------
PRINCIPAL
AMOUNT
(000)
- ---------
SHORT-TERM INVESTMENT--2.5%
REPURCHASE AGREEMENT
$ 6,094 Joint Repurchase Agreement Account,
5.52%, 10/1/98 (Note 5)
(cost $6,094,000) 6,094,000
------------
- ------------------------------------------------------------------------
TOTAL INVESTMENTS--100.0%
(cost $310,540,180; Note 4) 241,044,032
Liabilities in excess of other
assets--0.0% (109,122)
------------
Net Assets--100% $240,934,910
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1998
-------------------
<S> <C>
Investments, at value (cost $310,540,180).............................................................. $ 241,044,032
Receivable for Fund shares sold........................................................................ 350,574
Dividends and interest receivable...................................................................... 242,268
Prepaid expenses....................................................................................... 164,757
------------------
Total assets........................................................................................ 241,801,631
------------------
LIABILITIES
Payable for Fund shares reacquired..................................................................... 619,017
Distribution fee payable............................................................................... 151,411
Management fee payable................................................................................. 73,591
Accrued expenses and other liabilities................................................................. 22,702
------------------
Total liabilities................................................................................... 866,721
------------------
NET ASSETS............................................................................................. $ 240,934,910
------------------
------------------
Net assets were comprised of:
Common stock, at par................................................................................ $ 30,549
Paid-in capital in excess of par.................................................................... 307,588,518
------------------
307,619,067
Accumulated net investment loss..................................................................... (490,006)
Accumulated net realized gain on investments........................................................ 3,301,997
Net unrealized depreciation on investments.......................................................... (69,496,148)
------------------
Net assets, September 30, 1998......................................................................... $ 240,934,910
------------------
------------------
Class A:
Net asset value and redemption price per share
($70,454,774 DIVIDED BY 8,897,747 shares of common stock issued and outstanding)................. $7.92
Maximum sales charge (5% of offering price)......................................................... .42
------------------
Maximum offering price to public.................................................................... $8.34
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share
($140,863,668 DIVIDED BY 17,894,871 shares of common stock issued and outstanding)............... $7.87
------------------
------------------
Class C:
Net asset value, offering price and redemption price per share
($23,986,617 DIVIDED BY 3,046,917 shares of common stock issued and outstanding)................. $7.87
------------------
------------------
Class Z:
Net asset value, offering price and redemption price per share
($5,630,851 DIVIDED BY 709,856 shares of common stock issued and outstanding).................... $7.93
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
NET INVESTMENT INCOME September 30, 1998
------------------
<S> <C>
INCOME
Dividends............................. $ 1,955,539
Interest.............................. 275,858
------------------
Total income....................... 2,231,397
------------------
EXPENSES
Distribution fee--Class A............. 124,084
Distribution fee--Class B............. 909,578
Distribution fee--Class C............. 162,843
Management fee........................ 957,425
Registration fees..................... 198,000
Transfer agent's fees and expenses.... 172,000
Reports to shareholders............... 80,000
Custodian's fees and expenses......... 55,000
Legal fees and expenses............... 23,000
Amortization of deferred
organizational cost................ 15,667
Audit fee............................. 11,000
Directors' fees....................... 8,000
Miscellaneous......................... 4,806
------------------
Total expenses..................... 2,721,403
------------------
Net investment loss...................... (490,006)
------------------
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS
Net realized loss on investment
transactions.......................... (819,670)
Net change in unrealized depreciation on
investments........................... (96,414,820)
------------------
Net loss on investments.................. (97,234,490)
------------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS................ $(97,724,496)
------------------
------------------
</TABLE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months November 10, 1997(a)
Ended Through
INCREASE (DECREASE) September 30, March 31,
IN NET ASSETS 1998 1998
------------- --------------------
<S> <C> <C>
Operations
Net investment loss....... $ (490,006) $ (31,882)
Net realized gain (loss)
on investments......... (819,670) 4,191,233
Net change in unrealized
appreciation
(depreciation) on
investments............ (96,414,820) 26,918,672
------------- --------------------
Net increase (decrease) in
net assets resulting
from operations........ (97,724,496) 31,078,023
------------- --------------------
Distributions in excess of
net investment income
(Note 1)
Class A................... -- (97,677)
Class B................... -- (16,994)
Class C................... -- (3,484)
Class Z................... -- (3,733)
------------- --------------------
-- (121,888)
------------- --------------------
Fund share transactions (net
of share conversions)
(Note 6)
Net proceeds from shares
sold................... 49,182,370 349,199,926
Net asset value of shares
issued in reinvestment
of distributions....... -- 118,604
Cost of shares
reacquired............. (63,482,211) (27,415,418)
------------- --------------------
Net increase (decrease) in
net assets from Fund
share transactions..... (14,299,841) 321,903,112
------------- --------------------
Total increase (decrease).... (112,024,337) 352,859,247
NET ASSETS
Beginning of period.......... 352,959,247 100,000
------------- --------------------
End of period(b)............. $ 240,934,910 $ 352,959,247
------------- --------------------
------------- --------------------
- ---------------
(a) Commencement of investment operations.
(b) Includes accumulated net
investment loss of:...... $ (490,006) $ --
------------- --------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prudential Small-Cap Quantum Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund was incorporated in Maryland on February 4,
1997. The Fund issued 2,500 shares each of Class A, Class B, Class C and
Class Z common stock for $100,000 on August 1, 1997 to Prudential
Investments Fund Management LLC ("PIFM"). Investment operations commenced
on November 10, 1997. The investment objective of the Fund is long-term
capital appreciation by investing primarily in equity securities of
small-cap U.S. companies.
- ------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
SECURITIES VALUATION: Securities listed on a securities exchange and
Nasdaq National Market System securities are valued at the last sales
price on the day of valuation, or, if there was no sale on such day, the
mean between the last bid and asked prices on such day, as provided by a
pricing service. Corporate bonds and U.S. Government securities are valued
on the basis of valuations provided by a pricing service or principle
market makers. Options traded on an exchange are valued at the mean
between the most recently quoted bid and asked prices on the respective
exchange, and futures contracts and options thereon are valued at their
last sales prices as of the close of trading on the applicable commodities
exchange. Any security for which a reliable market quotation is
unavailable is valued at fair value as determined in good faith by or
under the direction of the Fund's Board of Directors.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days
or less are valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S.
financial institutions, it is the Fund's policy that its custodian or
designated subcustodians, as the case may be under triparty repurchase
agreements, take possession of the underlying collateral securities, the
value of which exceeds the principal amount of the repurchase transaction
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market
on a daily basis to ensure the adequacy of the collateral. If the seller
defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities transactions
are recorded on the trade date. Realized gains and losses on sales of
investments are calculated on the identified cost basis. Dividend income
is recorded on the ex-dividend date and interest income is recorded on the
accrual basis. Expenses are recorded on the accrual basis which may
require the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning
of the day.
DIVIDENDS AND DISTRIBUTIONS: The Fund expects to pay dividends of net
investment income and distributions of net realized capital, if any,
annually. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
TAXES: It is the Fund's policy to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income and net capital gains, if any, to
its shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax
rules and rates.
DEFERRED ORGANIZATION EXPENSES: Approximately $154,000 of expenses were
incurred in connection with the organization of the Fund. These costs have
been deferred and are being amortized ratably over a period of 60 months
from the date the Fund commenced investment operations.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with (PIFM). Pursuant to this
agreement, PIFM has responsibility for all investment advisory services
and supervises the subadviser's performance of such services. PIFM has
entered into a subadvisory agreement with The Prudential Investment
Corporation ("PIC"), doing business as Prudential Investments ("PI," the
Subadviser or the investment adviser); PIC furnishes investment advisory
services in connection with the management of the Fund. PIFM pays for the
cost of the subadviser's services, the compensation of officers of the
Fund, occupancy and certain clerical and bookkeeping costs of the Fund.
The Fund bears all other costs and expenses.
- -------------------------------------------------------------------------------
B-61
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The management fee paid PIFM is computed daily and payable monthly at an
annual rate of .60 of 1% of the average daily net assets of the Fund.
The Fund had a distribution agreement with Prudential Securities
Incorporated ("PSI"), which acted as the distributor of the Class A,
Class B, Class C and Class Z shares of the Fund through May 31, 1998.
Prudential Investment Management Services LLC ("PIMS") became the
distributor of the Fund effective June 1, 1998 and is serving the Fund
under the same terms and conditions as under the arrangment with PSI. The
Fund compensated PSI and PIMS for distributing and servicing the Fund's
Class A, Class B and Class C shares pursuant to plans of distribution (the
"Class A, B and C Plans") regardless of expenses actually incurred by
them. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI or PIMS as distributor of the
Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Class A, Class B and Class C Plans
were .25%, 1% and 1%, respectively, of the average daily net assets of
Class A, Class B and Class C shares for the six months ended September 30,
1998.
PSI and PIMS have advised the Fund that they received approximately
$233,000 in front-end sales charges resulting from sales of Class A shares
during the six months ended September 30, 1998. From these fees, PSI and
PIMS paid such sales charges, which in turn paid commissions to
salespersons and incurred other distribution costs.
PSI and PIMS advised the Fund that for the six months ended September 30,
1998, they received approximately $395,000 and $26,000 in contingent
deferred sales charges imposed upon certain redemptions by Class B and
Class C shareholders, respectively.
PSI, PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), has a credit agreement (the "Agreement") with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000.
Interest on any such borrowings outstanding will be at market rates. The
purpose of the Agreement is to serve as an alternative source of funding
for capital share redemptions. The Fund did not borrow any amounts
pursuant to the Agreement during the six months ended September 30, 1998.
The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and
paid quarterly on a pro rata basis by the Funds. The Agreement expires on
December 29, 1998.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent. During the six months ended
September 30, 1998, the Fund incurred fees of approximately $170,000 for
the services of PMFS. As of September 30, 1998, approximately $30,000 of
such fees were due to PMFS. Transfer agent fees and expenses in the
Statement of Operations include certain out-of-pocket expenses paid to
nonaffiliates.
- ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the six months ended September 30, 1998 were $204,744,512
and $214,511,077, respectively.
The federal income tax basis of the Fund's investments at September 30,
1998 was substantially the same as for financial reporting purposes and,
accordingly, net unrealized depreciation for federal income tax purposes
was $(69,496,148) (gross unrealized appreciation--$9,124,028; gross
unrealized depreciation--$78,620,176).
- ------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase
agreements collateralized by U.S. Treasury or federal agency obligations.
As of September 30, 1998, the Fund has a .83% undivided interest in the
repurchase agreements in the joint account. The undivided interest for the
Fund represents $6,094,000 principal amount. As of such date, the
repurchase agreements in the joint account and the value of the collateral
therefore were as follows:
SBC Warburg Dillon Read LLC, 5.52%, in the principal amount of
$210,000,000, repurchase price $210,032,200, due 10/1/98. The value of the
collateral including accrued interest was $214,255,819.
Bear Stearns & Co., 5.58%, in the principal amount of $210,000,000,
repurchase price $210,032,550, due 10/1/98. The value of the collateral
including accrued interest was $214,893,617.
Credit Suisse First Boston Corp., 5.55%, in the principal amount of
$107,606,000, repurchase price $107,622,589, due 10/1/98. The value of the
collateral including accrued interest was $111,084,883.
- --------------------------------------------------------------------------------
B-62
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Goldman Sachs & Co., 5.45%, in the principal amount of $210,000,000,
repurchase price $210,031,792, due 10/1/98. The value of the collateral
including accrued interest was $214,200,293.
- ------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A
shares were sold with a front-end sales charge of up to 5%. Class B shares
are sold with a contingent deferred sales charge which declines from 5% to
zero depending on the period of time the shares are held. Prior to
November 2, 1998, Class C shares are sold with a contingent deferred sales
charge of 1% during the first year. Effective November 2, 1998, Class C
shares were sold with a front-end sales charge of 1% and a contingent
deferred sales charge of 1% during the first 18 months. Class B shares
will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is
also available for shareholders who qualified to purchase Class A shares
at net asset value. Class Z shares are not subject to any sales charge and
are offered exclusively for sale to a limited group of investors.
There are 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.
As of September 30, 1998 Prudential owned 2,520 Class A shares, 2,520
Class B shares, 2,520 Class C shares and 2,510 Class Z shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
CLASS A
- -------------------------------------
<S> <C> <C>
Six months ended September 30, 1998:
Shares sold.......................... 1,571,783 $ 16,130,455
Shares reacquired.................... (3,242,769) (31,876,077)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (1,670,986) $(15,745,622)
Shares issued upon conversion from
Class B............................ 12,537 109,517
---------- ------------
Net decrease in shares outstanding... (1,658,449) (15,636,105)
---------- ------------
---------- ------------
November 10, 1997(a) through
March 31, 1998:
Shares sold.......................... 11,854,211 $118,541,655
Shares issued in reinvestment of
distributions...................... 9,833 95,083
Shares reacquired.................... (1,310,348) (13,297,055)
---------- ------------
Net increase in shares outstanding... 10,553,696 $105,339,683
---------- ------------
---------- ------------
<CAPTION>
CLASS B SHARES AMOUNT
- ------------------------------------- ---------- ------------
<S> <C> <C>
Six months ended September 30, 1998:
Shares sold.......................... 2,492,957 $ 25,227,857
Shares reacquired.................... (2,578,216) (24,592,666)
---------- ------------
Net increase (decrease) in shares
outstanding before conversion...... (85,259) $ 635,191
Shares reacquired upon conversion
into Class A....................... (12,591) (109,517)
---------- ------------
Net increase (decrease) in shares
outstanding........................ (97,850) $ 525,674
---------- ------------
---------- ------------
November 10, 1997(a) through
March 31, 1998:
Shares sold.......................... 18,843,085 $188,337,566
Shares issued in reinvestment of
distributions...................... 1,695 16,395
Shares reacquired.................... (854,559) (8,722,973)
---------- ------------
Net increase in shares outstanding... 17,990,221 $179,630,988
---------- ------------
---------- ------------
<CAPTION>
CLASS C
- -------------------------------------
<S> <C> <C>
Six months ended September 30, 1998:
Shares sold.......................... 256,676 $ 2,640,510
Shares reacquired.................... (560,679) (5,343,069)
---------- ------------
Net decrease in shares outstanding... (304,003) $ (2,702,559)
---------- ------------
---------- ------------
November 10, 1997(a) through
March 31, 1998:
Shares sold.......................... 3,713,146 $ 37,077,480
Shares issued in reinvestment of
distributions...................... 354 3,426
Shares reacquired.................... (365,080) (3,723,232)
---------- ------------
Net increase in shares outstanding... 3,348,420 $ 33,357,674
---------- ------------
---------- ------------
<CAPTION>
CLASS Z
- -------------------------------------
<S> <C> <C>
Six months ended September 30, 1998:
Shares sold.......................... 520,342 $ 5,183,548
Shares reacquired.................... (179,098) (1,670,399)
---------- ------------
Net increase in shares outstanding... 341,244 $ 3,513,149
---------- ------------
---------- ------------
November 10, 1997(a) through
March 31, 1998:
Shares sold.......................... 528,277 $ 5,243,225
Shares issued in reinvestment of
distributions...................... 383 3,700
Shares reacquired.................... (162,548) (1,672,158)
---------- ------------
Net increase in shares outstanding... 366,112 $ 3,574,767
---------- ------------
---------- ------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
B-63
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------ ------------------------------ -------------
November 10, November 10,
Six Months 1997(a) Six Months 1997(a) Six Months
Ended Through Ended Through Ended
September 30, March 31, September 30, March 31, September 30,
1998 1998 1998 1998 1998
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.95 $ 10.00 $ 10.93 $ 10.00 $ 10.93
------ ------------ ------------- ------------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)......... .02 .02 (.02) (.01) (.02)
Net realized and unrealized gain
(loss) on investment
transactions...................... (3.05) .94 (3.04) .94 (3.04)
------ ------------ ------------- ------------ ------
Total from investment
operations..................... (3.03) .96 (3.06) .93 (3.06)
------ ------------ ------------- ------------ ------
LESS DISTRIBUTIONS
Distributions in excess of net
investment income................. -- (.01) -- -- --
------ ------------ ------------- ------------ ------
Net asset value, end of period....... $ 7.92 $ 10.95 $ 7.87 $ 10.93 $ 7.87
------ ------------ ------------- ------------ ------
------ ------------ ------------- ------------ ------
TOTAL RETURN(c):..................... (27.67)% 9.60% (28.00)% 9.31% (28.00)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $70,454 $115,621 $ 140,864 $196,671 $23,987
Average net assets (000)............. $98,996 106,453 $ 181,419 $170,484 $32,480
Ratios to average net assets(b):
Expenses, including distribution
fees........................... 1.21% 1.22% 1.96% 1.97% 1.96%
Expenses, excluding distribution
fees........................... .96% 0.97% .96% 0.97% .96%
Net investment income (loss)...... .19% .47% (.56)% (.29)% (.56)%
Portfolio turnover rate.............. 67% 39% 67% 39% 67%
<CAPTION>
CLASS C CLASS Z
-------------- ------------------------------
<S> <C> <C> <C>
November 10, November 10,
1997(a) Six Months 1997(a)
Through Ended Through
March 31, September 30, March 31,
1998 1998 1998
------------ ------------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.00 $ 10.96 $10.00
------ ------------- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)......... (.01) .02 .02
Net realized and unrealized gain
(loss) on investment
transactions...................... .94 (3.05) .95
------ ------------- -----
Total from investment
operations..................... .93 (3.03) .97
------ ------------- -----
LESS DISTRIBUTIONS
Distributions in excess of net
investment income................. -- -- (.01)
------ ------------- -----
Net asset value, end of period....... $ 10.93 $ 7.93 $10.96
------ ------------- -----
------ ------------- -----
TOTAL RETURN(c):..................... 9.31% (27.65)% 9.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 36,628 $ 5,631 $4,039
Average net assets (000)............. $ 34,000 $ 5,375 $2,709
Ratios to average net assets(b):
Expenses, including distribution
fees........................... 1.97% .96% 0.97%
Expenses, excluding distribution
fees........................... 0.97% .96% 0.97%
Net investment income (loss)...... (.29)% .47% .51%
Portfolio turnover rate.............. 39% 67% 39%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-64
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY.
EDGAR REPRESENTATION OF CHART
VALUE OF $1.00 INVESTED
ON 1/1/26 THROUGH 12/31/98
SMALL STOCKS--$5,116.95
COMMON STOCKS--$2,350.89
LONG TERM BONDS--$44.18
TREASURY BILLS--$14.94
INFLATION $9.16
Source: Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson
and Rex A. Sinquefield). Used with permission. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
<TABLE>
<CAPTION>
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
- ---------------------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
- ---------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
- ---------------------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- ---------------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN PERCENT 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4
</TABLE>
(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
Source: Lipper, Inc.
(5)SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 1998. It does not represent
the performance of any Prudential Mutual Fund.
EDGAR REPRESENTATION OF CHART
BELGIUM 22.7%
SPAIN 22.5%
THE NETHERLANDS 20.8%
SWEDEN 19.9%
SWITZERLAND 18.3%
USA 18.1%
HONG KONG 17.8%
FRANCE 17.4%
UK 16.7%
GERMANY 13.4%
AUSTRIA 8.9%
JAPAN 6.5%
Source: Morgan Stanley Capital International (MSCI) and Lipper, Inc. as of
12/31/98. Used with permission. Morgan Stanley Country indices are unmanaged
indices which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
EDGAR REPRESENTATION OF CHART
CAPITAL APPRECIATION AND
REINVESTING DIVIDENDS -$391,707
CAPITAL APPRECIATION ONLY $133,525
Source: Lipper, Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential Mutual Fund. Common stock total
return is based on the Standard & Poor's 500 Stock Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indices.
II-3
<PAGE>
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $15.8 TRILLION
EDGAR REPRESENTATION OF CHART
CANADA--1.8%
U.S.--51.0%
EUROPE--34.7%
PACIFIC BASIN--12.5%
Source: Morgan Stanley Capital International, December 31, 1998. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of 1577 companies
in 22 countries (representing approximately 60% of the aggregate market value of
the stock exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
[CHART]
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1998. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.
II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and nearly
6,500 domestic and international financial advisors. Prudential is a major
issuer of annuities, including variable annuities. Prudential seeks to develop
innovative products and services to meet consumer needs in each of its business
areas. Prudential uses the Rock of Gibraltar as its symbol. Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 40 million people worldwide.
Long one of the largest issuers of life insurance, Prudential has 25 million
life insurance policies in force today with a face value of almost $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. Prudential provides auto insurance for
approximately 1.5 million cars and insures approximately 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $211 billion in assets of
institutions and individuals. In INSTITUTIONAL INVESTOR, July , 1998,
Prudential was ranked eighth in terms of total assets under management as of
December 31, 1997.
REAL ESTATE. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents with over 1,400 offices
across the United States.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.(3)
FINANCIAL SERVICES. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of Prudential, has over $1 billion in assets and serves nearly 1.5
million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1997, Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- ------------------------
(1) PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to Prudential Investment Portfolios, Inc., Mercator Asset
Management LP, as the subadviser to International Stock Series, a portfolio
of Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.
(2) As of December 31, 1996.
(3) On December 10, 1998, Prudential announced its intention to sell Prudential
Health Care to Aetna for $1 billion.
III-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
EQUITY FUNDS. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth Fund, a growth-style equity fund managed by Jennison Associates LLC, a
premier institutional equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitors
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(4) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Investment grade bond analysts monitor the financial
viability of approximately 1,750 different bond issuers in the investment grade
corporate and municipal bond markets--from IBM to small municipalities, such as
Rockaway Township, New Jersey. These analysts consider among other things
sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers met with several senior U.S. and foreign
government officials, on issues ranging from economic conditions in foreign
countries to the viability of index-linked securities in the United States.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(5)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment and financial planning
areas.
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ------------------------
(4) As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
(5) As of December 31, 1998.
III-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS:
<TABLE>
<C> <S>
(a) (1) Articles of Incorporation.(1)
(2) Articles of Amendment.(2)
(b) By-Laws.(2)
(c) Instruments defining rights of shareholders.(2)
(d) (1) Management Agreement between the Registrant and Prudential Investments Fund
Management LLC.(2)
(2) Subadvisory Agreement between Prudential Investments Fund Management LLC and The
Prudential Investment Corporation.(2)
(e) (1) Distribution Agreement between the Registrant and Prudential Investment
Management Services LLC.(3)
(2) Selected Dealer Agreement.(3)
(3) Rule 12b-1 Fee Waiver Agreement between Registrant and Prudential Investment
Management Services LLC.**
(g) Custodian Contract between the Registrant and State Street Bank and Trust
Company.(2)
(h) Transfer Agency and Service Agreement between the Registrant and Prudential Mutual
Fund Services LLC.(2)
(i) Opinion of Gardner, Carton & Douglas.(2)
(m) (1) Amended and Restated Distribution and Service Plan for Class A Shares.*
(2) Amended and Restated Distribution and Service Plan for Class B Shares.*
(3) Amended and Restated Distribution and Service Plan for Class C Shares.*
(n) Financial Data Schedules filed as Exhibit 27 for electronic purposes.*
(o) Rule 18f-3 Plan.*
</TABLE>
-------------------------
* Filed herewith.
** To be filed with future Post-Effective Amendment.
(1) Incorporated by reference to the Registration Statement on Form
N-1A filed on or aboutApril 3, 1997 (File Nos. 333-24495 and
811-08167).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A (File No.
333-24495) filed on August 19, 1997.
(3) Incorporated by reference to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A (File No.
333-24495) filed on June 10, 1998.
C-1
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit b to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of the Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit e(1) to
the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit d(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit d(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation doing business
as Prudential Investments (PIC), respectively, to liabilities arising from
willful misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard by them of their respective
obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either the
Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office.
C-2
<PAGE>
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange Commission
staff's position on Section 17(h) advances will be limited in the following
respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action
(including cost connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on
behalf of, the recipient to repay that amount of the advance which
exceeds the amount to which it is ultimately determined that he is
entitled to receive from the Registrant by reason of
indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance; and
(4) Such surety bond or other insurance must be paid for by the recipient
of such advance.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC (PIFM)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this Registration
Statement. The business and other connections of the officers of PIFM are listed
in Schedules A and D of Form ADV of PIFM as currently on file with the
Securities and Exchange Commission, the text of which is hereby incorporated by
reference (File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, NJ 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ------------------- -------------------------- -----------------------------------------------------------------------
<S> <C> <C>
Robert F. Gunia Executive Vice President Vice President, Prudential Investments; Executive Vice President and
and Treasurer Treasurer, PIFM; Senior Vice President, Prudential Securities
Incorporated
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, Prudential Mutual
Funds & Annuities (PMF&A); Executive Vice President, PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice President, PIFM
</TABLE>
(b) The Prudential Investment Corporation
See "How the Fund is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory and
Other Services" in the Statement of Additional Information constituting Part B
of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza, Newark,
New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- --------------------- -------------------------- ---------------------------------------------------------------------
<S> <C> <C>
John R. Strangfeld, Chairman of the Board, Serior Vice President, Prudential; Chief Executive Officer,
Jr. President and Chief Prudential Global Asset Management; Chairman of the Board, President,
Executive Officer and Chief Executive Officer and Director, PIC
Director
Bernard B. Winograd Senior Vice President and Chief Executive Officer, Prudential Real Estate Investors (PREI);
Director Senior Vice President and Director, PIC
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITER
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Money Fund, Command
Government Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc.,
Global Utility Fund, Inc., Nicholas Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond
Fund, Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe
C-3
<PAGE>
Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global
Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Government Securities Trust, Prudential High Yield Fund, Inc., Prudential High
Yield Total Return Fund, Inc., Prudential Index Series Fund, Prudential
Institutional Liquidity Portfolio, Prudential Intermediate Global Income Fund,
Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap Value Fund,
Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund,
Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential Special Money Market Fund, Prudential Structured Maturity Fund,
Inc., Prudential 20/20 Focus Fund, Prudential Tax Free Money Fund, Inc.,
Prudential Tax-Managed Equity Fund, Prudential Utility Fund, Inc., Prudential
World Fund, Inc. and The Target Portfolio Trust.
(b) Information concerning the directors and officers of PIMS is set forth
below. Except as otherwise indicated, the address of each person is 751
Broad Street, Newark 07102.
<TABLE>
<CAPTION>
POSITIONS AND
POSITIONS AND OFFICES OFFICES
NAME(1) WITH UNDERWRITER WITH REGISTRANT
- ------------------------------------------- ----------------------------------- ------------------
<S> <C> <C>
Mark R. Fetting ........................... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102
Jean D. Hamilton........................... Executive Vice President None
Ronald P. Joelson.......................... Executive Vice President None
John R. Strangfeld, Jr..................... Executive Vice President None
Brian Henderson ........................... Senior Vice President and Chief None
Gateway Center Three Operating Officer
100 Mulberry Street
Newark, NJ 07102
William V. Healey.......................... Senior Vice President, Secretary None
and Chief Legal Officer
Margaret M. Deverell ...................... Vice President, Comptroller and None
Gateway Center Three Chief Financial Officer
100 Mulberry Street
Newark, NJ 07102
C. Edward Chaplin.......................... Treasurer None
Kevin B. Frawley .......................... Senior Vice President and Chief None
213 Washington St. Compliance Officer
Newark, NJ 07102
</TABLE>
- --------------
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, The Prudential Investment Corporation, 751 Broad Street,
Newark, New Jersey 07102, the Registrant, Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077, and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1(b)(5), (6), (7), (9), (10) and (11), 31a-1(f), 31a-1(b)(4) and (11) and
31a-1(d) will be kept at Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077 and the remaining accounts, books and other documents required
by such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the caption "How the Fund is Managed" in the
Prospectus and the caption "Investment Advisory and Other Services" in the
Statement of Additional Information, constituting Parts A and B, respectively,
of this Post-Effective Amendment to the Registration Statement, Registrant is
not a party to any management-related service contract.
ITEM 30. UNDERTAKINGS
Not applicable.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Fund has duly caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Newark, and State of New Jersey, on the 1st day of
April, 1999.
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
By /s/ Robert F. Gunia
-----------------------------------------------------------------------
Robert F. Gunia, Acting President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ----------------
<S> <C> <C>
/s/ Robert F. Gunia Director and Acting President April 1, 1999
- ------------------------------------
ROBERT F. GUNIA
/s/ Edward D. Beach Director April 1, 1999
- ------------------------------------
EDWARD D. BEACH
/s/ Delayne Dedrick Gold Director April 1, 1999
- ------------------------------------
DELAYNE DEDRICK GOLD
/s/ Douglas H. McCorkindale Director April 1, 1999
- ------------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Thomas T. Mooney Director April 1, 1999
- ------------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Director April 1, 1999
- ------------------------------------
STEPHEN P. MUNN
/s/ Richard A. Redeker Director April 1, 1999
- ------------------------------------
RICHARD A. REDEKER
/s/ Robin B. Smith Director April 1, 1999
- ------------------------------------
ROBIN B. SMITH
/s/ Louis A. Weil, III Director April 1, 1999
- ------------------------------------
LOUIS A. WEIL, III
/s/ Clay T. Whitehead Director
- ------------------------------------
CLAY T. WHITEHEAD
/s/ Grace C. Torres Treasurer and Principal April 1, 1999
- ------------------------------------ Financial and Accounting
GRACE C. TORRES Officer
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------------------------------------------------------------------------
<S> <C>
(a) (1) Articles of Incorporation.(1)
(2) Articles of Amendment.(2)
(b) By-Laws.(2)
(c) Instruments defining rights of shareholders.(2)
(d) (1) Management Agreement between the Registrant and Prudential
Investments Fund Management LLC.(2)
(2) Subadvisory Agreement between Prudential Investments Fund
Management LLC and The Prudential Investment Corporation.(2)
(e) (1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.(3)
(2) Selected Dealer Agreement.(3)
(3) Rule 12b-1 Fee Waiver Agreement between Registrant and Prudential
Investment Management Services LLC.**
(g) Custodian Contract between the Registrant and State Street Bank and
Trust Company.(2)
(h) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services LLC.(2)
(i) Opinion of Gardner, Carton & Douglas.(2)
(m) (1) Amended and Restated Distribution and Service Plan for Class A
Shares.*
(2) Amended and Restated Distribution and Service Plan for Class B
Shares.*
(3) Amended and Restated Distribution and Service Plan for Class C
Shares.*
(n) Financial data schedules*
(o) Rule 18f-3 Plan.*
</TABLE>
- --------------
* Filed herewith.
** To be filed with future Post-Effective Amendment.
(1) Incorporated by reference to the Registration Statement on Form N-1A filed
on or about April 3, 1997 (File Nos. 333-24495 and 811-08167).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No. 333-24495) filed on August
19, 1997.
(3) Incorporated by reference to Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No. 333-24495) filed on June 10,
1998.
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
Amended and Restated
Distribution and Service Plan
(CLASS A SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Small-Cap Quantum Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor,
as compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors of the Fund, including a majority of
those 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 this Plan or any agreements related to it (the Rule 12b-1
Directors), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
A shares of
1
<PAGE>
the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under
the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions and trailer commissions paid to, or on account
of, account executives of the Distributor;
3
<PAGE>
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A
shares of the Fund, including sales commissions, trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than
current shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A
shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as the
Board shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the
4
<PAGE>
Distributor and to broker-dealers and financial institutions which have selected
dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class A shares of the Fund, the Plan shall, unless earlier terminated
in accordance with its terms, continue in full force and effect thereafter
for so long as such continuance is specifically approved at least annually by
a majority of the Board of Directors of the Fund and a majority of the Rule
12b-1 Directors by votes cast in person at a meeting called for the purpose
of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class A shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignment.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment
5
<PAGE>
Company Act) of the Class A shares of the Fund. All material amendments of the
Plan shall be approved by a majority of the Board of Directors of the Fund and a
majority of the Rule 12b-1 Directors by votes cast in person at a meeting called
for the purpose of voting on the Plan.
8. RULE 12b-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the Directors
shall be committed to the discretion of the Rule 12b-1 Directors.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: April 4, 1997
Amended: June 1, 1998
6
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
Amended and Restated
Distribution and Service Plan
(CLASS B SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Small-Cap Quantum Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Board of Directors of the Fund, including a majority 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
this Plan or any agreements related to it (the Rule 12b-1 Directors), have
determined by votes cast in person at a meeting called for the purpose of voting
on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class B shares of
1
<PAGE>
the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under
the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum
2
<PAGE>
of the average daily net assets of the Class B shares (service fee). The Fund
shall calculate and accrue daily amounts payable by the Class B shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Directors may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be
subject to the review of the Board of Directors. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred, unless
otherwise determined by the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution
3
<PAGE>
Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class B shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class B shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as
they shall from time to time reasonably request,
4
<PAGE>
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class B shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignment.
5
<PAGE>
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors of the Fund and a majority of the Rule 12b-1 Directors by votes cast
in person at a meeting called for the purpose of voting on the Plan.
8. RULE 12b-1 DIRECTORS
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors shall be committed to the discretion of the Rule 12b-1 Directors.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: April 4, 1997
Amended: June 1, 1998
6
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
Amended and Restated
Distribution and Service Plan
(CLASS C SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Small-Cap Quantum Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Directors of the Fund, including a majority 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
this Plan or any agreements related to it (the Rule 12b-1 Directors), have
determined by votes cast in person at a meeting called for the purpose of voting
on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class C shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum
2
<PAGE>
of the average daily net assets of the Class C shares (service fee). The Fund
shall calculate and accrue daily amounts payable by the Class C shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Directors may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be
subject to the review of the Board of Directors. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred, unless
otherwise determined by the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution
3
<PAGE>
Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class C shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class C shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as
they shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the
4
<PAGE>
Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class C shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignment.
7. AMENDMENTS
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors of the Fund and a majority of the Rule 12b-1 Directors by votes cast
in person at a meeting called for the purpose of voting on the Plan.
8. RULE 12b-1 DIRECTORS
While the Plan is in effect, the selection and nomination of the Rule 12b-1
DIRECTORs shall be committed to the discretion of the Rule 12b-1 DIRECTORs.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: April 4, 1997
Amended: June 1, 1998
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> SMALL CAP-QUANTUM FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 310,540,180
<INVESTMENTS-AT-VALUE> 241,044,032
<RECEIVABLES> 592,842
<ASSETS-OTHER> 164,757
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 866,721
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 307,619,067
<SHARES-COMMON-STOCK> 14,449,391
<SHARES-COMMON-PRIOR> 32,268,449
<ACCUMULATED-NII-CURRENT> (490,006)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,301,997
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (69,496,148)
<NET-ASSETS> (46,717,840)
<DIVIDEND-INCOME> 1,955,539
<INTEREST-INCOME> 275,858
<OTHER-INCOME> 0
<EXPENSES-NET> 2,721,403
<NET-INVESTMENT-INCOME> (490,006)
<REALIZED-GAINS-CURRENT> (819,670)
<APPREC-INCREASE-CURRENT> (96,414,820)
<NET-CHANGE-FROM-OPS> (97,724,496)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 49,182,370
<NUMBER-OF-SHARES-REDEEMED> (63,482,211)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (112,024,337)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 957,425
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,721,403
<AVERAGE-NET-ASSETS> 98,996,000
<PER-SHARE-NAV-BEGIN> 10.95
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (3.05)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.92
<EXPENSE-RATIO> 1.21
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> SMALL CAP-QUANTUM FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 310,540,180
<INVESTMENTS-AT-VALUE> 241,044,032
<RECEIVABLES> 592,842
<ASSETS-OTHER> 164,757
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 866,721
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 307,619,067
<SHARES-COMMON-STOCK> 14,449,391
<SHARES-COMMON-PRIOR> 32,268,449
<ACCUMULATED-NII-CURRENT> (490,006)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,301,997
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (69,496,148)
<NET-ASSETS> (46,717,840)
<DIVIDEND-INCOME> 1,955,539
<INTEREST-INCOME> 275,858
<OTHER-INCOME> 0
<EXPENSES-NET> 2,721,403
<NET-INVESTMENT-INCOME> (490,006)
<REALIZED-GAINS-CURRENT> (819,670)
<APPREC-INCREASE-CURRENT> (96,414,820)
<NET-CHANGE-FROM-OPS> (97,724,496)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 49,182,370
<NUMBER-OF-SHARES-REDEEMED> (63,482,211)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (112,024,337)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 957,425
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,721,403
<AVERAGE-NET-ASSETS> 181,419,000
<PER-SHARE-NAV-BEGIN> 10.93
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (3.04)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.87
<EXPENSE-RATIO> 1.96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> SMALL CAP-QUANTUM FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 310,540,180
<INVESTMENTS-AT-VALUE> 241,044,032
<RECEIVABLES> 592,842
<ASSETS-OTHER> 164,757
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 866,721
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 307,619,067
<SHARES-COMMON-STOCK> 14,449,391
<SHARES-COMMON-PRIOR> 32,268,449
<ACCUMULATED-NII-CURRENT> (490,006)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,301,997
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (69,496,148)
<NET-ASSETS> (46,717,840)
<DIVIDEND-INCOME> 1,955,539
<INTEREST-INCOME> 275,858
<OTHER-INCOME> 0
<EXPENSES-NET> 2,721,403
<NET-INVESTMENT-INCOME> (490,006)
<REALIZED-GAINS-CURRENT> (819,670)
<APPREC-INCREASE-CURRENT> (96,414,820)
<NET-CHANGE-FROM-OPS> (97,724,496)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 49,182,370
<NUMBER-OF-SHARES-REDEEMED> (63,482,211)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (112,024,337)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 957,425
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,721,403
<AVERAGE-NET-ASSETS> 32,480,000
<PER-SHARE-NAV-BEGIN> 10.93
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (3.04)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.87
<EXPENSE-RATIO> 1.96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> SMALL CAP-QUANTUM FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 310,540,180
<INVESTMENTS-AT-VALUE> 241,044,032
<RECEIVABLES> 592,842
<ASSETS-OTHER> 164,757
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 866,721
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 307,619,067
<SHARES-COMMON-STOCK> 14,449,391
<SHARES-COMMON-PRIOR> 32,268,449
<ACCUMULATED-NII-CURRENT> (490,006)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,301,997
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (69,496,148)
<NET-ASSETS> (46,717,840)
<DIVIDEND-INCOME> 1,955,539
<INTEREST-INCOME> 275,858
<OTHER-INCOME> 0
<EXPENSES-NET> 2,721,403
<NET-INVESTMENT-INCOME> (490,006)
<REALIZED-GAINS-CURRENT> (819,670)
<APPREC-INCREASE-CURRENT> (96,414,820)
<NET-CHANGE-FROM-OPS> (97,724,496)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 49,182,370
<NUMBER-OF-SHARES-REDEEMED> (63,482,211)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (112,024,337)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 957,425
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,721,403
<AVERAGE-NET-ASSETS> 5,375,000
<PER-SHARE-NAV-BEGIN> 10.96
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (3.05)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.93
<EXPENSE-RATIO> 0.96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
(the Fund)
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in the Fund. Any
material amendment to this plan is subject to prior approval of the Board of
Directors, including a majority of the independent Directors.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge
and a distribution and/or service fee pursuant to Rule 12b-1
under the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1%
per annum of the average daily net assets of the class. The
initial sales charge is waived or reduced for certain
eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge
but are subject to a high contingent deferred sales charge
(declining from 5% to zero over a six-year period) which
will be imposed on certain redemptions and a Rule 12b-1 fee
not to exceed 1% per annum of the average daily net assets
of the class. The contingent deferred sales charge is
waived for certain eligible investors. Class B shares
automatically convert to Class A shares approximately seven
years after purchase.
CLASS C SHARES: Class C shares issued before November 2, 1998 are not
subject to an initial sales charge but are subject to a 1%
contingent deferred sales charge which will be imposed on
certain redemptions within the first 12 month after purchase
and a Rule 12b-1 fee not to exceed 1% per annum of the
average daily net assets of the class. Class C shares
issued on or after November 2, 1998 are subject to a low
initial sales charge and a 1% contingent deferred sales
charge which will be imposed on certain redemptions within
the first 18 months after purchase and a Rule 12b-1 fee not
to exceed 1% per annum of the average daily net assets of
the class.
<PAGE>
CLASS Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge, nor are they subject to
any Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class of the Fund will be allocated to each
class of the Fund on the basis of the net asset value of that class in
relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of shares,
to the extent paid, will be paid on the same day and at the same time, and
will be determined in the same manner and will be in the same amount,
except that the amount of the dividends and other distributions declared
and paid by a particular class of the Fund may be different from that
paid by another class of the Fund because of Rule 12b-1 fees and other
expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares and Class Z
Shares shall have such exchange privileges as set forth in the Fund's
current prospectus. Exchange privileges may vary among classes and among
holders of a Class.
CONVERSION FEATURES
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.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Directors, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the existence of any material conflicts among the interests of its
several classes. The Directors,
2
<PAGE>
including a majority of the independent Directors, shall take such action
as is reasonably necessary to eliminate any such conflicts that may
develop. Prudential Investments Fund Management LLC, the Fund's Manager,
will be responsible for reporting any potential or existing conflicts to
the Directors.
C. For purposes of expressing an opinion on the financial statements of the
Fund, the methodology and procedures for calculating the net asset value
and dividends/distributions of the Fund's several classes and the proper
allocation of income and expenses among such classes will be examined
annually by the Fund's independent auditors who, in performing such
examination, shall consider the factors set forth in the relevant auditing
standards adopted, from time to time, by the American Institute of
Certified Public Accountants.
Date: April 4, 1997
as amended June 1, 1998
3
