<PAGE>
As filed with the Securities and Exchange Commission on March 24, 2000
Registration No. 333-24495
811-08167
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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. 4 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 5 /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 May 30, 2000, 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>
------------------------
<TABLE>
<S> <C>
Title of Securities Being Registered........... Shares of Common Stock, $.001 par value per share.
</TABLE>
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<PAGE>
[PRUDENTIAL LOGO]
PROSPECTUS MAY 30, 2000
PRUDENTIAL
TAX-MANAGED SMALL-CAP FUND, INC.
FUND TYPE Stock
OBJECTIVE Long-term capital appreciation
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.
<PAGE>
TABLE OF CONTENTS
- -----------------
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
2 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 HOW THE FUND INVESTS
6 Investment Objective and Policies
7 Other Investments and Strategies
11 Investment Risks
15 HOW THE FUND IS MANAGED
15 Board of Directors
15 Manager
15 Investment Adviser
15 Portfolio Managers
16 Distributor
17 FUND DISTRIBUTIONS AND TAX ISSUES
17 Distributions
18 Tax Issues
19 If You Sell or Exchange Your Shares
21 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
21 How to Buy Shares
29 How to Sell Your Shares
33 How to Exchange Your Shares
34 Telephone Redemptions or Exchanges
35 FINANCIAL HIGHLIGHTS
35 Class A Shares
36 Class B Shares
37 Class C Shares
38 Class Z Shares
40 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
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PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------
This section highlights key information about the PRUDENTIAL TAX-MANAGED
SMALL-CAP FUND, INC. (formerly known as 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. We seek investments
whose price we expect to 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 like those found in the Standard & Poor's 600 Small
Capitalization Stock Index (S&P SmallCap 600 Index).
We also try to reduce the taxes shareholders pay on the Fund's investment
income and capital gains. Part of our goal is to outperform the S&P SmallCap 600
Index on a before and after-tax basis. We try to limit taxes by attempting to
avoid short-term capital gains and by selling securities that have fallen in
value in order to generate losses that can be used to offset realized capital
gains on other securities. We may use hedging techniques to help limit taxable
income and capital gains.
Equity-related securities in which the Fund primarily invests are common
stocks, convertible securities and nonconvertible preferred stocks. We also may
use derivatives for hedging or to improve the Fund's returns. In addition, the
Fund may actively and frequently trade its portfolio securities. While we make
every effort to achieve our objective, we can't guarantee success.
- -------------------------------------------------------------------
HOW WE INVEST
A team of Prudential Investments' quantitative portfolio managers manages the
Fund using their judgment and a quantitative stock selection model to evaluate
growth potential, valuation, liquidity and investment risk. They try to select
common stocks and convertible securities that will provide strong capital
appreciation, while trying to limit both the effects of taxation and the
differences in portfolio characteristics from those of the S&P Small-Cap 600
Index.
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1
<PAGE>
RISK/RETURN SUMMARY
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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 companies vary more than the stock prices of large company
stocks and they may also present above-average risks. This means that when stock
prices decline overall, the Fund may decline more than the Standard & Poor's 500
Composite Stock Price Index and may, in fact, decline more than the S&P SmallCap
600 Index. The Fund's holdings can vary significantly from broad market indexes.
As a result, the Fund's performance 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.
The Fund may actively and frequently trade its portfolio securities. High
portfolio turnover results in higher brokerage commissions and other costs and
can affect the Fund's performance.
Some of our investment strategies--such as using derivatives--involve
above-average risks. The Fund may use hedging techniques to help limit taxes,
preserve assets or enhance return. Derivatives may not fully offset the
underlying positions and this could result in losses to the Fund that would not
otherwise have occurred.
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 TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation. The bar chart and table demonstrate the risk of investing in the Fund
by showing how returns can change from year to year and 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)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1998 -10.45%
1999
BEST QUARTER: % ( quarter of 199 )
WORST QUARTER: % ( quarter of 199 )
</TABLE>
* THE ANNUAL RETURN DOES NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURN WOULD BE LOWER THAN THAT SHOWN. WITHOUT THE
DISTRIBUTION AND SERVICE (12B-1) FEE WAIVER, THE ANNUAL RETURNS WOULD ALSO
HAVE BEEN LOWER. RETURN FOR THE QUARTER ENDED 3-31-00 WAS % WITH RESPECT
TO CLASS A SHARES.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR SINCE INCEPTION
<S> <C> <C>
Class A shares % % (since 11-10-97)
Class B shares % % (since 11-10-97)
Class C shares % % (since 11-10-97)
Class Z shares % % (since 11-10-97)
S&P SmallCap 600 Index(2) % % (since 11-10-97)
Lipper Average(3) % % (since 11-10-97)
</TABLE>
<TABLE>
<S> <C>
1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND
EXPENSES. WITHOUT THE DISTRIBUTION AND SERVICE (12B-1) FEE
WAIVER FOR CLASS A SHARES, THE RETURN WOULD HAVE BEEN LOWER.
2 THE S&P SMALLCAP 600 INDEX--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 OR OPERATING EXPENSES OF A
MUTUAL FUND. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED
THE EFFECT OF SALES CHARGES AND OPERATING EXPENSES. THE
SECURITIES IN THE S&P SMALLCAP 600 INDEX 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 VALUE 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.
</TABLE>
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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 .05% None None None
= NET ANNUAL FUND OPERATING EXPENSES %(4) % % %
</TABLE>
<TABLE>
<S> <C>
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 3-31-01, THE DISTRIBUTOR OF THE
FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND
SERVICE (12B-1) FEES FOR CLASS A SHARES TO .25 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
</TABLE>
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4 PRUDENTIAL TAX-MANAGED SMALL-CAP 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 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, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares during the
first year. 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>
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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 we expect will increase over several years. We also
try to limit current and future taxes shareholders pay on the Fund's investment
income and capital gains. Part of our goal is to outperform the S&P SmallCap 600
Index on a before and after-tax basis. The Fund is not sponsored by or
affiliated with S&P. 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 like those found in
the S&P SmallCap 600 Index. The S&P SmallCap 600 Index consists of 600 domestic
stocks chosen for market size, liquidity and industry group representation. The
market capitalization ranges of the Index change every month but, as of
April 30, 2000, the range was from $ million to $ billion with a weighted
average market value of $ million. Market capitalization is measured at the
time of initial purchase; the range of market capitalization may change at our
discretion to reflect industry norms. If a company's market capitalization grows
above "small-cap," we do not have to sell that company's security.
The Fund will invest in equity-related securities, principally common
stocks, convertible securities and nonconvertible preferred stocks. In addition,
equity-related securities include 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
(REITS); American Depositary Receipts (ADRs); and similar securities.
We also may buy convertible securities. These are securities--like bonds,
corporate notes and preferred stocks--that we can convert into the company's
common stock or some other equity security. We buy only investment-grade
convertible securities.
- -------------------------------------------------------------------
OUR TAX-MANAGED APPROACH
Taxes are a major influence on the net returns that you receive on your taxable
investments. We try to achieve long-term after-tax returns for you by managing
our investments so as to limit and defer the taxes you incur as a result of your
investment in the Fund.
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6 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
We try to limit taxes by attempting to avoid short-term capital gains. We
also try to limit taxes on investment income by investing in lower-yielding
equity securities. However, a portion of the Fund's securities may offer high
potential capital appreciation and a yield component.
Generally, we consider selling a security when its expected return has
decreased and for other reasons such as risk reduction or industry or sector
considerations. When deciding whether to sell securities, we will consider the
negative tax impact of realizing capital gains and the positive tax impact of
realizing capital losses. We sometimes may defer the sale of a security until
the realized capital gain would qualify as a long-term capital gain. We also may
sell a security to realize a capital loss that can be used to offset realized
capital gains. When selling a portion of a holding, we may sell those securities
with a higher cost basis first. The portfolio managers may employ tax-advantaged
hedging techniques such as using options to protect the value of a holding
without selling the security.
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 can change investment policies
that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to try to increase the Fund's returns or protect its
assets if market conditions warrant.
FOREIGN SECURITIES
The Fund can invest up to 20% of its total assets in stocks and other equity-
related securities of foreign issuers. For purposes of the 20% limit, we do not
consider ADRs and other similar receipts or shares to be foreign securities.
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,
- --------------------------------------------------------------------------------
7
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
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. 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.
REPURCHASE AGREEMENTS
The Fund may 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 and is, in effect, a loan by the Fund.
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, high-quality money
market instruments or repurchase agreements. 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.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S. government 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.
SHORT SALES
The Fund may make SHORT SALES of a security. This means that the Fund may sell a
security that it 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 costs and
risk. 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
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8 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
replaces the borrowed security. The Fund also may make SHORT SALES "AGAINST THE
BOX." In a short sale against the box, at the time 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
TAX-ADVANTAGED HEDGING
To protect against price declines in our holdings that have developed large
accumulated capital gains, we may use hedging techniques to help reduce taxes,
including the purchase of put options on securities held, and financial and
stock index futures contracts. Using these techniques rather than selling these
securities may reduce exposure to price declines in certain securities without
realizing substantial capital gains under current tax law. Our ability to use
these strategies as a tax management technique for holdings of appreciated
securities is limited--certain hedging transactions must be closed out within 30
days after the end of the taxable year. Our ability to use different
tax-management strategies may be limited in the future by market volatility,
excessive shareholder redemptions or changes in tax law.
We expect that by using various tax management strategies, we can reduce the
extent to which you incur taxes on Fund distributions of income and net realized
gains. Even so, we expect to distribute taxable income or capital gains from
time to time.
OTHER DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Fund's returns or
protect its assets. 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 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.
- --------------------------------------------------------------------------------
9
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
OPTIONS. The Fund may purchase and sell put and call options on equity
securities and financial indexes traded on U.S. or foreign securities exchanges
or in the over-the-counter market. An OPTION is the right to buy or sell
securities in exchange for a premium. The Fund will sell only covered options.
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.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks--Risk Management and Return Enhancement
Strategies."
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.
PORTFOLIO TURNOVER
As a result of the strategies described above, the Fund may have an annual
portfolio turnover rate of up to 200%. Portfolio turnover is generally the
percentage found by dividing the lesser of portfolio purchases or sales by the
monthly average value of the portfolio. High portfolio turnover (100% or more)
results in higher brokerage commissions and other transaction costs and can
affect the Fund's performance. It also can result in a greater amount of
distributions as ordinary income rather than long-term capital gains.
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10 PRUDENTIAL TAX-MANAGED SMALL-CAP 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 non-principal 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 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 companies
Index can outperform larger
-- Small-cap companies ones
are more likely to
reinvest earnings and
not pay dividends
-- Changes in interest
rates may affect the
securities of small
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
- -----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
- ----------------------------------------------------------------------------------------
TAX-RELATED INVESTING -- Sharply rising market -- Lower current taxes
AT LEAST 80% may limit the ability and future tax
to generate tax liability
losses -- Higher after-tax
-- Sharply falling market returns
may create
unavoidable increases
in dividend yield
-- Tax law changes may
limit the
effectiveness of some
strategies
-- Excessive shareholder
redemptions may
require realizing
unintended capital
gains
-- Lower pre-tax returns
- ----------------------------------------------------------------------------------------
STOCKS OF LARGER U.S. -- Similar risks to small -- Not as likely to lose
COMPANIES U.S. companies value as stocks of
UP TO 20% -- Companies that pay small companies
dividends may not do -- May be a source of
so if they don't have dividend income
profits or adequate
cash flow
- ----------------------------------------------------------------------------------------
FOREIGN SECURITIES -- Foreign markets, -- Investors can
UP TO 20% economies and participate in
political systems may foreign markets and
not be as stable as companies operating
in the U.S., in those markets
particularly those in -- Changing value of
developing countries foreign currencies
-- Currency risk-- -- Opportunities for
changing value of diversification
foreign currencies
can cause losses
-- May be less liquid
than U.S. stocks and
bonds
-- Differences in foreign
laws, accounting
standards, public
information, custody
and settlement
practices provide
less reliable
information on
foreign investments
and involve more risk
- ----------------------------------------------------------------------------------------
</TABLE>
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12 PRUDENTIAL TAX-MANAGED SMALL-CAP 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>
- ----------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Fund could make
UP TO 20% futures and options money and protect
that are used for against losses if the
hedging purposes may investment analysis
not fully offset the proves correct
underlying positions -- Derivatives that
and this could result involve leverage
in 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 intended balance is by locking
effects and may in the value of an
result in losses or investment ahead of
missed opportunities time
-- 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>
- --------------------------------------------------------------------------------
13
<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 SECURITIES -- Not all U.S. -- May preserve the
government securities Fund's assets
UP TO 20% are insured by the -- Principal and interest
U.S. government, but may be guaranteed by
only by the issuing the U.S. government
agency or issuing agency
-- Limits potential for -- Regular interest
capital appreciation income
-- Interest rate risk -- -- Generally more secure
the risk that the than lower quality
value of most bonds debt securities and
will fall when equity securities
interest rates rise.
The longer a bond's
maturity and the
lower its credit
quality, the more its
value typically
falls. It can lead to
price volatility
-- Credit risk -- the
risk that the
default of an issuer
would leave the Fund
with unpaid interest
or principal. The
lower an instrument's
quality, the higher
its potential
volatility
-- Market risk -- the
risk that the market
value of an
investment may move
up or down, sometimes
rapidly or
unpredictably. Market
risk may affect an
industry, a sector or
the market as a whole
- ----------------------------------------------------------------------------------------
SHORT SALES -- May magnify underlying -- May magnify underlying
investment losses investment gains
UP TO 25% OF NET ASSETS -- Investment costs may
exceed potential
underlying investment
gains
- ----------------------------------------------------------------------------------------
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 potential for growth
sell at the time or than more widely
price desired traded securities
- ----------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for -- May preserve the
capital appreciation Fund's assets
UP TO 20% ON A NORMAL BASIS -- See credit risk and
AND UP TO 100% ON A market risk
TEMPORARY BASIS
- ----------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
14 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- -------------------------------------
BOARD OF DIRECTORS
The Fund's 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. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended March 31, 2000, the Fund paid PIFM management fees of .60 of 1% of the
Fund's average net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of April 30, 2000, 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 and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street, Newark,
NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.
PORTFOLIO MANAGERS
JAMES SCOTT, PH.D., is a Senior Managing Director of Prudential Investments
Quantitative Management, a unit of Prudential Investments. He has managed
balanced and equity portfolios for Prudential's pension plans and several
institutional clients since 1987. Mr. Scott has 24 years of investment
experience. He received a B.A. from Rice University and an M.S. and a Ph.D. from
Carnegie Mellon University.
- --------------------------------------------------------------------------------
15
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------
MARK STUMPP, PH.D., is a Senior Managing Director of Prudential Investments.
He has managed mutual fund portfolios since 1995 and has managed investment
portfolios for over 11 years. Mr. Stumpp has 19 years of investment experience.
He received a B.A. from Boston University and an M.A. and a Ph.D. from Brown
University.
TED LOCKWOOD is Managing Director of Equity Management of Prudential
Investments, which includes quantitative equity, derivative and index funds. He
joined Prudential in 1988 and has over 13 years of investment experience. Mr.
Lockwood is also responsible for investment research, new product development
and managing balanced portfolios on behalf of institutional clients. He received
a B.S. from the State University of New York at Stony Brook and an M.B.A. and on
M.S. from Columbia University.
Messrs. Scott, Stumpp and Lockwood lead a team of 17 investment
professionals, seven of whom hold Ph.D.s, with over 200 years of combined
experience. The team is currently responsible for the management of over
$17 billion in assets. Messrs. Scott, Stumpp and Lockwood became co-portfolio
managers of the Fund on May 31, 2000.
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 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" tables.
- -------------------------------------------------------------------
16 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- -------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, although the Fund tries to limit the amount of its taxable
distributions, 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. Dividends
and distributions from the Fund also may be subject to state and local income
tax in the state where you live.
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 may realize taxable gains even though it tries to limit them. The Fund
also tries to limit taxable dividend distributions, but believes it will
distribute some taxable income.
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. Capital gains 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
- --------------------------------------------------------------------------------
17
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
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 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 taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions and sale proceeds.
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.
- -------------------------------------------------------------------
18 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
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 when dividends
are paid out, the value of each share of the Fund decreases by the amount of the
dividend to reflect the payout, although this may not be apparent because the
value of each share of the Fund also will be affected by the market changes, if
any. 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 OR TAX-DEFERRED 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.
- -------------------------------------------------------------------
RECEIPTS FROM SALE --> +$ CAPITAL GAIN
(taxes owed)
$ OR
RECEIPTS FROM SALE --> -$ CAPITAL LOSS
(offset against gain)
- -------------------------------------------------------------------
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days
- --------------------------------------------------------------------------------
19
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
before the sale of the shares). If you acquire shares of the Fund and sell your
shares within 90 days, you may not be allowed to include certain charges
incurred in acquiring the shares for purposes of calculating gain or loss
realized upon the sale of the shares.
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 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 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.
- -------------------------------------------------------------------
20 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<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 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 low
front-end sales charge and low CDSC
- --------------------------------------------------------------------------------
21
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
-- 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 public
offering offering
price price
Contingent Deferred Sales None If sold 1% on sales None
Charge (CDSC)(2) during: made within
Year 1 5% 18 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 of currently)
average net assets(3)
</TABLE>
<TABLE>
<S> <C>
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. FOR THE FISCAL YEAR ENDING 3-31-01, THE
DISTRIBUTOR OF THE FUND HAS CONTRACTUALLY AGREED TO REDUCE
ITS DISTRIBUTION AND SERVICE (12B-1) FEES FOR CLASS A SHARES
TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A
SHARES.
</TABLE>
- -------------------------------------------------------------------
22 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<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 how
the sales charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF 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>
<TABLE>
<S> <C>
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A
SHARES, UNLESS YOU QUALIFY TO BUY CLASS Z SHARES.
</TABLE>
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
current 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.
The Distributor may reallow Class A's sales charge to dealers.
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:
-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades and charges its clients a management, consulting
or other fee for its services
-- Mutual fund "supermarket" programs where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, the Prudential
mutual funds, the subadvisers of the Prudential mutual funds and registered
representatives and employees of brokers that have entered into a 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. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. 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 (Prudential Securities) or one
- -------------------------------------------------------------------
24 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades, links its clients' accounts to a master account
in the sponsor's name and charges its clients a management,
consulting or other fee for its services
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the
following:
-- 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
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
-- 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 A or 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."
- -------------------------------------------------------------------
26 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<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 (NYSE) is open for trading.
The NYSE is closed on most national holidays and Good Friday. Because the Fund
may invest in foreign securities, its NAV may change on days when you cannot buy
or sell shares. 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
the 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.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
27
<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. Eligible investors who apply for PruTector coverage after the
initial 6-month enrollment period will need to provide satisfactory
- -------------------------------------------------------------------
28 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
evidence of insurability. This insurance is subject to other restrictions and is
not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption 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, your broker 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.
- --------------------------------------------------------------------------------
29
<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 $100,000 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 you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker-dealer or credit union. 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.
- -------------------------------------------------------------------
30 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<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 (one year for Class C shares 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, 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
BENEFIT PLANS. The CDSC will be waived for purchases by certain group retirement
plans for which Prudential or brokers not affiliated with Prudential provide
administrative or recordkeeping services. The CDSC also will be waived for
certain redemptions by benefit plans sponsored by Prudential and its affiliates.
For more information, call Prudential at (800) 353-2847.
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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 qualified 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."
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.
- -------------------------------------------------------------------
32 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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.
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 a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
- --------------------------------------------------------------------------------
33
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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 decision
may be based upon dollar amount, volume and frequency of trading. The Fund may
notify a market timer of rejection of an exchange or 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.
TELEPHONE REDEMPTIONS OR EXCHANGES
You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852 before 4:15 p.m. New York time. You will receive a redemption
amount based on that day's NAV.
The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming or exchanging shares. The
Fund will not be liable if it follows instructions that it reasonably believes
are made by the shareholder. If the Fund does not follow reasonable procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail.
The telephone redemption or exchange privilege may be modified or terminated
at any time. If this occurs, you will receive a written notice from the Fund.
- -------------------------------------------------------------------
34 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<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 SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
CLASS A SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000 1999 1998(1)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.44 $10.95 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment gain .03 .02
Net realized and unrealized gain (loss) on
investment transactions (3.41) .94
TOTAL FROM INVESTMENT OPERATIONS (3.38) .96
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions in excess of net investment income -- (.01)
Distributions from net realized gains (.13) --
NET ASSET VALUE, END OF PERIOD $ $7.44 $10.95
TOTAL RETURN(2) % (31.00)% 9.60%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998(1)
- -------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $ $46,736 $115,621
Average net assets (000) $ $82,332 $106,453
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees(4) % 1.26% 1.22%(3)
Expenses, excluding distribution fees % 1.01% 0.97%(3)
Net investment income % .16% .47%(3)
Portfolio turnover % 106% 39%
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 11-10-97 (WHEN CLASS A
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 RETURN FOR PERIODS OF LESS THAN A FULL YEAR
IS NOT ANNUALIZED.
3 ANNUALIZED.
4 THE DISTRIBUTOR OF THE FUND AGREED TO LIMIT ITS DISTRIBUTION
FEES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS A SHARES.
</TABLE>
- --------------------------------------------------------------------------------
35
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS B SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
CLASS B SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000 1999 1998(1)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $10.93 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.06) (.01)
Net realized and unrealized gain (loss) on
investment transactions (3.37) .94
TOTAL FROM INVESTMENT OPERATIONS (3.43) .93
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions in excess of net investment income -- --
Distributions from net realized gains (.13) --
NET ASSET VALUE, END OF PERIOD $ $7.37 $10.93
TOTAL RETURN(2) % (31.61)% 9.31%
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $ $102,094 $196,671
Average net assets (000) $ $158,085 $170,484
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees %(3) 2.01% 1.97%(3)
Expenses, excluding distribution fees %(3) 1.01% 0.97%(3)
Net investment loss %(3) (.58)% (.29)%(3)
Portfolio turnover % 106% 39%
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 11-10-97 (WHEN CLASS B
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 RETURN FOR PERIODS OF LESS THAN A FULL YEAR
IS NOT ANNUALIZED.
3 ANNUALIZED.
</TABLE>
- -------------------------------------------------------------------
36 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS C SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
CLASS C SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000 1999 1998(1)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $10.93 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.08) (.01)
Net realized and unrealized gain (loss) on investment
transactions (3.35) .94
TOTAL FROM INVESTMENT OPERATIONS (3.43) .93
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions in excess of net investment income -- --
Distributions from net realized gains on investment
transactions (.13) --
NET ASSET VALUE, END OF PERIOD $ $7.37 $10.93
TOTAL RETURN(2) % (31.61)% 9.31%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998(1)
- -------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $ $14,951 $36,628
Average net assets (000) $ $27,182 $34,000
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees % 2.01% 1.97%(3)
Expenses, excluding distribution fees % 1.01% 0.97%(3)
Net investment loss % (.59)% (.29)%(3)
Portfolio turnover % 106% 39%
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 11-10-97 (WHEN CLASS C
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 RETURN FOR PERIODS OF LESS THAN ONE YEAR IS
NOT ANNUALIZED.
3 ANNUALIZED.
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000 1999 1998(1)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $10.96 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .05 .02
Net realized and unrealized gain (loss) on investment
transactions (3.42) .95
TOTAL FROM INVESTMENT OPERATIONS (3.37) .97
- --------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions in excess of net investment income -- (.01)
Distributions from net realized gains (.13) --
NET ASSET VALUE, END OF PERIOD $ $7.46 $10.96
TOTAL RETURN(2) (30.88)% 9.74%
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000(1) 1999 1998(1)
- --------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $ $4,121 $4,039
Average net assets (000) $ $5,315 $2,709
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees %(3) 1.01% 0.97%(3)
Expenses, excluding distribution fees %(3) 1.01% 0.97%(3)
Net investment income %(3) .43% .51%(3)
Portfolio turnover % 106% 39%
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 11-10-97 (WHEN CLASS Z
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 RETURN FOR PERIODS OF LESS THAN ONE YEAR IS
NOT ANNUALIZED.
3 ANNUALIZED.
</TABLE>
- -------------------------------------------------------------------
38 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
[This page has been left blank intentionally.]
- --------------------------------------------------------------------------------
39
<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 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 REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC.
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
TARGET FUNDS
LARGE CAPITALIZATION GROWTH FUND
LARGE CAPITALIZATION VALUE FUND
SMALL CAPITALIZATION GROWTH FUND
SMALL CAPITALIZATION VALUE 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.
PRUDENTIAL GLOBAL GROWTH FUND
PRUDENTIAL INTERNATIONAL VALUE FUND
PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
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40 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
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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
TARGET FUNDS
TOTAL RETURN BOND FUND
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
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41
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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) 482-7555 (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 website 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 20549-0102
BY ELECTRONIC REQUEST
[email protected]
(The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call
1-202-942-8090)
VIA THE INTERNET
On the EDGAR Database at
http://www.sec.gov
CUSIP Nos.: NASDAQ Symbols:
Class A Shares--74436N-10-8 PQVAX
Class B Shares--74436N-20-7 PQVBX
Class C Shares--74436N-30-6 PQVCX
Class Z Shares--74436N-40-5 --
Investment Company Act File No.: 811-08167
MF176A
[RECYCLED LOGO]
Printed on Recycled Paper
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PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 31, 2000
Prudential Tax-Managed Small-Cap Fund, Inc., formerly 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 seeks to
maximize long-term capital appreciation and to limit taxable distributions to
its shareholders. 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 May 31, 2000, a copy
of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
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PAGE
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Fund History................................................ B-2
Description of the Fund, Its Investments and Risks.......... B-2
Investment Restrictions..................................... B-12
Management of the Fund...................................... B-13
Control Persons and Principal Holders of Securities......... B-15
Investment Advisory and Other Services...................... B-16
Brokerage Allocation and Other Practices.................... B-19
Capital Shares, Other Securities and Organization........... B-21
Purchase, Redemption and Pricing of Fund Shares............. B-22
Shareholder Investment Account.............................. B-30
Net Asset Value............................................. B-34
Taxes, Dividends and Distributions.......................... B-35
Performance Information..................................... B-38
Financial Statements........................................ B-40
Report of Independent Accountants........................... B-50
Appendix I--General Investment Information.................. I-1
Appendix II--Historical Performance Data.................... II-1
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MF176B
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FUND HISTORY
The Fund was incorporated in Maryland on February 4, 1997. Effective
May 31, 2000, the Fund's name changed from Prudential Small-Cap Quantum Fund,
Inc. to Prudential Tax-Managed Small-Cap Fund, Inc.
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 principal and
non-principal strategies that are further described below in seeking to achieve
its objective. The Fund may not be successful in achieving its objective and you
could lose money.
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. For purposes of the 80% policy, the Fund will
not invest more than 5% of total assets in unattached rights and warrants.
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
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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.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in securities of real
estate investment trusts or REITs. Unlike corporations, REITs do not have to pay
income taxes if they meet certain requirements of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). To qualify, a REIT must distribute at
least 95% of its taxable income to its shareholders and receive at least 75% of
that income from rents, mortgages and sales of property. REITs offer investors
greater liquidity and diversification 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.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund may invest in U.S. Treasury securities,
including bills, notes, bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. government and,
as such, are backed by the "full faith and credit" of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances.
OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in 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 characteristics. 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.
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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 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.
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.
The costs attributable to foreign investing are higher than the costs of
domestic investing. For example, the cost of maintaining custody of foreign
securities generally exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing are frequently higher than
those attributable to domestic investing. Costs are incurred in connection with
conversions between various currencies. In addition, foreign brokerage
commissions are generally higher than in the U.S. and foreign securities markets
may be less liquid and more volatile than in the U.S. Foreign investment income
may be subject to foreign withholding or other government taxes that could
reduce the return to the Fund on those securities. Tax treaties between the
United States and certain foreign countries may, however, reduce or eliminate
the amount of foreign tax to which the Fund would be subject.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES. On January 1, 1999, 11 of the 15 member states of the European
Monetary Union introduced the "euro" as a common currency. During a three-year
transitional period, the euro will coexist with each member state's national
currency. By July 1, 2002, the euro is expected to become the sole legal tender
of the member states. During the transition period, the Fund will treat the euro
as a separate currency from the national currency of any member state.
The adoption by the member states of the euro will eliminate the substantial
currency risk among member states and will likely affect the investment process
and considerations of the Fund's investment adviser. To the extent the Fund
holds non-U.S. dollar-denominated securities, including those denominated in the
euro, the Fund will still be subject to currency risk due to fluctuations in
those currencies as compared to the U.S. dollar.
The medium- to long-term impact of the introduction of the euro in member
states cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general long-term ramifications
can be expected, such as changes in economic environment and changes in behavior
of investors, all of which will impact the Fund's investments.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund 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, futures contracts and options on such contracts. The Fund's
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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.
OPTIONS ON EQUITY SECURITIES AND SECURITIES INDEXES
The Fund may purchase and sell put and call options on equity securities and
securities indexes traded on U.S. or foreign securities exchanges or traded in
the over-the-counter markets. Options on securities indexes 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 INDEXES
The Fund's purchase and sale of options on indexes will be subject to risks
described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indexes 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 indexes 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 indexes 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
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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.
SPECIAL RISKS OF WRITING CALLS ON INDEXES
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 indexes 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 INDEXES. 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
B-6
<PAGE>
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.
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 indexes and foreign currencies.
The Fund may also purchase futures contracts on debt securities, including U.S.
government securities and aggregates of debt securities. 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 liquidation value of the Fund's total assets.
Although there are no other limits applicable to futures contracts, the value of
all futures contracts sold will not exceed the total market value of the Fund's
portfolio.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
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.
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 liquidation 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
B-7
<PAGE>
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
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.
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.
B-8
<PAGE>
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's investment adviser. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (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 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.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities. If the
Fund were to exceed this limit, the investment adviser would take prompt action
to reduce the Fund's holdings in illiquid securities to no more than 15% of its
net assets, as required by applicable law. Illiquid securities include
repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
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
B-9
<PAGE>
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and 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.
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.
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<PAGE>
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.
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.
(e) PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions. 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."
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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.
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, foreign currency forward 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 foreign
currency forward 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.
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<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------ ------------------ ---------------------
<S> <C> <C>
Delayne Dedrick Gold (61) Director Marketing and Management Consultant.
*Robert F. Gunia (53) Vice President and Executive Vice President and Chief Administrative
Director Officer (since June 1999) of Prudential
Investments; Corporate Vice President
(September 1997-March 1999) of The Prudential
Insurance Company of America (Prudential);
Executive Vice President and Treasurer (since
December 1996) of Prudential Investments Fund
Management LLC (PIFM); President (since April
1999) of Prudential Investment Management Services
LLC (PIMS); formerly Senior Vice President
(March 1987-May 1999) of Prudential Securities
Incorporated (Prudential Securities) and Chief
Administrative Officer (July 1990-September 1996),
Director (January 1989-September 1996) and
Executive Vice President, Treasurer and Chief
Financial Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.
Douglas H. McCorkindale (60) Director Vice Chairman (since March 1984) and President
(since September 1997) of Gannett Co. Inc.
(publishing and media); Director of Gannett Co.
Inc., Global Crossing Ltd. and Continental
Airlines, Inc.
Thomas T. Mooney (58) Director President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; former
Deputy Monroe County Executive; Trustee of Center
for Governmental Research, Inc.; Director of Blue
Cross of Rochester, Monroe County Water Authority
and Executive Service Corps of Rochester.
Stephen P. Munn (57) Director Chairman (since January 1994), Director and
President (since 1988) and Chief Executive Officer
(1988-December 1993) of Carlisle Companies
Incorporated (manufacturer of industrial
products).
*David R. Odenath, Jr. (42) Vice President and Officer in Charge, President, Chief Executive
Director Officer and Chief Operating Officer (since June
1999), PIFM; Senior Vice President (since June
1999), Prudential; formerly Senior Vice President
(August 1993-May 1999), PaineWebber Group, Inc.
Richard A. Redeker (56) Director Formerly President, Chief Executive Officer and
Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc., Executive
Vice President, Director and Member of the
Operating Committee (October 1993-September 1996)
of Prudential Securities; Director
(October 1993-September 1996) of Prudential
Securities Group, Inc.; Executive Vice President
(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.
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------ ------------------ ---------------------
<S> <C> <C>
Robin B. Smith (60) 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.
*John R. Strangfeld, Jr. (45) President and Director Chief Executive Officer, Chairman, President and
Director (since January 1990), of The Prudential
Investment Corporation, Executive Vice President
(since February 1998), Prudential Global Asset
Management Group of Prudential, and Chairman
(since August 1989), Pricoa Capital Group;
formerly various positions to Chief Executive
Officer (November 1994-December 1998), Private
Asset Management Group of Prudential and Senior
Vice President (January 1986-August 1989),
Prudential Capital Group, a unit of Prudential.
Louis A. Weil, III (58) Director Chairman (since January 1999), President and Chief
Executive Officer (since January 1996) and
Director (since September 1991) of Central
Newspapers, Inc.; Chairman of the Board (since
January 1996), Publisher and Chief Executive
Officer (August 1991-December 1995) of Phoenix
Newspapers, Inc.; formerly Publisher
(May 1989-March 1991) of Time Magazine; President,
Publisher & Chief Executive Officer
(February 1986-August 1989) of The Detroit News
and member of the Advisory Board, Chase Manhattan
Bank-Westchester.
Clay T. Whitehead (61) Director President (since May 1983) of National Exchange
Inc. (new business development firm).
Grace C. Torres (40) Treasurer and Principal First Vice President (since December 1996) of PIFM;
Financial and First Vice President (since March 1993) of
Accounting Officer Prudential Securities; formerly First Vice
President (March 1994-September 1996) of
Prudential Mutual Fund Management, Inc.
Marguerite E. H. Morrison (43) Secretary Vice President and Associate General Counsel (since
December 1996) of PIFM; Vice President and
Associate General Counsel of Prudential
Securities; formerly Vice President and Associate
General Counsel (June 1991-September 1996) of
Prudential Mutual Fund Management, Inc.
William V. Healey (46) Assistant Secretary Vice President and Associate General Counsel of
Prudential and Chief Legal Officer of The
Prudential Investment Corporation since
August 1998; Director, ICI Mutual Insurance
Company since June 1999; prior to August 1998,
Associate General Counsel of The Dreyfus
Corporation (Dreyfus), a subsidiary of Mellon
Bank, N.A. (Mellon Bank), and an officer and/or
director of various affiliates of Mellon Bank and
Dreyfus.
Stephen M. Ungerman (46) Assistant Treasurer Tax Director (since March 1996) of Prudential
Investments; formerly First Vice President
(February 1993-September 1996) of Prudential
Mutual Fund Management, Inc.
</TABLE>
- ------------
* "Interested" Director, as defined in the Investment Company Act, by reason
of affiliation with Prudential Securities, Prudential or PIFM.
** 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.
B-14
<PAGE>
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 75.
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 currently 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 a Commission exemptive
order, at the daily rate of return of any Prudential mutual fund. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Director. The Fund's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Fund.
The following table sets forth the estimated aggregate compensation paid by
the Fund for the fiscal year ended March 31, 2000 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, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM FUND
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF DIRECTOR FROM FUND TO DIRECTORS
- ---------------- ------------ ----------------
<S> <C> <C>
Edward D. Beach++........................................... $2,000 $142,500(43/70)*
Delayne Dedrick Gold........................................ $2,000 $144,500(43/70)*
Robert F. Gunia+............................................ -- --
Douglas H. McCorkindale**................................... $2,000 $ 80,000(24/49)*
Thomas T. Mooney**.......................................... $2,000 $129,500(35/75)*
Stephen P. Munn............................................. $2,000 $ 62,250(29/53)*
David R. Odenath, Jr.+...................................... -- --
Richard A. Redeker.......................................... $2,000 $ 95,000(29/53)*
Robin B. Smith**............................................ $2,000 $ 96,000(32/44)*
John R. Strangfeld, Jr.+.................................... -- --
Louis A. Weil, III.......................................... $2,000 $ 96,000(29/53)*
Clay T. Whitehead........................................... $2,000 $ 77,000(38/66)*
</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, 1999, includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $97,916, $135,102
and $156,478 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. Beach retired on December 31, 1999.
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 , 2000, the Directors and officers of the Fund, as a group, owned
less than 1% of the outstanding shares of the Fund.
B-15
<PAGE>
As of May , 2000, Oakbrook Realty & Investment, LLC, 1000 Royce Blvd.,
Oakbrook Terrace, IL 60181 was the beneficial owner of Class Z shares of
the Fund (approximately % of the outstanding Class Z shares).
As of May , 2000, 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
(a) MANAGER AND INVESTMENT ADVISER
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, 2000,
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 September 30, 1999, the Prudential mutual funds were
the 20th largest family of mutual funds in the United States.
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 and dividend distribution agent for the Prudential
mutual funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), 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 has hired The Prudential Investment Corporation, doing business as
Prudential Investments (PI, the investment adviser or the Subadviser), to
provide subadvisory services to 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 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'
B-16
<PAGE>
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 years ended March 31, 2000 and 1999 and the fiscal period ended
March 31, 1998, PIFM received management fees of $ , $1,637,480 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 to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises its
performance of such services. PI was reimbursed by PIFM for the reasonable costs
and expenses incurred by PI in furnishing those services. Effective January 1,
2000, PI is paid by PIFM at an annual rate of .25 of 1% of the Fund's average
daily net assets.
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.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
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. The Distributor is a subsidiary of
Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the 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 agreed to limit its distribution-related fees payable under the
Class A Plan to .25 of 1% of the average daily net assets of the Class A shares
through March 31, 2001.
B-17
<PAGE>
For the fiscal year ended March 31, 2000, the Distributor 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, 2000, the Distributor also received
approximately $ in initial sales charges in connection with the sale of
Class A shares.
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 and, with respect to Class C shares, an initial sales
charge.
CLASS B PLAN. For the fiscal year ended March 31, 2000, the Distributor
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 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 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, 2000, the Distributor received approximately
$ in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended March 31, 2000, the Distributor
received $ under the Class C Plan and spent approximately $ in
distributing Class C shares. It is estimated that of the latter total amount
approximately % ($ ) on compensation to brokers 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 also receives initial sales charges and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. For the fiscal year ended March 31, 2000, the Distributor
received approximately $ in contingent deferred sales charges
attributable to Class C shares. For the fiscal year ended March 31, 2000, 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.
B-18
<PAGE>
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.
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
and service (12b-1) fees for the Class A shares as described above. Fee waivers
and subsidies 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.
, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants, and in that capacity audits
the annual financial statements of the Fund.
CODES OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics. In
addition, the Manager, Subadviser and Distributor have each adopted a Code of
Ethics (the Codes). The Codes permit personnel subject to the Codes to invest in
securities, including securities that may be purchased or held by the Fund.
However, the protective provisions of the Codes prohibit certain investments and
limit such personnel from making investments during periods when the Fund is
making such investments. The Codes are on public file with, and are available
from, the Commission.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, futures
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
B-19
<PAGE>
brokerage commissions, if any. The term "Manager" as used in this section
includes the Subadviser. Brokers 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 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
efficient 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 Board of Directors. Portfolio securities may not be
purchased from any underwriting or selling syndicate of which Prudential
Securities or any affiliate, during the existence of the syndicate, is a
principal underwriter (as defined in the Investment
B-20
<PAGE>
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.
The table below sets forth information concerning the payment of commissions
by the Fund, including commissions paid to Prudential Securities for each of the
two years ended March 31, 2000 and the period ended March 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, FISCAL
------------------------- PERIOD ENDED
ITEM 2000 1999 MARCH 31, 1998
- ---- ----------- ----------- --------------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund..................................... $ $1,176,539 $982,575
Total brokerage commissions paid to
Prudential Securities and its foreign
affiliates............................... $ $ 4,806 $ 0
Percentage of total brokerage commissions
paid to Prudential Securities and its
foreign affiliates....................... % .41% 0%
</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, 2000. 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, 2000. As of March 31, 2000, the Fund held
securities of Bear, Stearns & Co. Inc., Morgan Stanley Dean Witter and SBC
Warburg Dillon Read LLC in the aggregate amounts of $ , $ and
$ , respectively.
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,
B-21
<PAGE>
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 fundamental
investment policies related thereto.
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, fund and 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 Tax-Managed Small-Cap 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 Tax-Managed
Small-Cap 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.
B-22
<PAGE>
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, 2000, 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, offering price and redemption 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.
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.
B-23
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class
A shares without the initial sales charge if they meet the required minimum
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
- Officers of the Prudential mutual funds (including the Fund)
- Employees of the Distributor, Prudential Securities, 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, directors, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service
with Prudential or one of its subsidiaries
- Members of the Board of Directors of Prudential
- Real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account of Prudential Securities, Prusec or with the Transfer
Agent
- Registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer
- Investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase
- Investors in Individual Retirement Accounts, provided the purchase is made
in a directed rollover to such Individual Retirement Account or with the
proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential provides administrative or recordkeeping services and further
provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution
- Orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services (for example,
mutual fund "wrap" or asset allocation programs)
- Orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket" programs).
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
For 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.
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 charge applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the Fund--How to
Buy Shares -- Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus.
B-24
<PAGE>
An eligible group of related Fund investors includes any combination of the
following:
- An individual
- The individual's spouse, their children and their parents
- The individual's and spouse's Individual Retirement Account (IRA)
- Any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners)
- A trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
- A Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
- One or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege do not apply
to individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors) who enter into a written Letter of
Intent providing for the purchase, within a thirteen-month period, of shares of
the Fund and shares of other Prudential mutual funds (Investment Letter of
Intent). Retirement and group plans no longer qualify to purchase Class A shares
at NAV by entering into a Letter of Intent.
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential mutual funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent or
its affiliates and through your broker will not be aggregated to determine the
reduced sales charge.
An Investment Letter of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales charge applicable to the amount represented by the goal, as if it
were a single investment. Escrowed Class A shares totaling 5% of the dollar
amount of the Letter of Intent will be held by the Transfer Agent in the name of
the purchaser. The effective date of an Investment Letter of Intent may be
back-dated up to 90 days, in order that any investments made during this 90-day
period, valued at the purchaser's cost, can be applied to the fulfillment of the
Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser is required
to pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charge actually paid. Such payment
may be made directly to the Distributor or, if not paid, the Distributor will
liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of Shares--
Contingent Deferred Sales Charge" below.
B-25
<PAGE>
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (2) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Prusec; and (3) investors purchasing shares
through other brokers. This waiver is not available to investors who purchase
shares directly from the Transfer Agent. You must notify the Transfer Agent
directly or through your broker if you are entitled to this waiver and provide
the Transfer Agent with such supporting documents as it may deem appropriate.
CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and financial planners
who have agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by
the following categories of investors:
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option
- Current and former Director/Trustees of the Prudential mutual funds
(including the Fund)
- Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finder's fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
rights of accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may
B-26
<PAGE>
aggregate the value of their existing holdings of shares of the Fund and shares
of other Prudential mutual funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) to determine the reduced sales
charge. Rights of accumulation may be applied across the classes of the
Prudential mutual funds. However, the value of shares held directly with the
Transfer Agent and through your broker will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of determining
the reduced sales charge is calculated using the maximum offering price (NAV
plus maximum sales charge) as of the previous business day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investor's holdings.
Rights of accumulation are not available to individual participants in any
retirement or group plans.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive 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 must be received by the Transfer Agent, the
Distributor or your broker in order for the redemption request to be processed.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services,
P.O. Box 15010, New Brunswick, New Jersey 08906-5010, the Distributor, or to
your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or
(4) are to be paid to a corporation, partnership, trust or fiduciary, and your
shares are held directly with the Transfer Agent, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices. In the case of redemptions from a PruArray Plan, if the proceeds of the
redemption are invested in another investment option of the plan in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through 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 Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as in a regular redemption. If your shares
B-27
<PAGE>
are redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund during
any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the same Fund at the NAV
next determined after the order is received, which must be within 90 days after
the date of the redemption. Any CDSC paid in connection with such redemption
will be credited (in shares) to your 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 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.
B-28
<PAGE>
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
at the time of death or initial determination of disability, provided that the
shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential mutual funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable Value
Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<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 (a copy of
medically determinable physical or the trust agreement identifying the grantor will be
mental impairment which can be expected required as well)) is permanently disabled. The
to result in death or to be of letter must also indicate the date of disability.
long-continued and indefinite duration.
Distribution from an IRA or A copy of the distribution form from the custodial
403(b) 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>
B-29
<PAGE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula:
(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 (that is, $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.
B-30
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value per share. An investor may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends or distributions sent in cash rather than reinvested. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payment will be made directly to the broker.
Any shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividend or distribution at NAV by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
reinvestment will be made at the NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Shares purchased with reinvested
dividends and/or distributions will not be subject to any CDSC upon redemption.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential mutual funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
mutual funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. For retirement and group plans having a limited menu of Prudential
mutual funds, the exchange privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, 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 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)
B-31
<PAGE>
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.
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 shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money market
fund. In order to minimize the period of time in which shares are subject to a
CDSC, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held in
a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of the month), the entire month will
be included in the CDSC holding period. Conversely, if shares are exchanged into
a money market fund prior to the last day of the month (and are held in the
money market fund on the last day of the month), the entire month will be
excluded from the CDSC holding period. For purposes of calculating the seven
year holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares 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.
B-32
<PAGE>
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years.............................................. $ 105 $ 158 $ 210 $ 263
20 Years.............................................. 170 255 340 424
15 Years.............................................. 289 433 578 722
10 Years.............................................. 547 820 1,093 1,366
5 Years.............................................. 1,361 2,041 2,721 3,402
</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. The withdrawal plan provides for
monthly, quarterly, semi-annual or annual redemption checks in any amount,
except as provided below, up to the value of the shares in the shareholder's
account. Withdrawals of Class B or Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan.
The Transfer Agent, the Distributor or your broker, acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate a
fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
B-33
<PAGE>
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (1) the purchase of Class
A and Class C shares and (2) the redemption of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly if used in connection with a retirement
plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7)of the Internal Revenue Code 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 is
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
B-34
<PAGE>
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.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indexes) are valued at the
last 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 indexes traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of trading on the applicable commodities exchange or
board of trade or, if there was no sale on the applicable commodities exchange
or board of trade on such day, at the mean between the most recently quoted bid
and asked prices on such exchange or board of trade. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
current rate obtained from a recognized bank or dealer, and foreign currency
forward contracts are valued at the current cost of covering or offsetting such
contracts. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
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 is qualified as, intends to remain qualified as and has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code. This relieves the Fund (but not its shareholders) from paying
federal income tax on income and capital gains which are distributed to
shareholders and permits net capital gains of the Fund (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
B-35
<PAGE>
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. The
Fund had a capital loss carryforward for federal income tax purposes at
March 31, 2000 of approximately $ which expires in 2007.
Qualification of the Fund as a regulated investment company under the
Internal Revenue Code requires, among other things, that (a) the Fund derive at
least 90% of 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 holdings so that,
at the end of each quarter of the taxable year (i) at least 50% of the value of
the Fund's assets is represented by cash, U.S. government securities and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the value of the Fund's assets and 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities of any one issuer (other than U.S. government
securities); and (c) the Fund distribute to its shareholders at least 90% of its
net investment income and net short-term capital gains (I.E., the excess of net
short-term capital gains over net long-term capital losses) in each year.
In addition, the Fund is required to distribute 98% of its ordinary income
in the same calendar year in which it is earned. The Fund is also required to
distribute during the calendar year 98% of the capital gain net income it earned
during the twelve months ending on October 31 of such calendar year. In
addition, the Fund must distribute during the calendar year all undistributed
ordinary income and undistributed capital gain net income from the prior
calendar year of the twelve-month period ending on October 31 of such prior
calendar year, respectively. To the extent it does not meet these distribution
requirements, the Fund will be subject to a non-deductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the Fund
pays income tax is treated as distributed.
Gains or losses on sales of securities by the Fund generally 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 indexes, futures contracts and
options thereon, and foreign currency forward 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 indexes 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
B-36
<PAGE>
taxable income during a taxable year, the Fund would not be able to make any
ordinary dividend distributions, or distributions made before the losses were
realized would be recharacterized as a return of capital to shareholders, rather
than as an ordinary dividend, thereby reducing each shareholder's basis in his
or her Fund shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share of the Fund on the reinvestment
date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. In addition, dividends and capital gains
distributions also may be subject to state and local taxes. Therefore, prior to
purchasing shares of the Fund, the investor should carefully consider the impact
of dividends, or capital gains distributions, which are expected to be or have
been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period beginning 30 days before the disposition of shares. Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Net capital gain 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. Foreign shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences resulting from
their investment in the Fund.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts (described above) and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are not eligible for the dividends-received deduction.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares and lower
on Class A shares in relation to Class Z shares. The per share distributions of
net capital gains, if any, will be paid in the same amount for Class A,
Class B, Class C and Class Z shares. See "Net Asset Value."
The Fund 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
B-37
<PAGE>
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.
Shareholders are advised to consult their own tax advisers with respect to
the federal, state and local tax consequences resulting from their investment in
the Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.
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, 2000.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE 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.
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, 2000.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE 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>
B-38
<PAGE>
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.
ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Fund shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indexes. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed-income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
Set forth below is a chart which compares the performance of different types
of investments over the long term and the rate of inflation.(1)
EDGAR REPRESENTATION OF CHART
PERFORMANCE COMPARISON OF
DIFFERENT TYPES OF INVESTMENTS OVER THE LONG TERM
(12/31/1925-12/31/1999)
COMMON STOCKS--11.4%
LONG-TERM GOV'T BONDS--5.1%
INFLATION--3.1%
- ------------
(1) Source: Ibbotson Associates. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Composite Stock Price Index, a market-
weighted, unmanaged index of 500 common stocks in a variety of industry sectors.
It is a commonly used indicator of broad stock price movements. This chart is
for illustrative purposes only and is not intended to represent the performance
of any particular investment or fund. Investors cannot invest directly in an
index. Past performance is not a guarantee of future results.
B-39
<PAGE>
Portfolio of Investments as of
March 31, 1999 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--94.5%
COMMON STOCKS
- ------------------------------------------------------------
Basic Industry--11.0%
21,600 Alaska Air Group, Inc. $ 1,026,000
10,800 Alliant Techsystems, Inc.(a) 839,025
103,100 AMCOL International Corp. 1,031,000
74,900 BE Aerospace, Inc.(a) 1,104,775
76,000 Building Materials Holdings Corp. 769,500
7,700 Castle (A.M.) & Co. 92,881
21,500 Cleveland-Cliffs, Inc. 732,344
30,700 Coach USA, Inc. 844,250
29,100 Commercial Intertech Corp. 323,738
14,000 Commercial Metals Co 280,000
86,300 JLG Industries, Inc. 1,175,837
21,800 Landstar Systems, Inc.(a) 722,125
18,200 Lone Star Industries, Inc. 564,200
9,500 Olympic Steel, Inc.(a) 66,500
62,300 Oregon Steel Mills, Inc. 650,256
21,100 Pentair, Inc. 712,125
18,600 Precision Castparts Corp. 748,650
49,700 Republic Group, Inc. 748,606
4,900 Roanoke Electric Steel Corp. 54,513
6,100 Rock-Tenn Co. 93,788
36,700 Schulman (A.), Inc. 500,037
34,200 Skywest, Inc. 987,525
35,500 Texas Industries, Inc. 880,844
7,900 Tredegar Industries, Inc. 244,406
3,100 Universal Forest Products, Inc. 63,550
67,800 USFreightways Corp. 2,228,925
7,700 Werner Enterprises, Inc. 121,275
42,300 Wolverine Tube, Inc.(a) 893,587
------------
18,500,262
- ------------------------------------------------------------
Business Services--1.6%
4,900 CSS Industries, Inc.(a) 109,025
13,000 Henry Jack & Associates, Inc.(a) 477,750
15,400 Interim Services, Inc.(a) 231,000
48,600 Merrill Corp. 650,025
60,400 Norrell Corp. 788,975
27,600 Romac International, Inc.(a) 234,600
29,000 Staffmark, Inc.(a) 228,375
------------
2,719,750
Capital Spending--3.4%
42,100 Juno Lighting, Inc. $ 944,619
52,800 Manitowoc Co., Inc. 2,211,000
29,700 SPS Technologies, Inc.(a) 1,165,725
15,000 Superior Telecom, Inc. 283,125
52,500 Varlen Corp. 1,155,000
------------
5,759,469
- ------------------------------------------------------------
Consumer Cyclical--10.4%
39,400 Arvin Industries, Inc. 1,327,287
66,300 Champion Enterprises, Inc. 1,284,562
88,300 D.R. Horton, Inc. 1,479,025
67,400 Intermet Corp. 901,475
88,000 Kaufman & Broad Home Corp. 1,985,500
100,000 Lennar Corp. 2,237,500
74,200 Lo Jack Corp.(a) 570,413
45,500 MascoTech, Inc. 705,250
70,400 Meritor Automotive, Inc. 1,091,200
8,400 Miller (Herman), Inc. 153,300
50,400 OshKosh B'Gosh, Inc. 891,450
29,100 Pier 1 Imports, Inc 236,438
34,100 Pulaski Furniture Corp. 699,050
72,850 Smith AO Corp. 1,384,150
39,900 Standard Products Co. 648,375
97,200 Tower Automotive, Inc.(a) 1,810,350
------------
17,405,325
- ------------------------------------------------------------
Consumer Services--18.5%
107,400 ADVO, Inc. 2,074,162
15,300 Anchor Gaming 669,375
9,200 Ann Taylor Stores Corp.(a) 406,525
142,900 Arctic Cat, Inc. 1,420,069
121,400 Brightpoint, Inc. 717,019
75,800 Cato Corp. 705,888
33,860 CKE Restaurants, Inc. 668,735
26,300 Claire's Stores, Inc. 792,287
44,000 CPI Corp. 984,500
51,900 Dress Barn, Inc.(a) 720,113
119,300 Foodmaker, Inc. 3,042,150
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-40
<PAGE>
Portfolio of Investments as of
March 31, 1999 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Consumer Services (cont'd.)
37,800 Galey & Lord, Inc. $ 167,738
32,600 Genesco, Inc.(a) 301,550
65,300 Group 1 Automotive, Inc. 1,603,931
74,200 Guilford Mills, Inc. 649,250
3,900 Insight Enterprises, Inc.(a) 96,525
2,300 Interface, Inc. (Class 'A' Stock) 22,138
6,200 Justin Industries, Inc. 68,200
70,900 Kellwood Co. 1,564,231
104,100 Luby's Cafeterias, Inc. 1,756,687
4,100 Mohawk Industries, Inc.(a) 123,000
72,600 Musicland Stores Corp.(a) 639,788
84,200 Nash Finch Co. 705,175
76,800 Nautica Enterprises, Inc. 868,800
37,700 North Face, Inc. 471,250
32,400 Pillowtex Corp. 459,675
20,200 Polaris Industries, Inc. 641,350
53,900 Pomeroy Computer Resources, Inc. 700,700
37,200 Pre-Paid Legal Services, Inc.(a) 911,400
34,500 Russ Berrie & Co., Inc. 901,312
102,000 Ryan's Family Steak Houses, Inc.(a) 1,230,375
8,900 Shuffle Master, Inc. 58,406
53,100 Sonic Automatic, Inc.(a) 823,050
35,400 Tech Data Corp.(a) 811,987
26,200 Timberland Co. (Class 'A' Stock) 1,652,237
1,600 Trans World Entertainment Corp.(a) 17,600
11,100 Travel Services International,
Inc.(a) 116,550
42,500 Zale Corp. 1,452,969
------------
31,016,697
- ------------------------------------------------------------
Consumer Staples--3.3%
53,400 Canandaigua Brands, Inc. (Class 'A'
Stock) 2,690,025
49,100 Herbalife International, Inc. (Class
'A' Stock) 604,544
65,500 Schweitzer-Mauduit International,
Inc. 753,250
51,900 Smithfield Foods Inc. 1,177,481
44,500 Windmere Durable Holdings, Inc. 311,500
------------
5,536,800
- ------------------------------------------------------------
Energy--2.5%
29,200 Barrett Resources Corp.(a) 731,825
36,100 New Jersey Resources Corp. 1,283,806
37,500 Newfield Exploration Co.(a) 848,437
17,700 Seitel, Inc.(a) $ 246,694
68,500 UGI Corp. 1,143,094
------------
4,253,856
- ------------------------------------------------------------
Finance--17.3%
70,200 Allied Capital Corp. 1,289,925
90,200 Americredit Corp. 1,183,875
78,700 Amerus Life Holdings, Inc. ( Class
'A' Stock) 1,888,800
39,700 Arthur J. Gallagher & Co. 1,826,200
34,400 Astoria Financial Corp. 1,720,000
1,160 Bank United Corp. (Class 'A' Stock) 47,415
34,000 Banknorth Group, Inc. 960,500
38,600 CMAC Investment Corp. 1,505,400
50,700 Cullen/Frost Bankers, Inc. 2,430,431
36,100 Delta Financial Corp.(a) 203,063
2,200 Doral Financial Corp. 40,425
36,500 Downey Financial Corp. 668,406
91,200 Enhance Financial Services Group,
Inc. 2,074,800
88,583 Fidelity National Financial, Inc. 1,328,745
142,150 First American Financial Corp. 2,247,747
74,000 Fremont General Corp.(b) 1,410,625
70,864 HUBCO, Inc. 2,378,373
35,300 IPC Holdings Ltd., ADR (Bermuda) 701,587
27,800 Morgan Keegan, Inc. 460,438
33,900 People's Bank 1,008,525
4,200 Protective Life Corp. 159,075
67,300 Rollins Truck Leasing Corp. 635,144
100,700 Selective Insurance Group, Inc. 1,774,837
197,200 World Acceptance Corp. 1,059,950
------------
29,004,286
- ------------------------------------------------------------
Health Care--5.8%
69,100 Ameripath, Inc. 621,900
51,000 Cooper Cos., Inc. 784,125
40,500 Empi, Inc. 875,812
5,500 ESC Medical Systems Ltd., ADR
(Israel)(a) 37,813
97,500 Genesis Health Ventures, Inc. 475,313
100,100 Integrated Health Services, Inc. 550,550
24,000 Medimmune, Inc.(a) 1,420,500
75,700 Orthodontic Ctrs. of America,
Inc.(a) 1,192,275
51,100 PhyCor, Inc.(a) 242,725
2,600 Polymedica Corp.(a) 19,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-41
<PAGE>
Portfolio of Investments as of
March 31, 1999 PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Health Care (cont'd.)
124,300 Prime Medical Services, Inc.(a) $ 916,712
33,400 Quadramed Corp. 254,675
39,000 RehabCare Corp. 587,438
18,400 Sierra Health Services, Inc.(a) 239,200
34,100 Universal Health Services, Inc.
(Class 'B' Stock)(a) 1,474,825
------------
9,693,363
- ------------------------------------------------------------
Technology--16.0%
33,200 Advanced Digital Information, Corp. 549,875
2,500 Alpha Industries, Inc.(a) 45,938
48,450 Apex Pc Solutions, Inc.(b) 675,272
11,200 Avant Corp.(a) 198,800
33,100 Avid Technology, Inc.(a) 577,181
159,900 Box Hill Systems Corp. 819,488
2,700 Brady (W.H.) Co. 56,531
6,400 Cerner Corp.(a) 102,800
61,300 CIBER, Inc.(a) 1,176,194
28,400 Complete Busines Solutions, Inc.(a) 557,350
28,800 Computer Horizons Corp. 315,000
10,800 Computer Task Group, Inc. 230,850
28,400 Concord Communications, Inc.(b) 1,618,800
7,600 Consolidated Graphics, Inc.(a) 438,900
6,000 DII Group, Inc.(a) 175,500
5,700 General Semiconductor Inc. 41,325
22,900 GenRad, Inc.(a) 329,188
19,600 Geotel Communications Corp.(a) 899,150
15,000 Hyperion Solutions Corp.(a) 217,500
42,500 Inacom Corp.(a) 329,375
70,600 Integrated Circuit Systems, Inc. 1,275,212
116,900 Invision Technologies, Inc. 611,898
30,900 Keane, Inc.(a) 658,556
36,400 Kellstrom Industries, Inc.(a) 577,850
13,600 Legato Systems, Inc.(a) 702,100
68,500 Mail-Well, Inc.(a) 916,187
42,200 Mapics, Inc. 324,413
93,700 Mastech Corp.(a) 1,218,100
7,100 Micros Systems, Inc.(a) 234,300
55,200 MicroTouch Systems, Inc.(a) 655,500
47,500 Park Electrochemical Corp. 1,116,250
106,500 Pioneer-Standard Electronics, Inc. 698,906
63,600 Platinum Software Corp. 469,050
107,700 Platinum Technology, Inc.(a) 2,746,350
19,900 Plexus Corp.(a) 554,713
4,600 Polycom, Inc.(a) $ 86,250
10,000 Powerhouse Technologies, Inc.(a) 171,875
11,500 Shared Medical Systems Corp. 640,406
2,500 Sterling Software, Inc.(a) 59,375
4,000 Structural Dynamics Research
Corp.(a) 76,250
35,200 Symantec Corp.(a) 596,200
49,300 Systems & Computer Technology
Corp.(a) 493,000
58,900 Technitrol, Inc. 1,358,381
38,900 United Stationers, Inc.(a) 593,225
5,800 Vicor Corp.(a) 72,500
24,900 Xircom, Inc.(a) 625,613
------------
26,887,477
- ------------------------------------------------------------
Utilities--4.7%
31,700 Cleco Corp. 935,150
11,500 Connecticut Energy Corp. 278,875
52,500 Energen Corp. 784,219
28,300 Madison Gas & Electric Co. 551,850
26,900 Otter Tail Power Co. 1,072,637
35,700 Sierra Pacific Resources 1,256,194
72,100 United Illuminating Co. 3,023,694
------------
7,902,619
Total long-term investments
(cost $208,985,660) 158,679,904
------------
Principal
Amount
(000)
SHORT-TERM INVESTMENT--5.3%
Repurchase Agreement
$ 8,891 Joint Repurchase Agreement Account,
4.91%, 4/1/99
(cost $8,891,000; Note 5) 8,891,000
- ------------------------------------------------------------
Total Investments--99.8%
(cost $217,876,660; Note 4) 167,570,904
Other assets in excess of
liabilities--0.2% 331,501
------------
Net Assets--100% $167,902,405
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-42
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets March 31, 1999
<S> <C>
Investments, at value (cost $217,876,660).................................................................. $167,570,904
Cash....................................................................................................... 464,403
Receivable for investments sold............................................................................ 2,179,110
Dividends and interest receivable.......................................................................... 153,242
Deferred organization expenses and other assets............................................................ 113,917
Receivable for Fund shares sold............................................................................ 59,055
--------------
Total assets............................................................................................ 170,540,631
--------------
Liabilities
Payable for Fund shares reacquired......................................................................... 2,191,742
Accrued expenses........................................................................................... 180,293
Distribution fees payable.................................................................................. 117,056
Management fee payable..................................................................................... 91,935
Due to broker - variation margin........................................................................... 57,200
--------------
Total liabilities....................................................................................... 2,638,226
--------------
Net Assets................................................................................................. $167,902,405
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................................... $ 22,718
Paid-in capital in excess of par........................................................................ 244,360,919
--------------
244,383,637
Accumulated net realized loss on investments............................................................ (26,249,463)
Net unrealized depreciation on investments.............................................................. (50,231,769)
--------------
Net assets, March 31, 1999................................................................................. $167,902,405
--------------
--------------
Class A:
Net asset value and redemption price per share
($46,735,854 / 6,281,463 shares of common stock issued and outstanding).............................. $7.44
Maximum sales charge (5% of offering price)............................................................. .39
--------------
Maximum offering price to public........................................................................ $7.83
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($102,093,958 / 13,855,137 shares of common stock issued and outstanding)............................ $7.37
--------------
--------------
Class C:
Net asset value and redemption price per share
($14,951,286 / 2,029,136 shares of common stock issued and outstanding).............................. $7.37
Sales charge (1% of offering price)..................................................................... .07
--------------
Offering price to public................................................................................ $7.44
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($4,121,307 / 552,115 shares of common stock issued and outstanding)................................. $7.46
--------------
--------------
</TABLE>
See Notes to Financial Statements. B-43
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
Net Investment Income March 31, 1999
<S> <C>
Income
Dividends................................ $ 3,385,738
Interest................................. 493,705
--------------
Total income.......................... 3,879,443
--------------
Expenses
Distribution fee--Class A................ 205,830
Distribution fee--Class B................ 1,580,847
Distribution fee--Class C................ 271,815
Management fee........................... 1,637,480
Transfer agent's fees and expenses....... 380,000
Registration fees........................ 258,000
Reports to shareholders.................. 200,000
Custodian's fees and expenses............ 120,000
Legal fees and expenses.................. 60,000
Amortization of deferred organization
expenses.............................. 31,248
Audit fee and expenses................... 25,000
Directors' fees.......................... 16,000
Miscellaneous............................ 21,606
--------------
Total expenses........................ 4,807,826
--------------
Net investment loss......................... (928,383)
--------------
Realized and Unrealized
Loss on Investments
Net realized gain (loss) on:
Investment transactions.................. (26,325,270)
Financial futures transactions........... 75,807
--------------
(26,249,463)
--------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. (77,224,428)
Financial futures transactions........... 73,987
--------------
(77,150,441)
--------------
Net loss on investments..................... (103,399,904)
--------------
Net Decrease in Net Assets
Resulting from Operations................... $(104,328,287)
--------------
--------------
</TABLE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year November 10, 1997(a)
Ended Through
Increase (Decrease) March 31, March 31,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment loss....... $ (928,383) $ (31,882)
Net realized gain (loss)
on investments......... (26,249,463) 4,191,233
Net change in unrealized
appreciation
(depreciation)
on investments......... (77,150,441) 26,918,672
------------- --------------------
Net increase (decrease) in
net assets resulting
from operations........ (104,328,287) 31,078,023
------------- --------------------
Dividends and distributions
(Note 1)
Distributions in excess of
net investment income
Class A................... -- (97,677)
Class B................... -- (16,994)
Class C................... -- (3,484)
Class Z................... -- (3,733)
------------- --------------------
-- (121,888)
------------- --------------------
Distributions from net
realized gains
Class A................... (1,145,659) --
Class B................... (2,301,304) --
Class C................... (390,070) --
Class Z................... (87,222) --
------------- --------------------
(3,924,255) --
------------- --------------------
Fund share transactions (net
of share conversions)
(Note 6)
Net proceeds from shares
sold................... 70,366,132 349,199,926
Net asset value of shares
issued in reinvestment
of distributions....... 3,790,396 118,604
Cost of shares
reacquired............. (150,960,828) (27,415,418)
------------- --------------------
Net increase (decrease) in
net assets from Fund
share transactions..... (76,804,300) 321,903,112
------------- --------------------
Total increase (decrease).... (185,056,842) 352,859,247
Net Assets
Beginning of period.......... 352,959,247 100,000
------------- --------------------
End of period................ $ 167,902,405 $352,959,247
------------- --------------------
------------- --------------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-44
<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 which is sought 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 gains, 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.
Reclassification of Capital Accounts: The Fund accounts for and reports
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 $928,383, increase accumulated net realized loss investments by $197,412
and decrease paid in capital in excess of par by $730,971 for redemptions
utilized as distributions for federal income tax purposes during the year and a
tax operating loss for the year ended March 31, 1999. Net investment loss, net
realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with (PIFM). Pursuant to this agreement,
PIFM has responsibility for all investment advisory services
- --------------------------------------------------------------------------------
B-45
<PAGE>
Notes to Financial Statements PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
and supervises the subadviser's performance of such services. PIFM has entered
into a subadvisory agreement with The Prudential Investment Corporation ('PIC').
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 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 arrangement 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 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 year ended March 31, 1999.
PSI and PIMS have advised the Fund that they received approximately $320,200 and
$5,100 in front-end sales charges resulting from sales of Class A shares and
Class C shares, respectively, during the year ended March 31, 1999. From these
fees, PSI and PIMS paid such sales charges to dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended March 31, 1999, they
received approximately $974,500 and $40,400 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC, PSI and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund along with other affiliated registered investment
companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with
an unaffiliated lender. The maximum commitment under the SCA is $1 billion. The
Funds pay a commitment fee at an annual rate of .065 of 1% on the unused portion
of the credit facility, which is accrued and paid quarterly on a pro rata basis
by the Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the
Funds had a credit agreement with a maximum commitment of $200,000,000. The
commitment fee was .055 of 1% on the unused portion of the credit facility. The
Fund did not borrow any amounts pursuant to either agreement during the six
months ended March 31, 1999. The purpose of the agreements are to serve as an
alternative source of funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended March 31, 1999, the
Fund incurred fees of approximately $339,200 for the services of PMFS. As of
March 31, 1999, approximately $26,700 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.
For the year ended March 31, 1999, PSI earned approximately $4,800 in brokerage
commissions from portfolio transactions executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended March 31, 1999 were $277,679,925 and $357,389,073,
respectively.
The federal income tax basis of the Fund's investments at March 31, 1999 was
$217,882,523 and, accordingly, net unrealized depreciation for federal income
tax purposes was $50,311,619 (gross unrealized appreciation--$6,011,226; gross
unrealized depreciation--$56,322,845).
For federal income tax purposes, the Fund had a capital loss carryforward as of
March 31, 1999, of $3,890,973 which expires in 2007. Accordingly, no capital
gains distributions are expected to be paid to shareholders until future net
gains have been realized in excess of such carryforward.
The Fund will elect, for United States Federal income tax purposes, to treat
short-term capital losses of $14,333,055 and long-term capital losses of
$7,945,585 incurred in the five months ended March 31, 1999 as having been
incurred in the following fiscal year.
During the year ended March 31, 1999, the Series entered into financial futures
contracts. Details of open contracts at March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration March 31, Trade Appreciation/
Contracts Type Date 1999 Date (Depreciation)
- -------------- ------------- ----------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Long Positions:
10 Russell 2000 June 1999 $1,992,500 $1,911,351 $ 81,149
4 Russell 2000 June 1999 797,000 788,040 8,960
4 Russell 2000 June 1999 797,000 791,841 5,159
8 Russell 2000 June 1999 1,594,000 1,615,281 (21,281)
-------
$ 73,987
-------
-------
</TABLE>
- --------------------------------------------------------------------------------
B-46
<PAGE>
Notes to Financial Statements PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
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, 1999, the Fund
has a 1.6% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund represents $8,891,000 principal amount. As
of such date, the repurchase agreements in the joint account and the value of
the collateral therefore were as follows:
Bear Stearns & Co. Inc., 4.92%, in the principal amount of $170,000,000,
repurchase price $170,023,233, due 4/1/99. The value of the collateral including
accrued interest was $174,282,442.
Salomon Smith Barney Inc., 4.90%, in the principal amount of $170,000,000,
repurchase price $170,023,139, due 4/1/99. The value of the collateral including
accrued interest was $174,947,170.
Morgan Stanley Dean Witter, 4.90%, in the principal amount of $170,000,000,
repurchase price $170,023,139, due 4/1/99. The value of the collateral including
accrued interest was $173,474,773.
Warburg Dillon Read LLC, 4.97%, in the principal amount of $44,773,000,
repurchase price $44,779,181, due 4/1/99. The value of the collateral including
accrued interest was $45,668,747.
- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Prior to November 2, 1998, Class C shares were sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. Class
Z shares are not subject to any sales 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.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended March 31, 1999:
Shares sold.......................... 2,696,758 $ 25,459,881
Shares issued in reinvestment of
distributions...................... 133,662 1,122,758
Shares reacquired.................... (7,130,641) (63,483,930)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (4,300,221) (36,901,291)
Shares issued upon conversion from
Class B............................ 25,488 213,899
---------- ------------
Net decrease in shares outstanding... (4,274,733) $(36,687,392)
---------- ------------
---------- ------------
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
- -------------------------------------
<S> <C> <C>
Year ended March 31, 1999:
Shares sold.......................... 3,544,591 $ 33,771,230
Shares issued in reinvestment of
distributions...................... 264,099 2,202,587
Shares reacquired.................... (7,920,628) (67,279,455)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (4,111,938) (31,305,638)
Shares reacquired upon conversion
into Class A....................... (25,646) (213,899)
---------- ------------
Net decrease in shares outstanding... (4,137,584) $(31,519,537)
---------- ------------
---------- ------------
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>
Year ended March 31, 1999:
Shares sold.......................... 477,990 $ 4,468,986
Shares issued in reinvestment of
distributions...................... 45,585 380,178
Shares reacquired.................... (1,845,359) (15,689,617)
---------- ------------
Net decrease in shares outstanding... (1,321,784) $(10,840,453)
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
B-47
<PAGE>
Notes to Financial Statements PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
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>
Year ended March 31, 1999:
Shares sold.......................... 703,945 $ 6,666,035
Shares issued in reinvestment of
distributions...................... 10,080 84,873
Shares reacquired.................... (530,522) (4,507,826)
---------- ------------
Net increase in shares outstanding... 183,503 $ 2,243,082
---------- ------------
---------- ------------
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-48
<PAGE>
Financial Highlights PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------ ------------------------------ -------------
November 10, November 10,
Year 1997(a) Year 1997(a) Year
Ended Through Ended Through Ended
March 31, March 31, March 31, March 31, March 31,
1999 1998 1999 1998 1999
------------- ------------ ------------- ------------ -------------
<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)......... .03 .02 (.06) (.01) (.08)
Net realized and unrealized gain
(loss) on investment
transactions...................... (3.41) .94 (3.37) .94 (3.35)
------ ------------ ------------- ------------ ------
Total from investment
operations..................... (3.38) .96 (3.43) .93 (3.43)
------ ------------ ------------- ------------ ------
Less distributions
Distributions in excess of net
investment income................. -- (.01) -- -- --
Distributions from net realized
gains............................. (.13) -- (.13) -- (.13)
------ ------------ ------------- ------------ ------
Net asset value, end of period....... $ 7.44 $ 10.95 $ 7.37 $ 10.93 $ 7.37
------ ------------ ------------- ------------ ------
------ ------------ ------------- ------------ ------
TOTAL RETURN(c):..................... (31.00)% 9.60% (31.61)% 9.31% (31.61)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $46,736 $115,621 $ 102,094 $196,671 $14,951
Average net assets (000)............. $82,332 $106,453 $ 158,085 $170,484 $27,182
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.26% 1.22%(b) 2.01% 1.97%(b) 2.01%
Expenses, excluding distribution
fees........................... 1.01% 0.97%(b) 1.01% 0.97%(b) 1.01%
Net investment income (loss)...... .16% .47%(b) (.58)% (.29)%(b) (.59)%
Portfolio turnover rate.............. 106% 39% 106% 39% 106%
<CAPTION>
Class Z
------------------------------
<S> <C> <C> <C>
November 10, November 10,
1997(a) Year 1997(a)
Through Ended Through
March 31, March 31, March 31,
1998 1999 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) .05 .02
Net realized and unrealized gain
(loss) on investment
transactions...................... .94 (3.42) .95
------ ------------- -----
Total from investment
operations..................... .93 (3.37) .97
------ ------------- -----
Less distributions
Distributions in excess of net
investment income................. -- -- (.01)
Distributions from net realized
gains............................. -- (.13) --
------ ------------- -----
Net asset value, end of period....... $ 10.93 $ 7.46 $10.96
------ ------------- -----
------ ------------- -----
TOTAL RETURN(c):..................... 9.31% (30.88)% 9.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 36,628 $ 4,121 $4,039
Average net assets (000)............. $ 34,000 $ 5,315 $2,709
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.97%(b) 1.01% 0.97%(b)
Expenses, excluding distribution
fees........................... 0.97%(b) 1.01% 0.97%(b)
Net investment income (loss)...... (.29)%(b) .43% .51%(b)
Portfolio turnover rate.............. 39% 106% 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-49
<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.
1177 Avenue of the Americas
New York, New York
May 20, 1999
- --------------------------------------------------------------------------------
B-50
<PAGE>
Portfolio of Investments as of September 30, 1999
(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--10.3%
600 AAR Corp. $ 10,800
21,600 Alaska Air Group, Inc. 878,850
400 Alliant Techsystems, Inc.(a) 27,725
79,900 AMCOL International Corp. 1,178,525
9,300 American Freightways Corp. 169,144
1,800 Armor Holdings, Inc. 19,575
59,300 Building Materials Holdings Corp. 593,000
7,700 Castle (A.M.) & Co. 97,213
28,100 Commercial Intertech Corp. 338,956
13,600 Commercial Metals Co. 391,000
2,800 Gibraltor Steel Corp. 58,975
200 Hughes Supply Inc. 4,350
80,200 JLG Industries, Inc. 1,218,037
21,100 Landstar Systems, Inc.(a) 733,225
8,900 Lilly Industries, Inc. 121,263
11,900 Mueller Industries, Inc.(a) 353,281
57,700 Oregon Steel Mills, Inc. 645,519
15,800 Paxar Corp. 152,075
20,500 Pentair, Inc. 822,562
18,600 Precision Castparts Corp. 567,300
7,050 Reliance Steel & Aluminum Co. 148,050
48,000 Republic Group, Inc. 669,000
4,900 Roanoke Electric Steel Corp. 85,750
5,700 Rock-Tenn Co. 82,294
21,400 Schulman (A.), Inc. 370,487
33,800 Skywest, Inc. 741,487
33,000 Texas Industries, Inc. 1,221,000
2,600 Universal Forest Products, Inc. 33,963
45,600 USFreightways Corp. 2,160,300
7,700 Werner Enterprises, Inc. 135,713
4,400 West Pharmaceutical Services, Inc. 166,925
3,700 Yellow Corp.(a) 61,281
------------
14,257,625
- ------------------------------------------------------------
Business Services--5.8%
600 ABM Industries, Inc. 15,225
3,600 CDI Corp.(a) 98,325
13,600 Henry Jack & Associates, Inc.(a) 502,350
23,100 Interim Services, Inc.(a) $ 378,262
18,300 Labor Ready, Inc.(a) 184,144
20,200 Lason, Inc.(a) 899,531
14,900 Lightbridge, Inc.(a) 293,344
1,300 MAXIMUS, Inc.(a) 38,919
10,400 NCO Group, Inc.(a) 488,800
11,700 Price Communications Corp.(a) 293,231
19,600 Profit Recovery Group
International, Inc.(a) 874,650
12,400 Right Management Consultants,
Inc.(a) 139,500
10,400 Sei Investments Co. 928,525
29,000 Staffmark, Inc.(a) 230,188
5,400 Standard Register Co. 126,900
4,700 UniFirst Corp. 64,625
27,600 Valassis Communications, Inc.(a) 1,212,675
14,700 Wackenhut Corrections Corp.(a) 196,613
6,700 Wallace Computer Services, Inc. 135,675
18,100 World Fuel Services Corp. 176,475
15,100 Zebra Technologies Corp.(a) 686,578
------------
7,964,535
- ------------------------------------------------------------
Capital Spending--2.0%
6,500 Cable Design Technologies Corp. 148,281
5,300 Graco, Inc. 173,906
600 LSI Industries, Inc. 13,725
23,200 Manitowoc Co., Inc. 791,700
3,500 New Horizons Worldwide, Inc.(a) 55,563
8,300 Ocular Sciences, Inc.(a) 160,813
3,300 RTI International Metals, Inc.(a) 33,000
28,700 SPS Technologies, Inc.(a) 1,088,806
15,000 Superior Telecom, Inc. 209,062
3,300 URS Corp. 80,850
5,400 Watsco, Inc. 61,425
------------
2,817,131
- ------------------------------------------------------------
Consumer Cyclical--7.8%
32,900 Arvin Industries, Inc. 1,017,844
200 Bassett Furniture Industries, Inc. 3,800
3,500 Carlisle Companies, Inc. 138,250
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51
<PAGE>
Portfolio of Investments as of September 30, 1999
(Unaudited) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Consumer Cyclical (cont'd.)
62,400 Champion Enterprises, Inc. $ 561,600
70,600 D.R. Horton, Inc. 913,388
67,400 Intermet Corp. 570,794
57,400 Kaufman & Broad Home Corp. 1,183,875
7,900 Kimball International, Inc.
(Class 'B' Stock) 152,075
6,500 La-Z-Boy, Inc. 123,906
58,000 Lennar Corp. 924,375
63,900 Lo Jack Corp.(a) 529,172
43,900 MascoTech, Inc. 710,631
48,900 Meritor Automotive, Inc. 1,020,787
1,100 Monaco Coach Corp. 26,813
8,600 Myers Industries, Inc. 152,650
200 Oneida Ltd. 4,763
33,000 Pulaski Furniture Corp. 499,125
49,650 Smith AO Corp. 1,501,912
4,400 Standard Motor Products, Inc. 85,525
22,500 Tower Automotive, Inc.(a) 445,781
8,900 Wabash National Corp. 180,781
------------
10,747,847
- ------------------------------------------------------------
Consumer Services--15.0%
4,600 Aaron Rents, Inc. 79,350
32,200 ADVO, Inc. 641,988
3,500 Anchor Gaming 208,250
8,800 AnnTaylor Stores Corp.(a) 359,700
86,400 Arctic Cat, Inc. 826,200
3,800 Ben & Jerry's Homemade, Inc.(a) 65,313
8,000 Buffets, Inc.(a) 93,000
44,400 Cato Corp. 625,763
33,860 CKE Restaurants, Inc. 245,485
24,800 Claire's Stores, Inc. 410,750
9,600 CPI Corp. 328,200
7,300 Department 56, Inc.(a) 174,744
22,400 Dress Barn, Inc.(a) 410,900
15,600 Ethan Allen Interiors, Inc. 496,275
3,800 Extended Stay America, Inc.(a) 34,200
63,800 Jack in the Box, Inc.(a) 1,591,012
6,600 Footstar, Inc.(a) 232,650
32,600 Genesco, Inc.(a) 407,500
900 Goody's Family Clothing, Inc.(a) 7,256
32,100 Group 1 Automotive, Inc. $ 587,831
15,400 Guilford Mills, Inc. 132,825
7,600 Hollywood Park, Inc.(a) 116,850
5,700 IHOP Corp.(a) 115,425
22,800 Insight Enterprises Inc.(a) 741,000
4,000 Insurance Auto Auctions, Inc.(a) 59,500
2,700 Jo-Ann Stores, Inc.(a) 33,581
3,600 K-Swiss Inc. 113,625
58,400 Kellwood Co. 1,284,800
91,300 Luby's Cafeterias, Inc. 1,049,950
3,100 Madden Steven Ltd.(a) 40,106
12,200 Men's Wearhouse, Inc.(a) 262,300
14,600 Michaels Stores, Inc.(a) 430,700
12,000 Mohawk Industries, Inc.(a) 239,250
41,700 Musicland Stores Corp.(a) 364,875
44,800 OshKosh B'Gosh, Inc. 715,400
29,100 Pier 1 Imports, Inc 196,425
20,200 Polaris Industries, Inc. 699,425
38,100 Pomeroy Computer Resources 421,481
26,000 Pre-Paid Legal Services, Inc.(a) 1,023,750
9,900 Prime Hospitality Corp.(a) 79,200
5,500 Quiksilver, Inc.(a) 100,375
5,000 Rent-A-Center, Inc.(a) 93,125
33,400 Russ Berrie & Co., Inc. 699,313
3,800 ShopKo Stores, Inc. 110,200
8,900 Shuffle Master, Inc. 73,425
43,000 Sonic Automatic, Inc.(a) 559,000
3,200 Stein Mart, Inc.(a) 22,800
3,800 Stride Rite Corp. 26,600
20,700 Tech Data Corp.(a) 481,922
27,600 Timberland Co. (Class 'A' Stock) 1,078,125
1,600 Trans World Entertainment Corp.(a) 20,300
4,100 Wet Seal, Inc. (Class 'A' Stock)(a) 67,906
37,000 Zale Corp. 1,417,562
------------
20,697,488
- ------------------------------------------------------------
Consumer Staples--3.2%
26,900 Canandaigua Brands, Inc.
(Class 'A' Stock) 1,607,275
47,500 Herbalife International, Inc.
(Class 'A' Stock) 724,375
3,800 International Multifoods Corp. 87,400
51,500 Schweitzer-Mauduit International,
Inc. 666,281
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-52
<PAGE>
Portfolio of Investments as of September 30, 1999
(Unaudited) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Consumer Staples (cont'd.)
44,100(b) Smithfields Foods, Inc. $ 1,179,675
7,000 USA Detergents, Inc. 34,563
5,900 Worthington Foods, Inc. 84,812
------------
4,384,381
- ------------------------------------------------------------
Energy--4.9%
31,200 Barrett Resources Corp.(a) 1,152,450
25,200 Cabot Oil & Gas Corp. 434,700
8,100 Evergreen Resources, Inc.(a) 194,906
1,200 Giant Industries, Inc.(a) 13,950
10,800 Howell Corp. 63,450
5,000 Louis Dreyfus Natural Gas Corp.(a) 107,187
39,700 Newfield Exploration Co.(a) 1,307,619
3,000 Northwest Nat. Gas Co. 77,438
6,600 Patina Oil & Gas Corp. 58,575
19,700 Plains Resources Inc.(a) 352,137
1,100 Remington Oil & Gas Corp.(a) 6,256
28,400 Seitel, Inc.(a) 276,900
13,800 Stone Energy Corp.(a) 702,075
8,300 Swift Energy Co.(a) 104,788
23,800 Tesoro Petroleum Corp.(a) 392,700
68,100(b) UGI Corp. 1,583,325
------------
6,828,456
- ------------------------------------------------------------
Finance--17.6%
8,100 Affiliated Managers Group, Inc.(a) 220,725
66,100 Allied Capital Corp. 1,483,119
90,200 Americredit Corp. 1,347,362
57,500 Amerus Life Holdings, Inc.
(Class 'A' Stock) 1,218,281
28,200 Arthur J. Gallagher & Co. 1,501,650
34,400 Astoria Financial Corp. 1,057,800
1,160 Bank United Corp. (Class 'A' Stock) 37,555
25,200 Colonial BancGroup, Inc. 281,925
23,900 Community First Bankshares, Inc. 403,312
77,400 Cullen/Frost Bankers, Inc. 1,935,000
3,200 Dain Rauscher Corp. 156,800
300 Delphi Financial Group, Inc.(a) 9,056
33,900 Delta Financial Corp.(a) 169,500
2,200 Doral Financial Corp. 29,425
35,400 Downey Financial Corp. 712,425
75,500 Enhance Financial Services Group,
Inc. $ 1,335,406
49,283 Fidelity National Financial, Inc. 748,486
93,000 First American Financial Corp. 1,243,875
3,800 First Midwest Bancorp, Inc. 145,113
55,500 Fremont General Corp. 527,250
7,200 GBC Bancorp 139,500
17,700 Hambrecht & Quist Group(a) 866,194
59,964 Hudson United Bancorp 1,847,641
17,300 IPC Holdings Ltd., ADR (Bermuda) 324,375
1,400 Metris Companies, Inc. 41,213
26,700 Morgan Keegan, Inc. 455,569
33,900 People's Bank 800,887
4,000 Protective Life Corp. 116,000
9,800 Provident Financial Group, Inc. 358,313
35,000 Radian Group, Inc. 1,502,812
10,000 Raymond James Financial, Inc. 199,375
18,600 Republic Bancorp, Inc. 215,063
64,700 Rollins Truck Leasing Corp. 655,087
31,100 Selective Insurance Group, Inc. 587,012
8,200 Silicon Valley Bancshares 197,825
10,600 TCF Financial Corp. 302,763
189,700 World Acceptance Corp. 1,019,637
1,800 XTRA Corp.(a) 71,550
------------
24,264,881
- ------------------------------------------------------------
Health Care--6.9%
19,400 Ameripath, Inc. 162,475
15,800 Barr Laboratories, Inc.(a) 501,650
18,666 Bindley Western Inds Inc. 267,157
5,300 Chattem, Inc.(a) 116,931
7,300 Cooper Cos., Inc. 225,388
18,700 Covance, Inc.(a) 181,156
4,200 Diagnostic Products Corp. 112,613
3,800 Hanger Orthopedic Group, Inc.(a) 55,100
8,600 IDEC Pharmaceuticals Corp.(a) 808,669
5,600 MedImmune, Inc.(a) 558,075
11,900 MedQuist, Inc.(a) 397,906
12,500 Mentor Corp. 356,250
1,600 Meridian Diagnostics, Inc. 12,800
63,500 Orthodontic Ctrs. of America,
Inc.(a) 1,111,250
200 Osteotech, Inc.(a) 2,725
15,400 Owens & Minor, Inc. 148,225
5,300 Pediatrix Medical Group, Inc.(a) 73,538
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-53
<PAGE>
Portfolio of Investments as of September 30, 1999
(Unaudited) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Health Care (cont'd.)
2,600 Polymedica Corp.(a) $ 60,450
72,200 Prime Medical Services, Inc.(a) 685,900
20,100 Priority Healthcare Corp.(a) 620,587
27,900 RehabCare Corp. 495,225
3,600 ResMed, Inc.(a) 119,025
19,400 Serologicals Corp. 82,450
9,700 Sola International, Inc.(a) 150,350
21,000 Theragenics Corp.(a) 267,750
26,800 Universal Health Services, Inc.
(Class 'B' Stock)(a) 693,450
38,200 US Oncology, Inc.(a) 346,187
5,300 VISX, Inc.(a) 419,197
4,200 Vital Signs, Inc. 85,575
12,500 Wesley Jessen VisionCare, Inc.(a) 389,844
12,000 X-Rite, Inc. 78,000
------------
9,585,898
- ------------------------------------------------------------
Technology--21.3%
3,700 Actel Corp.(a) 70,300
30,800 Acxiom Corp.(a) 605,412
10,500 Advanced Digital Information Corp. 292,031
7,000 Advanced Energy Industries, Inc.(a) 216,125
19,200 Aeroflex, Inc.(a) 234,000
22,800 American Management Systems,
Inc.(a) 584,962
10,500 ANADIGICS, Inc.(a) 295,313
22,700 Analysts International Corp. 235,513
2,600 Anixter International, Inc.(a) 60,450
34,550(b) Apex, Inc.(a) 645,653
18,000 Applied Science & Technology,
Inc.(a) 371,250
11,500 Ardent Software, Inc.(a) 309,781
16,200 Artesyn Technologies, Inc.(a) 307,294
7,600 ATMI, Inc.(a) 283,575
7,300 Brady (W.H.) Co. 233,600
11,300 Citrix Systems, Inc.(a) 699,894
19,800 Clarify, Inc.(a) 996,187
21,300 Computer Horizons Corp. 247,613
20,300 Computer Task Group, Inc. 299,425
4,800 Comverse Technology, Inc.(a) 452,700
10,900 Concord Communications, Inc. 433,275
7,500 Consolidated Graphics, Inc.(a) 315,937
4,600 Credence Systems Corp.(a) 206,425
3,400 Davox Corp.(a) $ 44,413
13,400 DII Group, Inc.(a) 471,512
9,300 DuPont Photomasks, Inc.(a) 428,381
3,800 EMS Technologies, Inc.(a) 45,600
28,600 FileNET Corp.(a) 305,662
12,600 Galileo Technology Ltd.(a) 315,000
8,800 Hadco Corp.(a) 380,600
13,500 Harmon Industries, Inc. 169,594
8,400 Herman Miller, Inc. 200,813
9,200 Hypercom Corp.(a) 73,600
24,900 Inacom Corp.(a) 228,769
49,300 International Rectifier Corp.(a) 751,825
16,000 InterVoice-Brite, Inc.(a) 177,000
6,100 Kronos Inc. (a) 223,794
9,200 Lattice Semiconductor Corp.(a) 273,125
20,800 Legato Systems, Inc.(a) 906,750
59,100 Mail-Well, Inc. 820,012
39,700 Mapics, Inc. 344,894
8,500 MICROS Systems, Inc.(a) 344,250
2,100 MTS Systems Corp. 21,788
6,400 Network Solutions, Inc.(a) 588,000
30,400 Park Electrochemical Corp. 999,400
19,000 Peregrine Systems, Inc.(a) 774,250
38,900 Pioneer-Standard Electronics, Inc. 561,619
18,300 Polycom, Inc.(a) 872,109
13,200 Powerwave Technologies, Inc.(a) 636,487
9,300 Progress Software Corp.(a) 291,788
14,500 QLogic Corp.(a) 1,013,187
4,000 Rainbow Technologies, Inc.(a) 52,500
2,400 RWD Technologies, Inc.(a) 18,900
55,000 S3 Inc.(a) 574,062
14,000 Sawtek, Inc.(a) 490,000
25,600 SIPEX Corp.(a) 366,400
2,500 Sterling Software, Inc.(a) 50,000
4,000 Structural Dynamics Research
Corp.(a) 60,125
31,300 Symantec Corp.(a) 1,125,822
200 Systems & Computer Technology Corp. 2,513
42,200 Technitrol, Inc. 1,487,550
13,500 Three-Five Systems, Inc.(a) 298,687
5,100 Transaction Systems Architects,
Inc.(a) 137,381
10,250 TranSwitch Corp.(a) 584,250
10,100 Trimble Navigation Ltd.(a) 107,944
36,900 United Stationers, Inc.(a) 786,431
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54
<PAGE>
Portfolio of Investments as of September 30, 1999
(Unaudited) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Technology (cont'd.)
3,800 Vertex Communications Corp.(a) $ 42,513
2,400 ViaSat, Inc.(a) 42,900
28,700 Whittman-Hart Inc.(a) 1,113,022
40,300 Wolverine Tube, Inc.(a) 624,650
20,900 Xircom, Inc. (a) 892,169
------------
29,518,756
- ------------------------------------------------------------
Utilities--2.7%
50,900 Energen Corp. 1,030,725
4,000 Hawaiian Electric Industries, Inc. 140,750
4,600 IDACORP, Inc. 138,575
27,100 Madison Gas & Electric Co. 538,613
8,300 Otter Tail Power Co. 352,750
31,300 United Illuminating Co. 1,514,137
------------
3,715,550
Total long-term investments
(cost $149,828,151) 134,782,548
------------
- ------------------------------------------------------------
Principal
Amount
(000)
SHORT-TERM INVESTMENT--3.6%
Repurchase Agreement
$ 4,989 Joint Repurchase Agreement Account,
5.22%, 10/1/99
(cost $4,989,000; Note 5) 4,989,000
- ------------------------------------------------------------
Total Investments--101.1%
(cost $154,817,151; Note 4) 139,771,548
Liabilities in excess of
other assets--(1.1%) (1,489,043)
------------
Net Assets--100% $138,282,505
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-55
<PAGE>
Statement of Assets and Liabilities (Unaudited)
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1999
<S> <C>
Investments, at value (cost $154,817,151).............................................................. $ 139,771,548
Receivable for investments sold........................................................................ 409,176
Dividends and interest receivable...................................................................... 109,839
Deferred organization expenses and other assets........................................................ 98,867
Due from broker - variation margin..................................................................... 38,625
Receivable for Fund shares shold....................................................................... 25,009
------------------
Total assets........................................................................................ 140,453,064
------------------
Liabilities
Payable for Fund shares reacquired..................................................................... 1,062,765
Payable for investments purchased...................................................................... 626,089
Accrued expenses....................................................................................... 316,734
Distribution fees payable.............................................................................. 93,629
Management fee payable................................................................................. 71,342
------------------
Total liabilities................................................................................... 2,170,559
------------------
Net Assets............................................................................................. $ 138,282,505
------------------
------------------
Net assets were comprised of:
Common stock, at par................................................................................ $ 16,990
Paid-in capital in excess of par.................................................................... 197,865,989
------------------
197,882,979
Accumulated net investment loss..................................................................... (437,772)
Accumulated net realized loss on investments........................................................ (44,000,823)
Net unrealized depreciation on investments.......................................................... (15,161,879)
------------------
Net assets, September 30, 1999......................................................................... $ 138,282,505
------------------
------------------
Class A:
Net asset value and redemption price per share
($36,912,729 / 4,491,299 shares of common stock issued and outstanding).......................... $8.22
Maximum sales charge (5% of offering price)......................................................... 0.43
------------------
Maximum offering price to public.................................................................... $8.65
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share
($88,385,599 / 10,900,546 shares of common stock issued and outstanding)......................... $8.11
------------------
------------------
Class C:
Net asset value and redemption price per share
($11,406,713 / 1,406,757 shares of common stock issued and outstanding).......................... $8.11
Sales charge (1% of offering price)................................................................. 0.08
------------------
Offering price to public............................................................................ $8.19
------------------
------------------
Class Z:
Net asset value, offering price and redemption price per share
($1,577,464 / 191,064 shares of common stock issued and outstanding)............................. $8.26
------------------
------------------
</TABLE>
See Notes to Financial Statements. B-56
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Loss September 30, 1999
<S> <C>
Income
Dividends............................. $ 987,617
Interest.............................. 147,064
------------------
Total income.......................... 1,134,681
------------------
Expenses
Management fee........................ 485,341
Distribution fee--Class A............. 55,164
Distribution fee--Class B............. 504,174
Distribution fee--Class C............. 70,522
Transfer agent's fees and expenses.... 155,000
Reports to shareholders............... 100,000
Custodian's fees and expenses......... 60,000
Registration fees..................... 60,000
Legal fees and expenses............... 35,000
Amortization of deferred organization
expenses........................... 15,667
Audit fee and expenses................ 12,500
Directors' fees....................... 9,000
Miscellaneous......................... 10,085
------------------
Total expenses..................... 1,572,453
------------------
Net investment loss...................... (437,772)
------------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss) on:
Investment transactions............... (18,324,390)
Financial futures transactions........ 573,030
------------------
(17,751,360)
------------------
Net change in unrealized appreciation
(depreciation) on:
Investments........................... 35,260,153
Financial futures transactions........ (190,263)
------------------
35,069,890
------------------
Net gain on investments.................. 17,318,530
------------------
Net Increase in Net Assets
Resulting from Operations................ $ 16,880,758
------------------
------------------
</TABLE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) September 30, March 31,
in Net Assets 1999 1999
<S> <C> <C>
Operations
Net investment loss....... $ (437,772) $ (928,383)
Net realized loss on
investments............ (17,751,360) (26,249,463)
Net change in unrealized
appreciation
(depreciation)
on investments......... 35,069,890 (77,150,441)
------------- --------------------
Net increase (decrease) in
net assets resulting
from operations........ 16,880,758 (104,328,287)
------------- --------------------
Distributions from net
realized gains
Class A................... -- (1,145,659)
Class B................... -- (2,301,304)
Class C................... -- (390,070)
Class Z................... -- (87,222)
------------- --------------------
-- (3,924,255)
------------- --------------------
Fund share transactions (net
of share conversions)
(Note 6)
Net proceeds from shares
sold................... 10,295,891 70,366,132
Net asset value of shares
issued in reinvestment
of distributions....... -- 3,790,396
Cost of shares
reacquired............. (56,796,549) (150,960,828)
------------- --------------------
Net decrease in net assets
from Fund share
transactions........... (46,500,658) (76,804,300)
------------- --------------------
Total decrease............... (29,619,900) (185,056,842)
Net Assets
Beginning of period.......... 167,902,405 352,959,247
------------- --------------------
End of period................ $ 138,282,505 $ 167,902,405
------------- --------------------
------------- --------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
<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 which is sought 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 its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income and distributions of net realized capital gains, 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-58
<PAGE>
Notes to Financial Statements (Unaudited)
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.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'). PIC 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 Investment Management
Services LLC ('PIMS') which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Fund compensates PIMS for distributing and
servicing the Fund's Class A, Class B and Class C shares pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
No distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the 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, 1999.
PIMS has advised the Fund that they received approximately $14,100 and $2,500 in
front-end sales charges resulting from sales of Class A shares and Class C
shares, respectively, during the six months ended September 30, 1999. From these
fees, PIMS paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the six months ended September 30, 1999, it
received approximately $448,300 and $42,900 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America.
As of March 11, 1999, the Fund along with other affiliated registered investment
companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with
an unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any borrowings will be at market rates. The Funds pay a commitment
fee at an annual rate of .065 of 1% on the unused portion of the credit
facility, which is accrued and paid quarterly on a pro rata basis by the Funds.
The SCA expires on March 9, 2000. The Fund did not borrow any amounts pursuant
to either agreement during the six months ended September 30, 1999. The purpose
of the agreements are to serve as an alternative source of funding for capital
share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended September 30,
1999, the Fund incurred fees of approximately $137,000 for the services of PMFS.
As of September 30, 1999, approximately $20,600 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.
For the six months ended September 30, 1999, Prudential Securities Incorporated
('PSI') received approximately $8,200 in brokerage commissions from portfolio
transactions executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended September 30, 1999 were $53,894,198 and $94,727,317,
respectively.
The federal income tax basis of the Fund's investments at September 30, 1999 was
$155,345,336 and, accordingly, net unrealized depreciation for federal income
tax purposes was $15,573,788 (gross unrealized appreciation--$10,794,789; gross
unrealized depreciation--$26,368,577).
For federal income tax purposes, the Fund had a capital loss carryforward as of
March 31, 1999, of $3,890,973 which expires in 2007. Accordingly,
- --------------------------------------------------------------------------------
B-59
<PAGE>
Notes to Financial Statements (Unaudited)
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
no capital gains distributions are expected to be paid to shareholders until
future net gains have been realized in excess of such carryforward.
During the six months ended September 30, 1999, the Fund entered into financial
futures contracts. Details of open contracts at September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Value at Value at
Number of Expiration September 30, Trade Unrealized
Contracts Type Date 1999 Date Depreciation
- -------------- ------------- ----------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Long Positions:
5 Russell 2000 Dec 1999 $ 1,073,750 $1,116,300 $ (42,550)
5 Russell 2000 Dec 1999 1,073,750 1,117,426 (43,676)
5 Russell 2000 Dec 1999 1,073,750 1,103,800 (30,050)
--------------
$ (116,276)
--------------
--------------
</TABLE>
- ------------------------------------------------------------
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, 1999, the
Fund has a 0.8% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $4,989,000 principal
amount. As of such date, the repurchase agreements in the joint account and the
value of the collateral therefore were as follows:
Warburg Dillon Read LLC, 5.32%, in the principal amount of $190,000,000,
repurchase price $190,028,077, due 10/1/99. The value of the collateral
including accrued interest was $193,802,299.
Bear, Stearns & Co. Inc., 5.32%, in the principal amount of $190,000,000,
repurchase price $190,028,077, due 10/1/99. The value of the collateral
including accrued interest was $194,200,266.
Morgan (J.P.) Securities, Inc., 5.25%, in the principal amount of $190,000,000,
repurchase price $190,027,708, due 10/1/99. The value of the collateral
including accrued interest was $193,800,121.
Goldman, Sachs & Co., 4.75%, in the principal amount of $88,875,000, repurchase
price $88,886,726, due 10/1/99. The value of the collateral including accrued
interest was $90,653,200.
- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Prior to November 2, 1998, Class C shares were sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. Class
Z shares are not subject to any sales 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.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Six months ended September 30, 1999:
Shares sold.......................... 855,627 $ 7,150,558
Shares issued in reinvestment of
distributions...................... -- --
Shares reacquired.................... (2,662,569) (21,935,778)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (1,806,942) (14,785,220)
Shares issued upon conversion from
Class B............................ 16,778 141,285
---------- ------------
Net decrease in shares outstanding... (1,790,164) $(14,643,935)
---------- ------------
---------- ------------
Year ended March 31, 1999:
Shares sold.......................... 2,696,758 $ 25,459,881
Shares issued in reinvestment of
distributions...................... 133,662 1,122,758
Shares reacquired.................... (7,130,641) (63,483,930)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (4,300,221) (36,901,291)
Shares issued upon conversion from
Class B............................ 25,488 213,899
---------- ------------
Net decrease in shares outstanding... (4,274,733) $(36,687,392)
---------- ------------
---------- ------------
<CAPTION>
Class B
- -------------------------------------
Six months ended September 30, 1999:
Shares sold.......................... 249,178 $ 2,022,657
Shares issued in reinvestment of
distributions...................... -- --
Shares reacquired.................... (3,186,788) (25,772,385)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (2,937,610) (23,749,728)
Shares reacquired upon conversion
into Class A....................... (16,981) (141,285)
---------- ------------
Net decrease in shares outstanding... (2,954,591) $(23,891,013)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-60
<PAGE>
Notes to Financial Statements (Unaudited)
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended March 31, 1999:
Shares sold.......................... 3,544,591 $ 33,771,230
Shares issued in reinvestment of
distributions...................... 264,099 2,202,587
Shares reacquired.................... (7,920,628) (67,279,455)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (4,111,938) (31,305,638)
Shares reacquired upon conversion
into Class A....................... (25,646) (213,899)
---------- ------------
Net decrease in shares outstanding... (4,137,584) $(31,519,537)
---------- ------------
---------- ------------
<CAPTION>
Class C
- -------------------------------------
Six months ended September 30, 1999:
Shares sold.......................... 44,744 $ 374,003
Shares issued in reinvestment of
distributions...................... -- --
Shares reacquired.................... (667,123) (5,349,997)
---------- ------------
Net decrease in shares outstanding... (622,379) $ (4,975,994)
---------- ------------
---------- ------------
Year ended March 31, 1999:
Shares sold.......................... 477,990 $ 4,468,986
Shares issued in reinvestment of
distributions...................... 45,585 380,178
Shares reacquired.................... (1,845,359) (15,689,617)
---------- ------------
Net decrease in shares outstanding... (1,321,784) $(10,840,453)
---------- ------------
---------- ------------
<CAPTION>
Class Z
- -------------------------------------
Six months ended September 30, 1999:
Shares sold.......................... 90,565 $ 748,673
Shares issued in reinvestment of
distributions...................... -- --
Shares reacquired.................... (451,616) (3,738,389)
---------- ------------
Net decrease in shares outstanding... (361,051) $ (2,989,716)
---------- ------------
---------- ------------
Year ended March 31, 1999:
Shares sold.......................... 703,945 $ 6,666,035
Shares issued in reinvestment of
distributions...................... 10,080 84,873
Shares reacquired.................... (530,522) (4,507,826)
---------- ------------
Net increase in shares outstanding... 183,503 $ 2,243,082
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-61
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
--------------------------------------------- -------------
November 10,
Six Months Year 1997(a) Six Months
Ended Ended Through Ended
September 30, March 31, March 31, September 30,
1999(d) 1999 1998 1999(d)
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 7.44 $ 10.95 $ 10.00 $ 7.37
------ ---------- ------------ -------------
Income from investment operations
Net investment income (loss)........................... -- .03 .02 (.03)
Net realized and unrealized gain (loss) on investment
transactions........................................ .78 (3.41) .94 .77
------ ---------- ------------ -------------
Total from investment operations.................... .78 (3.38) .96 .74
------ ---------- ------------ -------------
Less distributions
Distributions in excess of net investment income....... -- -- (.01) --
Distributions from net realized gains.................. -- (.13) -- --
------ ---------- ------------ -------------
Net asset value, end of period......................... $ 8.22 $ 7.44 $ 10.95 $ 8.11
------ ---------- ------------ -------------
------ ---------- ------------ -------------
TOTAL RETURN(c):....................................... 10.48% (31.00)% 9.60% 10.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $36,913 $ 46,736 $115,621 $ 88,386
Average net assets (000)............................... $44,010 $ 82,332 $106,453 $ 100,559
Ratios to average net assets:
Expenses, including distribution fees............... 1.42%(b) 1.26% 1.22%(b) 2.17%(b)
Expenses, excluding distribution fees............... 1.17%(b) 1.01% 0.97%(b) 1.17%(b)
Net investment income (loss)........................ (.01)%(b) .16% .47%(b) (.76)%(b)
Portfolio turnover rate................................ 35% 106% 39% 35%
<CAPTION>
November 10,
Year 1997(a)
Ended Through
March 31, March 31,
1999 1998
---------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 10.93 $ 10.00
---------- ------------
Income from investment operations
Net investment income (loss)........................... (.06) (.01)
Net realized and unrealized gain (loss) on investment
transactions........................................ (3.37) .94
---------- ------------
Total from investment operations.................... (3.43) .93
---------- ------------
Less distributions
Distributions in excess of net investment income....... -- --
Distributions from net realized gains.................. (.13) --
---------- ------------
Net asset value, end of period......................... $ 7.37 $ 10.93
---------- ------------
---------- ------------
TOTAL RETURN(c):....................................... (31.61)% 9.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $102,094 $196,671
Average net assets (000)............................... $158,085 $170,484
Ratios to average net assets:
Expenses, including distribution fees............... 2.01% 1.97%(b)
Expenses, excluding distribution fees............... 1.01% 0.97%(b)
Net investment income (loss)........................ (.58)% (.29)%(b)
Portfolio turnover rate................................ 106% 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.
(d) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-62
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
--------------------------------------------- -------------
November 10,
Six Months Year 1997(a) Six Months
Ended Ended Through Ended
September 30, March 31, March 31, September 30,
1999(d) 1999 1998 1999(d)
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 7.37 $ 10.93 $ 10.00 $ 7.46
------ ---------- ------ -----
Income from investment operations
Net investment income (loss)........................... (.03) (.08) (.01) .01
Net realized and unrealized gain (loss) on investment
transactions........................................ .77 (3.35) .94 .79
------ ---------- ------ -----
Total from investment operations.................... .74 (3.43) .93 .80
------ ---------- ------ -----
Less distributions
Distributions in excess of net investment income....... -- -- -- --
Distributions from net realized gains.................. -- (.13) -- --
------ ---------- ------ -----
Net asset value, end of period......................... $ 8.11 $ 7.37 $ 10.93 $ 8.26
------ ---------- ------ -----
------ ---------- ------ -----
TOTAL RETURN(c):....................................... 10.19% (31.61)% 9.31% 10.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $11,407 $ 14,951 $ 36,628 $ 1,577
Average net assets (000)............................... $14,066 $ 27,182 $ 34,000 $ 2,703
Ratios to average net assets:
Expenses, including distribution fees............... 2.17%(b) 2.01% 1.97%(b) 1.17%(b)
Expenses, excluding distribution fees............... 1.17%(b) 1.01% 0.97%(b) 1.17%(b)
Net investment income (loss)........................ (.76)%(b) (.59)% (.29)%(b) .27%(b)
Portfolio turnover rate................................ 35% 106% 39% 35%
<CAPTION>
November 10,
Year 1997(a)
Ended Through
March 31, March 31,
1999 1998
---------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $10.96 $10.00
----- -----
Income from investment operations
Net investment income (loss)........................... .05 .02
Net realized and unrealized gain (loss) on investment
transactions........................................ (3.42) .95
----- -----
Total from investment operations.................... (3.37) .97
----- -----
Less distributions
Distributions in excess of net investment income....... -- (.01)
Distributions from net realized gains.................. (.13) --
----- -----
Net asset value, end of period......................... $ 7.46 $10.96
----- -----
----- -----
TOTAL RETURN(c):....................................... (30.88)% 9.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $4,121 $4,039
Average net assets (000)............................... $5,315 $2,709
Ratios to average net assets:
Expenses, including distribution fees............... 1.01% 0.97%(b)
Expenses, excluding distribution fees............... 1.01% 0.97%(b)
Net investment income (loss)........................ .43% .51%(b)
Portfolio turnover rate................................ 106% 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.
(d) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-63
<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 DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE OF $1.00 INVESTED ON
1/1/1926 THROUGH 12/31/1999
<S> <C> <C> <C> <C> <C>
Small Stocks Common Stocks Long-Term Bonds Treasury Bills Inflation
1926
1936
1946
1956
1966
1976
1986
1999 $6,640.79 $2,845.63 $40.22 $15.64 $9.40
</TABLE>
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential mutual fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due 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 1989
through 1999. The total returns of the indexes include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "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.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
YEAR 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)%
------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.86%
------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE BONDS(3) 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6% (1.96)%
------------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD
BONDS(4) 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6% 2.39%
------------------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS(5) (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (5.07)%
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN PERCENT 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4 7.46
</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, 1999. It does not represent
the performance of any Prudential mutual fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS
(12/31/85 - 12/31/99) (IN U.S. DOLLARS)
EDGAR REPRESENTATION OF CHART
SWEDEN 22.70%
HONG KONG 20.37%
SPAIN 20.11%
NETHERLAND 18.63%
BELGIUM 18.41%
FRANCE 17.69%
USA 17.39%
UK 16.41%
EUROPE 16.28%
SWITZERLAND 15.58%
SING/MLYSIA 15.07%
DENMARK 14.72%
GERMANY 13.29%
AUSTRALIA 11.68%
ITALY 11.39%
CANADA 11.10%
JAPAN 9.59%
NORWAY 8.91%
AUSTRIA 7.09%
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
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 -$474,094
CAPITAL APPRECIATION ONLY -$159,597
Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential mutual fund. Common stock total
return is based on the Standard & Poor's 500 Composite Stock Price Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indexes.
II-3
<PAGE>
WORLD STOCK MARKET CAPITALIZATION BY REGION
World Total: $20.7 Trillion
EDGAR REPRESENTATION OF CHART
CANADA--2.1%
U.S.--49.0%
EUROPE--32.5%
PACIFIC BASIN--16.4%
Source: Morgan Stanley Capital International, December 31, 1999. 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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1999)
<S> <C>
1926 PLOT POINTS
1936
1946
1956
1966
1976
1986
1996
1999
</TABLE>
Year-End
- ------------
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1999. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
mutual fund.
II-4
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS:
<TABLE>
<C> <S>
(a) (1) Articles of Incorporation.(1)
(2) Articles of Amendment.(2)
(3) Form of Articles of Amendment.*
(b) Amended By-Laws.*
(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)
(3) Amendment to Subadvisory Agreement.*
(e) (1) Distribution Agreement between the Registrant and
Prudential Investment Management Services LLC.(3)
(2) Selected Dealer Agreement.(3)
(g) (1) Custodian Contract between the Registrant and State
Street Bank and Trust Company.(2)
(2) Amendment to Custodian Contract.*
(h) (1) Transfer Agency and Service Agreement between the
Registrant and Prudential Mutual Fund Services LLC.(2)
(2) Amendment to Transfer Agency Agreement.*
(i) Opinion and consent of Counsel.**
(j) Consent of Independent Accountants.**
(m) (1) Amended and Restated Distribution and Service Plan for
Class A Shares.(4)
(2) Amended and Restated Distribution and Service Plan for
Class B Shares.(4)
(3) Amended and Restated Distribution and Service Plan for
Class C Shares.(4)
(n) Rule 18f-3 Plan.(4)
(p) (1) Fund's Code of Ethics.*
(2) Manager's, Subadviser's and Distributor's Code of
Ethics.*
</TABLE>
-------------------------
* Filed herewith.
** To be filed by 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.
(4) Incorporated by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A (File No.
333-24495) filed on April 1, 1999.
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>
David R. Odenath, Jr. Officer in Charge, Officer in Charge, President, Chief Executive Officer
President, Chief and Chief Operating Officer, PIFM; Senior Vice
Executive Officer and Chief President, The Prudential Insurance Company of America
Operating Officer (Prudential)
Robert F. Gunia Executive Vice President and Executive Vice President and Treasurer, PIFM; Corporate
Treasurer Vice President, Prudential; President, Prudential
Investment Management Services LLC (PIMS)
William V. Healey Executive Vice President, Executive Vice President, Chief Legal Officer and
Chief Legal Officer and Secretary, PIFM; Vice President and Associate General
Secretary Counsel, Prudential; Senior Vice President, Chief Legal
Officer and Secretary, PIMS
Brian W. Henderson Executive Vice President Executive Vice President, PIFM; Senior Vice President
and Chief Operating Officer, PIMS
Stephen Pelletier Executive Vice President Executive Vice President, PIFM
Judy A. Rice Executive Vice President Executive Vice President, PIFM
Lynn M. Waldvogel Executive Vice President 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.
C-3
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza, Newark,
New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Jeffrey Hiller Chief Compliance Officer Chief Compliance Officer, Prudential Global Asset
Management
John R. Strangfeld, Jr. Chairman of the Board, Serior Vice President, Prudential; President,
President, Chief Executive Prudential Global Asset Management Group of Prudential;
Officer and Director Chairman of the Board, President, Chief Executive
Officer and Director, PIC
Bernard B. Winograd Senior Vice President and Chief Executive Officer, Prudential Real Estate
Director Investors (PREI); 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, Global Utility Fund, Inc., Nicholas
Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund), Prudential
Balanced Fund, Prudential California Municipal Fund, Prudential Diversified Bond
Fund, Inc., Prudential Diversified Funds, Prudential Emerging Growth
Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Total Return 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, Inc., Prudential
International Bond Fund, Inc., Prudential Mid-Cap Value Fund, Prudential
MoneyMart Assets, 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 Sector Funds, Inc., Prudential Small-Cap
Quantum Fund, Inc., Prudential Small Company Value Fund, Inc., Prudential
Special Money Market Fund, Inc., Prudential Structured Maturity Fund, Inc.,
Prudential Tax-Free Money Fund, Inc., Prudential Tax-Managed Funds, Prudential
20/20 Focus Fund, Prudential World Fund, Inc., The Prudential Investment
Portfolios, Inc., Strategic Partners Series, Target Funds and The Target
Portfolio Trust.
PIMS is also distributor of the following unit investment trusts: Separate
Accounts: Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential Variable
Contract Account-11, The Prudential Variable Contract Account-24, The Prudential
Variable Contract Account GI-2, The Prudential Discovery Select Group Variable
Contract Account, The Pruco Life Flexible Premium Variable Annuity Account, The
Pruco Life of New Jersey Flexible Premium Variable Annuity Account, The
Prudential Individual Variable Contract Account and The Prudential Qualified
Individual Variable Contract Account.
(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND
POSITIONS AND OFFICES OFFICES
NAME(1) WITH UNDERWRITER WITH REGISTRANT
- ------- ---------------- ---------------
<S> <C> <C>
Margaret Deverell.................. Vice President and Chief Financial None
Officer
Robert F. Gunia.................... President Vice President
and Director
Kevin Frawley ..................... Senior Vice President and Compliance None
213 Washington Street Officer
Newark, NJ 07102
William V. Healey.................. Senior Vice President, Secretary and Assistant
Chief Legal Officer Secretary
Brian W. Henderson................. Senior Vice President and Officer None
John R. Strangfeld, Jr............. Advisory Board Member President and
Director
</TABLE>
- --------------
(1)
The address of each person named is Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
C-4
<PAGE>
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-5
<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 24th day of
March, 2000.
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
By /s/ John R. Strangfeld, Jr.
-----------------------------------------------------------------------
John R. Strangfeld, Jr., 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/ Delayne Dedrick Gold Director March 24, 2000
- ------------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Director March 24, 2000
- ------------------------------------
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale Director March 24, 2000
- ------------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Thomas T. Mooney Director March 24, 2000
- ------------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Director March 24, 2000
- ------------------------------------
STEPHEN P. MUNN
/s/ David R. Odenath, Jr. Director March 24, 2000
- ------------------------------------
DAVID R. ODENATH, JR.
/s/ Richard A. Redeker Director March 24, 2000
- ------------------------------------
RICHARD A. REDEKER
/s/ Robin B. Smith Director March 24, 2000
- ------------------------------------
ROBIN B. SMITH
/s/ John R. Strangfeld, Jr. President and Director March 24, 2000
- ------------------------------------
JOHN R. STRANGFELD, JR.
/s/ Louis A. Weil, III Director March 24, 2000
- ------------------------------------
LOUIS A. WEIL, III
/s/ Clay T. Whitehead Director March 24, 2000
- ------------------------------------
CLAY T. WHITEHEAD
/s/ Grace C. Torres Treasurer and Principal March 24, 2000
- ------------------------------------ Financial and Accounting
GRACE C. TORRES Officer
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<S> <C>
(a) (1) Articles of Incorporation.(1)
(2) Articles of Amendment.(2)
(3) Form of Articles of Amendment.*
(b) Amended By-Laws.*
(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)
(3) Amendment to Subadvisory Agreement.*
(e) (1) Distribution Agreement between the Registrant and Prudential Investment Management Services
LLC.(3)
(2) Selected Dealer Agreement.(3)
(g) (1) Custodian Contract between the Registrant and State Street Bank and Trust Company.(2)
(2) Amendment to Custodian Contract.*
(h) (1) Transfer Agency and Service Agreement between the Registrant and Prudential Mutual Fund
Services LLC.(2)
(2) Amendment to Transfer Agency Agreement.*
(i) Opinion and consent of Counsel.**
(j) Consent of Independent Accountants.**
(m) (1) Amended and Restated Distribution and Service Plan for Class A Shares.(4)
(2) Amended and Restated Distribution and Service Plan for Class B Shares.(4)
(3) Amended and Restated Distribution and Service Plan for Class C Shares.(4)
(n) Rule 18f-3 Plan.(4)
(p) (1) Fund's Code of Ethics.*
(2) Manager's, Subadviser's and Distributor's Code of Ethics.*
</TABLE>
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* Filed herewith.
** To be filed by 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.
(4) Incorporated by reference to Post-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A (File No. 333-24495) filed on April 1,
1999.
<PAGE>
ARTICLES OF AMENDMENT
OF
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
Prudential Small-Cap Quantum Fund, Inc., a Maryland corporation having its
principal offices in Baltimore, Maryland and Newark, New Jersey (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended by striking out
Article I and inserting in lieu thereof the following:
The name of the corporation (hereinafter called the "Corporation") is
Prudential Tax-Managed Small-Cap Fund, Inc.
SECOND: The foregoing amendment does not change the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of the capital stock of the
Corporation and does not increase the authorized stock of the Corporation.
THIRD: The foregoing amendment is limited to changes expressly permitted by
Section 2-605 of the Maryland General Corporation Law and have been approved by
a majority of the entire Board of Directors of the Corporation without action by
the stockholders in accordance with Section 2-605(a)(4) of the Maryland General
Corporation Law (the Corporation being registered as an open-end company under
the Investment Company Act of 1940).
FOURTH: The foregoing amendment to the Charter of the Corporation shall
become effective at 9:00 a.m. on May 31, 2000.
IN WITNESS WHEREOF, PRUDENTIAL SMALL-CAP QUANTUM FUND, INC., has caused
these presents to be signed in its name and on its behalf by its Vice President
and attested by its Secretary on April ____, 2000.
PRUDENTIAL SMALL-CAP QUANTUM
FUND, INC.
By:
---------------------------
Robert F. Gunia
Vice President
Attest:
---------------------------
Marguerite E.H. Morrison
Secretary
<PAGE>
THE UNDERSIGNED, Vice President of Prudential Small-Cap Quantum Fund, Inc.,
who executed on behalf of said Corporation the foregoing amendments to the
charter of which this certificate is made a part, hereby acknowledges in the
name and on behalf of said Corporation the foregoing amendments to the charter
to be the corporate act of said Corporation and further certifies that, to the
best of his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material respects
under the penalties of perjury.
-------------------------
Robert F. Gunia
Vice President
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
By-Laws
ARTICLE I.
STOCKHOLDERS
Section 1. PLACE OF MEETING. All meetings of the stockholders shall be
held at the principal office of the Corporation in the State of Maryland or at
such other place within the United States as may from time to time be designated
by the Board of Directors and stated in the notice of such meeting.
Section 2. ANNUAL MEETINGS. The annual meeting of the stockholders of
the Corporation shall be held on a date and at such hour as may from time to
time be designated by the Board of Directors and stated in the notice of such
meeting, within the month ending four months after the end of the Corporation's
fiscal year, for the transaction of such business as may properly be brought
before the meeting; PROVIDED, however, that an annual meeting shall not be
required to be held in any year in which the election of directors is not
required to be acted on by stockholders under the Investment Company Act of
1940.
Section 3. MEETINGS. Meetings of the stockholders for any purpose or
purposes, including for purposes of voting on the removal of one or more
Directors, may be called by the Chairman of the Board, the President or a
majority of the Board of Directors, and shall be called by the Secretary upon
receipt of the request in writing signed by stockholders holding not less than
10% of the common stock issued and outstanding and entitled to vote thereat.
Such request shall state the purpose or purposes of the
<PAGE>
proposed meeting. The Secretary shall inform such stockholders of the reasonably
estimated costs of preparing and mailing such notice of meeting and upon payment
to the Corporation of such costs, the Secretary shall give notice stating the
purpose or purposes of the meeting as required in this Article and by-law to all
stockholders entitled to notice of such meeting. No meeting need be called upon
the request of the holders of shares entitled to cast less than a majority of
all votes entitled to be cast at such meeting to consider any matter which is
substantially the same as a matter voted upon at any meeting of stockholders
held during the preceding twelve months.
Section 4. NOTICE OF MEETINGS OF STOCKHOLDERS. Not less than
ten days' and not more than ninety days' written or printed notice of every
meeting of stockholders, stating the time and place thereof and the general
nature of the business proposed to be transacted thereat, shall be given to each
stockholder entitled to vote thereat by leaving the same with such stockholder
or at such stockholder's residence or usual place of business or by mailing it,
postage prepaid, and addressed to such stockholder at such stockholder's address
as it appears upon the books of the Corporation. If mailed, notice shall be
deemed to be given when deposited in the United States mail addressed to the
stockholder as aforesaid.
No notice of the time, place or purpose of any meeting of stockholders
need be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with the records of the meeting,
either before or after the holding thereof, waives such notice.
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Section 5. RECORD DATES. The Board of Directors may fix, in advance, a
date not exceeding ninety days preceding the date of any meeting of
stockholders, any dividend payment date or any date for the allotment of rights,
as a record date for the determination of the stockholders entitled to notice of
and to vote at such meeting or entitled to receive such dividends or rights, as
the case may be; and only stockholders of record on such date shall be entitled
to notice of and to vote at such meeting or to receive such dividends or rights,
as the case may be. In the case of a meeting of stockholders, such date shall
not be less than ten days prior to the date fixed for such meeting.
Section 6. QUORUM, ADJOURNMENT OF MEETINGS. The presence in person or
by proxy of the holders of record of one-third of the shares of the common stock
of the Corporation issued and outstanding and entitled to vote thereat shall
constitute a quorum at all meetings of the stockholders except as otherwise
provided in the Articles of Incorporation. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the holders of a
majority of the stock present in person or by proxy shall have power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until stockholders owning the requisite amount of stock entitled to
vote at such meeting shall be present. At such adjourned meeting at which
stockholders owning the requisite amount of stock entitled to vote thereat shall
be represented, any business may be transacted which might have been transacted
at the meeting as originally notified.
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Section 7. VOTING AND INSPECTORS. At all meetings, stockholders of
record entitled to vote thereat shall have one vote for each share of common
stock standing in his or her name on the books of the Corporation (and such
stockholders of record holding fractional shares, if any, shall have
proportionate voting rights) on the date for the determination of stockholders
entitled to vote at such meeting, either in person or by proxy. A stockholder
may sign a writing authorizing another person to act as proxy. Signing may be
accomplished by the stockholder or the stockholder's authorized agent signing
the writing or causing the stockholder's signature to be affixed to the
writing by any reasonable means, including facsimile signature. A stockholder
may authorize another person to act as proxy by transmitting, or authorizing
the transmission of, a telegram, cablegram, datagram, or other means of
electronic transmission to the person authorized to act as proxy or to a
proxy solicitation firm, proxy support service organization, or other person
authorized by the person who will act as proxy to receive the transmission.
All questions shall be decided by a majority of the votes cast and all
elections of directors shall be decided by a plurality of the votes cast at a
duly constituted meeting, except as otherwise provided by statute or by the
Articles of Incorporation or by these By-Laws.
At any election of directors, the Chairman of the meeting may, and upon
the request of the holders of ten percent (10%) of the stock entitled to vote at
such election shall, appoint two inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of director shall be appointed such
inspector.
Section 8. CONDUCT OF STOCKHOLDERS' MEETINGS. The meetings of the
stockholders shall be presided over by the Chairman of the Board, or if he or
she is not present, by the President, or if he or she is not present, by a
Vice-President, or if none
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of them is present, by a Chairman to be elected at the meeting. The Secretary of
the Corporation, if present, shall act as a Secretary of such meetings, or if he
or she is not present, an Assistant Secretary shall so act; if neither the
Secretary nor the Assistant Secretary is present, then the meeting shall elect
its Secretary.
Section 9. CONCERNING VALIDITY OF PROXIES, BALLOTS, ETC. At every
meeting of the stockholders, all proxies shall be received and taken in charge
of and all ballots shall be received and canvassed by the Secretary of the
meeting, who shall decide all questions concerning the qualification of voters,
the validity of the proxies and the acceptance or rejection of votes, unless
inspectors of election shall have been appointed by the Chairman of the meeting,
in which event such inspectors of election shall decide all such questions.
ARTICLE II.
BOARD OF DIRECTORS
Section 1. NUMBER AND TENURE OF OFFICE. The business and affairs of the
Corporation shall be conducted and managed by a Board of Directors of not less
than three nor more than fifteen directors, as may be determined from time to
time by vote of a majority of the directors then in office, provided that if
there is no stock outstanding the number of directors may be less than three but
not less than one. Directors need not be stockholders.
Section 2. VACANCIES. In case of any vacancy in the Board of Directors
through death, resignation or other cause, other than an increase in the number
of directors, a
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majority of the remaining directors, although a majority is less than a quorum,
by an affirmative vote, may elect a successor to hold office until the next
meeting of stockholders or until his or her successor is chosen and qualifies.
Section 3. INCREASE OR DECREASE IN NUMBER OF DIRECTORS. The Board of
Directors, by the vote of a majority of the entire Board, may increase the
number of directors and may elect directors to fill the vacancies created by any
such increase in the number of directors until the next meeting of stockholders
or until their successors are duly chosen and qualified. The Board of Directors,
by the vote of a majority of the entire Board, may likewise decrease the number
of directors to a number not less than three.
Section 4. PLACE OF MEETING. The directors may hold their meetings,
have one or more offices, and keep the books of the Corporation, outside the
State of Maryland, at any office or offices of the Corporation or at any other
place as they may from time to time by resolution determine, or in the case of
meetings, as they may from time to time by resolution determine or as shall be
specified or fixed in the respective notices or waivers of notice thereof.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such time and on such notice as the directors may from time to
time determine.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be held from time to time upon call of the Chairman of the Board, the
President, the Secretary or two or more of the directors, by oral or telegraphic
or written notice duly
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<PAGE>
served on or sent or mailed to each director not less than one day before such
meeting. No notice need be given to any director who attends in person or to any
director who, in writing executed and filed with the records of the meeting
either before or after the holding thereof, waives such notice. Such notice or
waiver of notice need not state the purpose or purposes of such meeting.
Section 7. QUORUM. One-third of the directors then in office shall
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two directors. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum shall have been obtained.
The act of the majority of the directors present at any meeting at which there
is a quorum shall be the act of the directors, except as may be otherwise
specifically provided by statute or by the Articles of Incorporation or by these
By-Laws.
Section 8. OPERATING COMMITTEE. The Board of Directors may, by the
affirmative vote of a majority of the whole Board, appoint from the directors an
Operating Committee to consist of such number of directors (not less than three)
as the Board may from time to time determine. The Chairman of the Committee
shall be elected by the Board of Directors. The Board of Directors by such
affirmative vote shall have power at any time to change the members of such
Committee and may fill vacancies in the Committee by election from the
directors. When the Board of Directors is not in session, to the extent
permitted by law, the Operating Committee shall have and may
7
<PAGE>
exercise any or all of the powers of the Board of Directors in the management
of the business and affairs of the Corporation. The Operating Committee may
fix its own rules of procedure, and may meet when and as provided by such
rules or by resolution of the Board of Directors, but in every case the
presence of a majority shall be necessary to constitute a quorum. During the
absence of a member of the Operating Committee, the remaining members may
appoint a member of the Board of Directors to act in his or her place.
Section 9. OTHER COMMITTEES. The Board of Directors, by the affirmative
vote of a majority of the whole Board, may appoint from the directors other
committees which shall in each case consist of such number of directors (not
less than one) and shall have and may exercise such powers as the Board may
determine in the resolution appointing them. A majority of all the members of
any such committee may determine its action and fix the time and place of its
meetings, unless the Board of Directors shall otherwise provide. The Board of
Directors shall have power at any time to change the members and powers of any
such committee, to fill vacancies and to discharge any such committee.
Section 10. TELEPHONE MEETINGS. Members of the Board of Directors or a
committee of the Board of Directors may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Participation
in a meeting by these means constitutes presence in person at the meeting unless
otherwise provided
8
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by the Investment Company Act of 1940.
Section 11. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken at any meeting of the Board of Directors or any committee thereof
may be taken without a meeting, if a written consent to such action is signed by
all members of the Board or of such committee, as the case may be, and such
written consent is filed with the minutes of the proceedings of the Board or
such committee, unless otherwise provided by the Investment Company Act of 1940.
Section 12. COMPENSATION OF DIRECTORS. No director shall receive any
stated salary or fees from the Corporation for his or her services as such if
such director is, other than by reason of being such director, an interested
person (as such term is defined by the Investment Company Act of 1940) of the
Corporation or of its investment adviser, administrator or principal
underwriter. Except as provided in the preceding sentence, directors shall be
entitled to receive such compensation from the Corporation for their services as
may from time to time be voted by the Board of Directors.
Section 13. REMOVAL OF DIRECTORS. No director shall continue to hold
office after the holders of record of not less than two-thirds of the
Corporation's outstanding common stock of all series have declared that that
director be removed from office either by declaration in writing filed with the
Corporation's secretary or by votes cast in person or by proxy at a meeting
called for the purpose. The directors shall promptly call a meeting of
stockholders for the purpose of voting upon the question of removal of any
director or directors when requested in writing to do so by the record holders
of not less
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than 10 percent of the Corporation's outstanding common stock of all series.
ARTICLE III.
OFFICERS
Section 1. EXECUTIVE OFFICERS. The executive officers of the
Corporation shall be chosen by the Board of Directors. These may include a
Chairman of the Board of Directors and shall include a President, one or more
Vice-Presidents (the number thereof to be determined by the Board of Directors),
a Secretary and a Treasurer. The Board of Directors or the Operating Committee
may also in its discretion appoint Assistant Secretaries, Assistant Treasurers
and other officers, agents and employees, who shall have such authority and
perform such duties as the Board or the Operating Committee may determine. The
Board of Directors may fill any vacancy which may occur in any office. Any two
offices, except those of President and Vice-President, may be held by the same
person, but no officer shall execute, acknowledge or verify any instrument in
more than one capacity, if such instrument is required by law or these By-Laws
to be executed, acknowledged or verified by two or more officers.
Section 2. TERM OF OFFICE. The term of office of all officers shall be
one year and until their respective successors are chosen and qualified. Any
officer may be removed from office at any time with or without cause by the vote
of a majority of the whole Board of Directors.
Section 3. POWERS AND DUTIES. The officers of the Corporation shall
have such powers and duties as generally pertain to their respective offices, as
well as such
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powers and duties as may from time to time be conferred by the Board of
Directors or the Operating Committee.
ARTICLE IV.
CAPITAL STOCK
Section 1. CERTIFICATES FOR SHARES. Each stockholder of the Corporation
shall be entitled to a certificate or certificates for the full shares of stock
of the Corporation owned by him or her in such form as the Board from time to
time prescribe.
Section 2. TRANSFER OF SHARES. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by his or her duly authorized attorney or legal representative, upon surrender
and cancellation of certificates, if any, for the same number of shares, duly
endorsed or accompanied by proper instruments of assignment and transfer, with
such proof of the authenticity of the signature as the Corporation or its agents
may reasonably require; in the case of shares not represented by certificates,
the same or similar requirements may be imposed by the Board of Directors.
Section 3. STOCK LEDGERS. The stock ledgers of the Corporation,
containing the names and addresses of the stockholders and the number of shares
held by them respectively, shall be kept at the principal office of the
Corporation or, if the Corporation employs a Transfer Agent, at the office of
the Transfer Agent of the Corporation.
Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of
Directors or the Operating Committee may determine the conditions upon which
a new certificate of
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stock of the Corporation of any class may be issued in place of a certificate
which is alleged to have been lost, stolen or destroyed; and may, in its
discretion, require the owner of such certificate or such owner's legal
representative to give bond, with sufficient surety, to the Corporation and each
Transfer Agent, if any, to indemnify it and each such Transfer Agent against any
and all loss or claims which may arise by reason of the issue of a new
certificate in the place of the one so lost, stolen or destroyed.
ARTICLE V.
CORPORATE SEAL
The Board of Directors may provide for a suitable corporate seal, in
such form and bearing such inscriptions as it may determine.
ARTICLE VI.
FISCAL YEAR
The fiscal year of the Corporation shall be fixed by the Board of
Directors.
ARTICLE VII.
INDEMNIFICATION
Directors, officers, employees and agents of the Corporation shall
not be liable to the Corporation, any stockholder, officer, director,
employee or other person for any action or failure to act except for willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of their office. The Corporation shall indemnify
present and former directors, officers, employees and agents of the
Corporation (each, a "Covered Person") against judgments, fines, settlements
and expenses to the fullest extent authorized and in the
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manner permitted by applicable federal and state law. The Corporation shall
advance the expenses of Covered Persons who are parties to any Proceeding to
the fullest extent authorized, and in the manner permitted, by applicable
federal and state law. For purposes of this paragraph, "Proceeding" means any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative. The Corporation may purchase
insurance to protect itself and its Covered Persons against judgments, fines,
settlements and expenses to the fullest extent authorized and in the manner
permitted by applicable federal and state law. Pursuant and subject to the
other provisions of this Article, the Corporation shall indemnify each
Covered Person against, or advance the expenses of any Covered Person for,
the amount of any deductible provided in any liability insurance policy
maintained by the Corporation. Nothing contained in this Article VII shall be
construed to indemnify directors, officers, employees and agents of the
Corporation against, nor to permit the Corporation to purchase insurance that
purports to protect against, any liability to the Corporation or any
stockholder, officer, director, employee, agent or other person to whom he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his or her office.
ARTICLE VIII.
CUSTODIAN
Section 1. The Corporation shall have as custodian or custodians one or
more trust companies or banks of good standing, each having a capital, surplus
and undivided profits aggregating not less than fifty million dollars
($50,000,000), and, to the extent required by the Investment Company Act of
1940, the funds and securities held by the Corporation shall be kept in the
custody of one or more such custodians, provided such custodian or custodians
can be found ready and willing to act, and further provided that the Corporation
may use as subcustodians, for the purpose of holding any foreign securities and
related funds of the Corporation, such foreign banks as the Board of Directors
may approve and as shall be permitted by law.
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Section 2. The Corporation shall upon the resignation or inability to
serve of its custodian or upon change of the custodian:
(a) in case of such resignation or inability to serve, use its
best efforts to obtain a successor custodian;
(b) require that the cash and securities owned by the
Corporation be delivered directly to the successor custodian; and
(c) in the event that no successor custodian can be found,
submit to the stockholders before permitting delivery of the cash and
securities owned by the Corporation otherwise than to a successor
custodian, the question whether or not this Corporation shall be
liquidated or shall function without a custodian.
ARTICLE IX.
AMENDMENT OF BY-LAWS
The By-Laws of the Corporation may be altered, amended, added to or
repealed by the stockholders or by majority vote of the entire Board of
Directors; but any such alteration, amendment, addition or repeal of the By-Laws
by action of the Board of Directors may be altered or repealed by stockholders.
Dated: February 19, 1997
Amended as of March 1, 2000
t: \george\Bible\Quantum\By-laws.2/97
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AMENDMENT TO SUBADVISORY AGREEMENT
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
AMENDMENT made as of this 1st day of January, 2000, between Prudential
Investments Fund Management LLC ("PIFM"), and The Prudential Investment
Corporation ("PIC").
WHEREAS, PIFM, either itself or as successor to Prudential
Investments Fund Management, Inc., and PIC have entered into a Subadvisory
Agreement (the "Agreement") dated April 4, 1997, with respect to the
management of Prudential Small-Cap Quantum Fund, Inc. (the "Fund"); and
WHEREAS, the Agreement provides that PIC shall provide investment
advisory services to the Fund, subject to oversight by PIFM; and
WHEREAS, PIFM and PIC desire to amend the Agreement with respect to the
compensation to be paid by PIFM to PIC for services provided by PIC pursuant to
the Agreement.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement for its current term, and other good and valuable consideration,
PIFM and PIC hereby amend the Agreement to provide for the compensation to be
paid by PIFM to PIC at the annual rate of .25 of 1% of the Fund's average
daily net assets, effective as of January 1, 2000, for the same term,
including renewals, as the Agreement and upon the same terms and conditions
as described in the Agreement.
IN WITNESS WHEREOF, PIMS and PIC have signed this Amendment as of the
day and year first above written.
PRUDENTIAL INVESTMENTS THE PRUDENTIAL INVESTMENT
FUND MANAGEMENT LLC CORPORATION
By: /s/ Robert F. Gunia By: /s/ John R. Strangfeld, Jr.
--------------------------- ---------------------------
Name: Robert F. Gunia Name: John R. Strangfeld, Jr.
------------------------- -------------------------
Title: Executive Vice President Title: President
------------------------ ------------------------
T: \george\bible\Quantum\Subadvisory.Amend
<PAGE>
AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT
This Amendment to the respective Custodian Contract/Agreement is made as of
February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.
WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and
WHEREAS, each Fund and the Custodian desire to amend certain provisions of
the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, each Fund and the Custodian desire to amend and restate certain
other provisions of the Contract relating to the custody of assets of each of
the Funds held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereby agree to amend the
Contract, to add the following new provisions which supersede the provisions in
the existing contracts relating to the custody of assets of the Funds outside
the United States.
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.1. DEFINITIONS.
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
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"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule
17f-5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.
3.3. COUNTRIES COVERED.
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list
on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody
Manager to maintain the assets of the Funds which list of Eligible Foreign
Custodians may be amended from time to time in the sole discretion of the
Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Execution of this Amendment by the Fund shall be deemed to be a Proper
Instruction to open an account, or to place or maintain Foreign Assets, in each
country listed on Schedule A in which the Custodian has previously placed or
currently maintains Foreign Assets pursuant to the terms of the
2
<PAGE>
Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of a Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by that Fund's Board to the Custodian as Foreign Custody Manager for
that country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING.
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign
3
<PAGE>
Custody Manager which is a foreign securities depository or clearing agency that
is not a Mandatory Securities Depository). The Foreign Custody Manager shall
provide the Board at least annually with information as to the factors used in
such monitoring system. If the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has selected are no
longer appropriate, the Foreign Custody Manager shall notify the Board in
accordance with Section 3.7 hereunder and withdraw the Foreign Assets from such
Eligible Foreign Custodian as soon as reasonably practicable.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO.
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17f-5.
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty (60)
days after receipt by the non-terminating party of such notice.
4
<PAGE>
The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Funds with
respect to designated countries.
3.10. MOST FAVORED CLIENT.
If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUNDS HELD OUTSIDE
THE UNITED STATES.
4.1 DEFINITIONS.
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign Sub-Custodian in an account that is identified as
belonging to the Custodian for the benefit of its customers, PROVIDED HOWEVER,
that (i) the records of the Custodian with respect to foreign securities of the
Funds which are maintained in such account shall identify those securities as
belonging to the Funds and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign
Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
5
<PAGE>
4.4.1. DELIVERY OF FOREIGN ASSETS.
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Fund in accordance
with customary market practice in the country where such foreign
securities are held or traded, including, without limitation: (A)
delivery against expectation of receiving later payment; or (B) in
the case of a sale effected through a Foreign Securities System,
in accordance with the rules governing the operation of the
Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other similar
offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the name of
the Custodian (or the name of the respective Foreign Sub-Custodian
or of any nominee of the Custodian or such Foreign Sub-Custodian)
or for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units;
(vi) to brokers, clearing banks or other clearing agents for examination
or trade execution in accordance with reasonable market custom;
PROVIDED that in any such case the Foreign Sub-Custodian shall have
no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Foreign Sub-Custodian's own
negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
6
<PAGE>
(ix) for delivery as security in connection with any borrowing by the
Funds requiring a pledge of assets by the Funds;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the foreign securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper trust\corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
4.4.2. PAYMENT OF FUND MONIES.
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, in accordance with
reasonable market settlement practice in the country where such
foreign securities are held or traded, including, without
limitation, (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer) against
expectation of receiving later delivery of such foreign securities;
or (B) in the case of a purchase effected through a Foreign
Securities System, in accordance with the rules governing the
operation of such Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of foreign
securities of the Fund;
(iii) for the payment of any expense or liability of the Fund,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees
under this Contract, legal fees, accounting fees, and other
operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Fund, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as
7
<PAGE>
original margin and variation margin;
(vi) for payment of part or all of the dividends received in respect of
securities sold short;
(vii) in connection with the borrowing or lending of foreign securities;
and
(viii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper trust\corporate purpose,
and naming the person or persons to whom such payment is to be
made.
4.4.3. MARKET CONDITIONS; MARKET INFORMATION.
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension funds or substantially similar institutions which, as a part
of their ordinary business operations, purchase or sell securities and make use
of global custody services.
The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:
(i) legal opinions relating to whether local law restricts with
respect to U.S. registered mutual funds (a) access of a fund's
independent public accountants to books and records of a Foreign
Sub-Custodian or Foreign Securities System, (b) a fund's ability
to recover in the event of bankruptcy or insolvency of a Foreign
Sub-Custodian or Foreign Securities System, (c) a fund's ability to
recover in the event of a loss by a Foreign Sub-Custodian or
Foreign Securities System, and (d)
8
<PAGE>
the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars;
(ii) summary of information regarding Foreign Securities Systems; and
(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership
limits, and (f) unique market arrangements.
4.5. REGISTRATION OF FOREIGN SECURITIES.
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign
Sub-Custodian or in the name of any nominee of the foregoing, and the Fund
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities, except to the extent that the Fund incurs
loss or damage due to failure of such nominee to meet its standard of care set
forth in the Contract. The Custodian or a Foreign Sub-Custodian shall not be
obligated to accept securities on behalf of a Fund under the terms of this
Contract unless the form of such securities and the manner in which they are
delivered are in accordance with reasonable market practice.
4.6. BANK ACCOUNTS.
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.
4.7. COLLECTION OF INCOME.
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
4.8. SHAREHOLDER RIGHTS.
With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use
9
<PAGE>
reasonable commercial efforts to facilitate the exercise of voting and other
shareholder rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued. The
Fund acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.
4.11. TAX LAW.
Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section 4.11
or from the failure of any Foreign Sub-Custodian to perform in accordance with
the terms of the applicable subcustody agreement, the Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on a
Fund, a series thereof or the Custodian as custodian of the Fund by the tax law
of the United States or of any state or political subdivision thereof. It shall
be the responsibility of each Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of
10
<PAGE>
the Fund by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
4.12. LIABILITY OF CUSTODIAN.
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in
the event of any conflict between the provisions of Articles 3 and 4
hereof, the provisions of Article 3 shall prevail.
11
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY
/s/Marc L. Parsons By: /s/Ronald E. Logue
- ------------------- -------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund
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 Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios Fund, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.
<PAGE>
Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Prudential Tax-Free Money Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.
WITNESSED BY:
By: /s/S. Jane Rose By: /s/Grace Torres
---------------- -----------------
Grace Torres
Treasurer
First Financial Fund, Inc.
The High Yield Plus Fund, Inc.
WITNESSED BY:
By: /s/Stephanie L. Bourque By: /s/Arthur J. Brown
----------------------- ------------------
Arthur J. Brown
Secretary
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Oesterreichischen --
Sparkassen AG
Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale de Banque --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano S.A. --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. Deposito Central de
Valores S.A.
People's The Hongkong and Shanghai --
Republic Banking Corporation Limited,
of China Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
</TABLE>
14
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Costa Rica Banco BCT S.A. --
Croatia Privredna Banka Zagreb d.d --
Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. The Bank of Greece,
System for Monitoring
Transactions in
Securities in Book-Entry
Form
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
Iceland Icebank Ltd.
</TABLE>
15
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
India Deutsche Bank AG --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.
Japan The Daiwa Bank, Limited Japan Securities
Depository Center
The Fuji Bank, Limited
Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic The Hongkong and Shanghai Banking
of Korea Corporation Limited
Latvia JSC Hansabank-Latvija --
Lebanon British Bank of the Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
</TABLE>
16
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa --
The
Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
Portugal Banco Comercial Portugues --
</TABLE>
17
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Romania ING Bank N.V. --
Russia Credit Suisse First Boston AO, Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)
Singapore The Development Bank --
of Singapore Limited
Slovak Republic Ceskoslovenska Obchodni Banka, A.S. --
Slovenia Bank Austria d.d. Ljubljana --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland UBS AG --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
Trinidad
& Tobago Republic Bank Limited --
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
Ottoman Bank
</TABLE>
18
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Ukraine ING Bank, Ukraine --
United Kingdom State Street Bank and Trust Company, --
London Branch
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities)
</TABLE>
* The global custody network approved by each fund is set forth below on
Schedules A-1 and A-2.
19
<PAGE>
SCHEDULE A-1
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
Country Funds
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina Mexico Global Utility Fund, Inc.
Australia Morocco Prudential 20/20 Focus Fund
Austria Netherlands Prudential Balanced Fund
Bangladesh/+/ New Zealand Prudential Equity Fund, Inc.
Belgium Norway Prudential Equity Income Fund
Brazil Pakistan Prudential Developing Markets Fund
Canada Peru Prudential Diversified Bond Fund, Inc.
Chile Philippines Prudential Distressed Securities Fund, Inc.
China Poland Prudential Diversified Funds
Columbia Portugal Prudential Emerging Growth Fund, Inc.
Cyprus Russia Prudential Global Genesis Fund, Inc.
Czech Republic Singapore Prudential Global Limited Maturity Fund, Inc.
Denmark Slovak Republic Prudential Index Series Fund
Ecuador South Africa Prudential Intermediate Global Income Fund, Inc.
Egypt Spain Prudential International Bond Fund, Inc.
Finland Sri Lanka Prudential Mid-Cap Value Fund
France Sweden Prudential Natural Resources Fund, Inc.
Germany Switzerland Prudential Pacific Growth Fund, Inc.
Ghana Taiwan Prudential Real Estate Securities Fund
Greece Thailand Prudential Small-Cap Quantum Fund, Inc.
Hong Kong Turkey Prudential Small Company Value Fund, Inc.
Hungary Transnational Prudential Tax-Managed Equity Fund
India United Kingdom Prudential Utility Fund, Inc.
Indonesia Uruguay Prudential World Fund, Inc.
Ireland Venezuela The Prudential Investment Portfolios Fund, Inc.
Israel The Target Portfolio Trust
Italy The Global Total Return Fund, Inc.
Ivory Coast
Japan
Jordan
Kenya
Korea
Lebanon
Malaysia
- ---------------------------------------------------------------------------------------------------------------
+ Countries marked by a dagger have been approved only for The Target Portfolio Trust.
</TABLE>
<PAGE>
SCHEDULE A-2
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
Country Funds
- ----------------------------------------------------------------------------------------------
<S> <C>
United Kingdom Cash Accumulation Trust
Command Government Fund
Command Money Fund
Prudential Government Income Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential High Yield Income Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)
Bolsa de Valores de Rio de Janeiro
All SSB clients presently use CBLC
Central de Custodia e de Liquidacao
Financeira de Titulos
Canada The Canadian Depository
for Securities Limited
People's Republic Shanghai Securities Central Clearing
of China and Registration Corporation
Shenzhen Securities Central Clearing
Co., Ltd.
Croatia
Czech Republic Stredisko cennych papiru
Czech National Bank
Denmark Vaerdipapircentralen
(the Danish Securities Center)
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Egypt Misr Company for Clearing, Settlement,
and Central Depository
Finland The Finnish Central Securities
Depository
France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository
(Apothetirion Titlon AE)
Hong Kong The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]
India The National Securities Depository Limited
Indonesia Bank Indonesia
Ireland Central Bank of Ireland
Securities Settlement Office
Israel The Tel Aviv Stock Exchange Clearing
House Ltd.
Bank of Israel
Italy Monte Titoli S.p.A.
Banca d'Italia
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Japan Bank of Japan Net System
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository Corporation
Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.
The Central Bank of Lebanon
Malaysia The Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System
Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores)
Morocco Maroclear
The Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand New Zealand Central Securities
Depository Limited
Norway Verdipapirsentralen (the Norwegian
Registry of Securities)
Pakistan Central Depository Company of Pakistan
Limited
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
Philippines The Philippines Central Depository, Inc.
The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury
Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych)
Central Treasury Bills Registrar
Portugal Central de Valores Mobiliarios (Central)
Romania National Securities Clearing, Settlement and
Depository Co.
Bucharest Stock Exchange Registry Division
Singapore The Central Depository (Pte)
Limited
Monetary Authority of Singapore
Slovak Republic Stredisko Cennych Papierov
National Bank of Slovakia
South Africa The Central Depository Limited
Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana,
Central de Anotaciones en Cuenta
Sri Lanka Central Depository System
(Pvt) Limited
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.
Thailand Thailand Securities Depository
Company Limited
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
Venezuela Central Bank of Venezuela
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE C
MARKET INFORMATION
<TABLE>
<CAPTION>
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
<S> <C>
(Frequency)
THE GUIDE TO CUSTODY IN WORLD MARKETS An overview of safekeeping and
(annually) settlement practices and
procedures in each market in which
State Street Bank and Trust Company
offers custodial services.
GLOBAL CUSTODY NETWORK REVIEW Information relating to the operating
(annually) history and structure of
depositories and subcustodians
located in the markets in which
State Street Bank and Trust Company
offers custodial services,
including transnational
depositories.
GLOBAL LEGAL SURVEY With respect to each market in
(annually) which State Street Bank and Trust
Company offers custodial services,
opinions relating to whether local
law restricts (i) access of a
fund's independent public
accountants to books and records of
a Foreign Sub-Custodian or Foreign
Securities System, (ii) the Fund's
ability to recover in the event of
bankruptcy or insolvency of a
Foreign Sub-Custodian or Foreign
Securities System, (iii) the Fund's
ability to recover in the event of
a loss by a Foreign Sub-Custodian
or Foreign Securities System, and
(iv) the ability of a foreign
investor to convert cash and cash
equivalents to U.S. dollars.
SUBCUSTODIAN AGREEMENTS Copies of the subcustodian
(annually) contracts State Street Bank and
Trust Company has entered into with
each subcustodian in the markets in
which State Street Bank and Trust
Company offers subcustody services
to its US mutual fund clients.
Network Bulletins (weekly): Developments of interest to
investors in the markets in which
State Street Bank and Trust Company
offers custodial services.
Foreign Custody Advisories With respect to markets in which
(as necessary): State Street Bank and Trust Company
offers custodial services which
exhibit special custody risks,
developments which may impact State
Street's ability to deliver
expected levels of service.
</TABLE>
<PAGE>
SCHEDULE D
LIST OF FUNDS, CONTRACTS AND AGREEMENTS
<TABLE>
<CAPTION>
Fund Name Execution Date
- --------- --------------
<S> <C>
Cash Accumulation Trust December 12, 1997
Command Government Fund July 1, 1990
Command Money Fund July 1, 1990
Command Tax-Free Fund July 1, 1990
The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield Fund, Inc.)
Prudential 20/20 Focus Fund April 14, 1998
Prudential California Municipal Fund August 1, 1990
Prudential Developing Markets Fund June 1, 1998
Prudential Distressed Securities Fund, Inc. February 8, 1996
Prudential Diversified Bond Fund, Inc. January 3, 1995
Prudential Diversified Funds September 2, 1998
Prudential Emerging Growth Fund, Inc. October 21, 1996
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Limited Maturity Fund, Inc. October 25, 1990
(formerly Prudential Short-Term Global
Income Fund, Inc.)
Prudential Government Income Fund, Inc. July 31, 1990
(formerly Prudential Government Plus Fund)
Prudential Government Securities Trust July 26, 1990
Prudential High Yield Fund, Inc. July 26, 1990
Prudential High Yield Total Return Fund, Inc. May 30, 1997
Prudential International Bond Fund, Inc. January 16, 1996
(formerly The Global Government Plus Fund, Inc.)
The Prudential Investment Portfolios Fund, Inc.
(formerly Prudential Jennison Series Fund, Inc.) October 27, 1995
Prudential Mid-Cap Value Fund April 14, 1998
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Prudential MoneyMart Assets, Inc. July 25, 1990
Prudential Mortgage Income Fund, Inc. August 1, 1990
(formerly Prudential GNMA Fund, Inc.)
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990
Prudential National Municipals Fund, Inc. July 26, 1990
Prudential Pacific Growth Fund, Inc. July 16, 1992
Prudential Real Estate Securities Fund February 18, 1998
Prudential Small Cap Quantum Fund, Inc. August 1, 1997
Prudential Small Company Value Fund, Inc. July 26, 1990
(formerly Prudential Growth Opportunity Fund, Inc.)
Prudential Special Money Market Fund, Inc. January 12, 1990
Prudential Structured Maturity Fund, Inc. July 25, 1989
Prudential Tax-Free Money Fund, Inc. July 26, 1990
Prudential Utility Fund, Inc. June 6, 1990
Prudential World Fund, Inc. June 7, 1990
(formerly Prudential Global Fund, Inc.)
The Target Portfolio Trust November 9, 1992
Global Utility Fund, Inc. December 21, 1989
Nicholas-Applegate Fund, Inc. April 10, 1987
Prudential Balanced Fund September 4, 1987
Prudential Equity Income Fund January 6, 1987
Prudential Global Genesis Fund, Inc. October 21, 1987
Prudential Institutional Liquidity Portfolio, Inc. November 20, 1987
Prudential Intermediate Global Income Fund, Inc. May 19, 1988
Prudential Municipal Bond Fund August 25, 1987
Prudential Natural Resources Fund, Inc. September 18, 1987
Prudential Tax-Managed Equity Fund December 8, 1998
The Asia Pacific Fund April 24, 1987
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Duff & Phelps Utilities Tax-Free Income Fund, Inc. November 21, 1991
First Financial Fund, Inc. May 1, 1986
The High Yield Income Fund, Inc. November 6, 1987
The High Yield Plus Fund, Inc. March 15, 1988
</TABLE>
<PAGE>
AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AMENDMENT to the Transfer Agency and Service Agreement by and between
Prudential Small-Cap Quantum Fund, Inc. (the "Fund") and Prudential Mutual Fund
Services LLC (successor to Prudential Mutual Fund Services, Inc.)("PMFS") is
entered into as of August 24, 1999.
WHEREAS, the Fund and PMFS have entered into a Transfer Agency and
Service Agreement (the "Agreement") pursuant to which PMFS serves as transfer
agent, dividend disbursing agent and shareholder servicing agent for the Fund;
and
WHEREAS, the Fund and PMFS desire to amend the Agreement to confirm the
Fund's agreement to pay transfer agency account fees and expenses for beneficial
owners holding shares through omnibus accounts maintained by The Prudential
Insurance Company of America, its subsidiaries or affiliates.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement, and other good and valuable consideration, Article 8 of the Agreement
is amended by adding the following section to the Agreement:
8.04 PMFS may enter into agreements with Prudential or any
subsidiary or affiliate of Prudential whereby PMFS will maintain an omnibus
account and the Fund will reimburse PMFS for amounts paid by PMFS to
Prudential, or such subsidiary or affiliate, in an amount not in excess of
the annual maintenance fee for each beneficial shareholder account and
transactional fees and expenses with respect to such beneficial shareholder
account as if each beneficial shareholder account were maintained by PMFS
on the Fund's records, subject to the fee schedule attached hereto as
Schedule A. Prudential, its subsidiary or affiliate, as the case may be,
shall maintain records relating to each beneficial shareholder account that
underlies the omnibus account maintained by PMFS.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
PRUDENTIAL SMALL-CAP ATTEST:
QUANTUM FUND, INC.
By: /s/ R.F. Gunia By: /s/ Marguerite E.H. Morrison
------------------------ -----------------------------
Robert F. Gunia Marguerite E.H. Morrison
Vice President Secretary
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTEST:
By: /s/ Brian W. Henderson By: /s/ William V. Healey
------------------------ -------------------------
Brian W. Henderson William V. Healey
President Secretary
t: \george\Bible\Quantum\TranAgency.Amend
<PAGE>
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
(THE FUND)
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees of the
Fund, in accordance with Rule 17j-1(c) under the Investment Company Act of 1940
(the Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF
SHAREHOLDERS FIRST.
Investment company personnel should scrupulously
avoid serving their own personal interests ahead of
shareholders' interests in any decision relating to their
personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS
BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS
TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY
ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to
achieve technical compliance with the Code but should strive
to abide by its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL
SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation
that might compromise, or call into question, their exercise
of fully independent judgment in the interest of shareholders,
including, but not limited to the receipt of unusual
investment opportunities, perquisites, or gifts of more than a
DE MINIMIS value from persons doing or seeking business with
the Fund.
<PAGE>
Rule 17j-1 under the Act generally proscribes fraudulent or
manipulative practices with respect to a purchase or sale of a security held or
to be acquired (as such term is defined in Section 2.) by an investment company,
if effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the
Act and Rule 17j-1 to give effect to the following general prohibitions as set
forth in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or
Principal Underwriter for a registered investment company, or any
affiliated person of an investment adviser of or principal underwriter
for a registered investment company in connection with the purchase or
sale, directly or indirectly, by such person of a security held or to
be acquired, by such registered investment company:
(1) To employ any device, scheme or artifice to defraud
such registered investment company;
(2) To make to such registered investment company any
untrue statement of a material fact or omit to state to such
registered investment company a material fact necessary in
order to make the statements made, in light of the
circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit
upon any such registered investment company; or
(4) To engage in any manipulative practice with respect
to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer,
general partner or Advisory Person (including any Investment Personnel,
as that term is defined herein) of the Fund, the Manager, the
Adviser/Subadviser, or the Principal Underwriter.
2
<PAGE>
(b) "Adviser/Subadviser" means the Adviser or Subadviser of
the Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund,
Manager or Adviser/Subadviser (or of any company in a control
relationship to the Fund, Manager or Adviser/Subadviser) who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale
of a security by the Fund, or whose functions relate to the making of
any recommendations with respect to such purchases or sales; and (ii)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to
the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same
manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in
determining which security holdings of a person are subject to the
reporting and short-swing profit provisions of Section 16 of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder, except that the determination of direct or indirect
beneficial ownership will apply to all securities which an Access
Person has or acquires (EXHIBIT A).
(e) "Complex" means the group of registered investment
companies for which Prudential Investments Fund Management LLC serves
as Manager; provided, however, that with respect to Access Persons of
the Subadviser (including any unit or subdivision thereof), "Complex"
means the group of registered investment companies in the Complex
advised by the Subadviser or unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the
Manager, the Adviser/Subadviser, or Principal Underwriter (including
his or her designee) as having responsibility for compliance with the
requirements of the Code.
(g) "Control" will have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/ Trustee
of the Fund who is not an "interested person" of the Fund within the
meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be
deemed to be an Access Person, shall be treated as a Disinterested
Director/Trustee for purposes of compliance with the provisions of the
3
<PAGE>
Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and
other Advisory Persons who provide investment information and/or advice
to the Portfolio Manager(s) and/or help execute the Portfolio
Manager's(s') investment decisions, including securities analysts and
traders ; and (b) any natural person in a control relationship to the
Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management,
LLC.
(l) "Portfolio Manager" means any Advisory Person who has the
direct responsibility and authority to make investment decisions for
the Fund.
(m) "Private placement" means a limited offering that is
exempt from registration under the Securities Act of 1933 pursuant to
section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule
506 under such Securities Act.
(n) "Security" will have the meaning set forth in Section
2(a)(36) of the Act, except that it will not include shares of
registered open-end investment companies, direct obligations of the
Government of the United States, , short-term debt securities which are
"government securities" within the meaning of Section 2(a)(16) of the
Act, bankers' acceptances, bank certificates of deposit, commercial
paper and such other money market instruments as are designated by the
Compliance Officer. For purposes of the Code, an "equivalent Security"
is one that has a substantial economic relationship to another
Security. This would include, among other things, (1) a Security that
is exchangeable for or convertible into another Security, (2) with
respect to an equity Security, a Security having the same issuer
(including a private issue by the same issuer) and any derivative,
option or warrant relating to that Security and (3) with respect to a
fixed-income Security, a Security having the same issuer, maturity,
coupon and rating.
(o) "Security held or to be acquired" means any Security or
any equivalent Security which, within the most recent 15 days: (1) is
or has
4
<PAGE>
been held by the Fund; or (2) is being considered by the Fund or its
investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall not
include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private
placement without prior approval.
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment
opportunity should be reserved for the Fund and its shareholders and
whether the opportunity is being offered to the Investment Personnel by
virtue of his or her position with the Fund. The Adviser/Subadviser
shall
5
<PAGE>
maintain a record of such prior approval and reason for same, for at
least 5 years after the end of the fiscal year in which the approval is
granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent
consideration of an investment by the Fund in the issuer. In such
circumstances, the Fund's decision to purchase Securities of the issuer
will be subject to an independent review by appropriate personnel with
no personal interest in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during
which any investment company in the Complex has a pending "buy" or
"sell" order in the same or an equivalent Security and until such time
as that order is executed or withdrawn; provided, however, that this
prohibition shall not apply to Disinterested Directors/Trustees except
if they have actual knowledge of trading by any fund in the Complex
and, in any event, only with respect to those funds on whose boards
they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have
6
<PAGE>
access to information regarding the purchase and sale of Securities for
the Fund and are not engaged in the day-to-day operations of the Fund;
provided that Securities investments effected by such Access Persons
during the proscribed period are not effected with knowledge of the
purchase or sale of the same or equivalent Securities by any fund in
the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to
purchase or sell a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or selling
a Security within seven calendar days before or after the Fund trades
in the same or an equivalent Security. Nevertheless, a personal trade
by any Investment Personnel shall not prevent a Fund in the same
Complex from trading in the same or an equivalent security. However,
such a transaction shall be subject to independent review by the
Compliance Officer.
(iii) If trades are effected during the periods proscribed in
(i) or (ii) above, except as provided in (iv) below with respect to (i)
above, any profits realized on such trades will be promptly required to
be disgorged to the Fund.
(iv) A transaction by Access Persons (other than Investment
Personnel) inadvertently effected during the period proscribed in (i)
above will not be considered a violation of the Code and disgorgement
will not be required so long as the transaction was effected in
accordance with the preclearance procedures described in Section 6
below and without prior knowledge of trading by any fund
7
<PAGE>
in the Complex in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are
prohibited from profiting from a purchase and sale, or sale and purchase, of the
same or an equivalent Security within any 60 calendar day period. If trades are
effected during the proscribed period, any profits realized on such trades will
be immediately required to be disgorged to the Fund.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund
in the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put
option on a security owned by any Fund in the Complex. Access Persons may
purchase options on securities not held by any Fund in the Complex, or purchase
call options or write put options on securities owned by any Fund in the
Complex, subject to preclearance and the same restrictions applicable to other
Securities. Access Persons may write covered call options or buy covered put
options on a Security owned by any Fund in the Complex at the discretion of the
Compliance Officer.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
8
<PAGE>
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect
to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account
over which the Access Person has no direct or indirect influence or
control or in any account of the Access Person which is managed on a
discretionary basis by a person other than such Access Person and with
respect to which such Access Person does not in fact influence or
control such transactions.
(b) Purchases or sales of Securities (or their equivalents)
which are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional
on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic
dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by
an issuer PRO RATA to all holders of a class of its Securities, to the
extent such rights were acquired from such issuer, and sales of such
rights so acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500
shares or less in the aggregate, if (i) the Access Person has no prior
knowledge of activity in such security by any fund in the Complex and
(ii) the issuer is listed on The New York Stock Exchange or has a
market capitalization (outstanding shares multiplied by the current
price per share) greater than $1 billion (or a corresponding market
capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of
related transactions effected over a 30 calendar day period, involving
100 units ($100,000 principal amount) or less in the aggregate, if the
Access Person has no prior knowledge of transactions in such Securities
by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based
9
<PAGE>
index (See Exhibit B.)(1)
(i) Purchases or sales of Securities which receive the prior
approval of the Compliance Officer (such person having no personal
interest in such purchases or sales), based on a determination that no
abuse is involved and that such purchases and sales are not likely to
have any economic impact on any fund in the Complex or on its ability
to purchase or sell Securities of the same class or other Securities of
the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must
preclear all personal Securities investments with the exception of those
identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance
Officer for approval. All approved orders must be executed no later than 5:00
p.m. local time on the business day following the date preclearance is granted.
If any order is not timely executed, a request for preclearance must be
resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of
the Fund or the Compliance Officer the information described in Section 7(b)
hereof with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security ONLY if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
- -----------------
(1) Exhibit B will be amended by the Compliance Officer as necessary.
10
<PAGE>
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is
not required to make a report with respect to transactions effected in any
account over which such Director/Trustee does not have any direct or indirect
influence or control or in any account of the Disinterested Director/Trustee
which is managed on a discretionary basis by a person other than such
Director/Trustee and with respect to which such Director/Trustee does not in
fact influence or control such transactions. The Secretary of the Fund or the
Compliance Officer shall maintain such reports and such other records to the
extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not
later than ten days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall contain the
following information:
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (I.E., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom
the transaction was effected; and
(v) The date that the report is submitted.
11
<PAGE>
(c) Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are
required to direct their brokers to supply, on a timely basis, duplicate copies
of confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees
12
<PAGE>
with respect to Securities transactions reported pursuant to Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting
13
<PAGE>
transactions in Securities issued by any publicly traded company on whose board
such Investment Personnel serves as a director through the use of "Chinese Wall"
or other procedures designed to address the potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to
the requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and
any
14
<PAGE>
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action
is required.
15
<PAGE>
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors
or officers who are not Directors/Trustees or Officers of the Fund since they
are deemed not to constitute Access Persons or Advisory Persons as defined in
paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
16
<PAGE>
EXHIBIT A
DEFINITION OF BENEFICIAL OWNERSHIP
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own
benefit,whether in bearer form or registered in his or her own name or
otherwise, but also ownership of securities held for his or her benefit by other
(regardless of whether or how they are registered) such as custodians, brokers,
executors, administrators, or trustees (including trusts in which he or she has
only a remainder interest), and securities held for his or her account by
pledges, securities owned by a partnership in which he or she should regard as a
personal holding corporation. Correspondingly, this term would exclude
securities held by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contact,
understanding, relationship, agreement or other arrangement, he obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as an access person may in itself indicate that the access person would
obtain benefits substantially equivalent to those of ownership from securities
held in the name of such relative. Thus, absent countervailing facts, it is
expected that securities held by relatives who share the same home as an access
person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE>
EXHIBIT B
INDEX OPTIONS ON A BROAD-BASED INDEX
<TABLE>
<CAPTION>
TICKER SYMBOL DESCRIPTION
<S> <C>
NIK Nikkei 300 Index CI/Euro
OEX S&P 100 Close/Amer Index
OEW S&P 100 Close/Amer Index
OEY S&P 100 Close/Amer Index
SPB S&P 500 Index
SPZ S&P 500 Open/Euro Index
SPX S&P 500 Open/Euro Index
SXZ S&P 500 (Wrap)
SXB S&P 500 Open/Euro Index
RUZ Russell 2000 Open/Euro Index
RUT Russell 2000 Open/Euro Index
MID S&P Midcap 400 Open/Euro Index
NDX NASDAQ- 100 Open/Euro Index
NDU NASDAQ- 100 Open/Euro Index
NDZ NASDAQ- 100 Open/Euro Index
NDV NASDAQ- 100 Open/Euro Index
NCZ NASDAQ- 100 Open/Euro Index
SML S&P Small Cap 600
TPX U.S. Top 100 Sector
SPL S&P 500 Long-Term Close
ZRU Russell 2000 L-T Open./Euro
VRU Russell 2000 Long-Term Index
</TABLE>
t: \george\bible\Quantum\code-ethics 2-29-00
<PAGE>
PRUDENTIAL INVESTMENT CORPORATION
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees or the
Duly Appointed Officer-In-Charge of the Prudential Mutual Fund (hereinafter,
referred to as the "Fund"), the Manager, the Adviser/Subadviser, and the
Principal Underwriter in accordance with Rule 17j-1(c) under the Investment
Company Act of 1940 (the Act) and in accordance with the following general
principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF
SHAREHOLDERS FIRST.
Investment company personnel should scrupulously
avoid serving their own personal interests ahead of
shareholders' interests in any decision relating to their
personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS
BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS
TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY
ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to
achieve technical compliance with the Code but should strive
to abide by its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL
SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation
that might compromise, or call into question, their exercise
of fully independent
<PAGE>
judgment in the interest of shareholders, including, but not
limited to the receipt of unusual investment opportunities,
perquisites, or gifts of more than a DE MINIMIS value from
persons doing or seeking business with the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or
manipulative practices with respect to a purchase or sale of a security held or
to be acquired (as such term is defined in Section 2.) by an investment company,
if effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the
Act and Rule 17j-1 to give effect to the following general prohibitions as set
forth in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or
Principal Underwriter for a registered investment company, or any
affiliated person of an investment adviser of or principal underwriter
for a registered investment company in connection with the purchase or
sale, directly or indirectly, by such person of a security held or to
be acquired, by such registered investment company:
(1) To employ any device, scheme or artifice to
defraud such registered investment company;
(2) To make to such registered investment company any
untrue statement of a material fact or omit to state to such
registered investment company a material fact necessary in
order to make the statements made, in light of the
circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit
upon any such registered investment company; or
2
<PAGE>
(4) To engage in any manipulative practice with
respect to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer,
general partner or Advisory Person (including any Investment Personnel,
as that term is defined herein) of the Fund, the Manager, the
Adviser/Subadviser, or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or Subadviser of
the Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund,
Manager or Adviser/Subadviser (or of any company in a control
relationship to the Fund, Manager or Adviser/Subadviser) who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale
of a security by the Fund, or whose functions relate to the making of
any recommendations with respect to such purchases or sales; and (ii)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to
the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same
manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in
determining which security holdings of a person are subject to the
reporting and short-swing profit provisions of Section 16 of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder, except that the determination of direct or indirect
beneficial ownership will apply to all securities which an Access
Person has or acquires (EXHIBIT A).
(e) "Complex" means the group of registered investment
companies for which Prudential Investments Fund Management LLC serves
as Manager; provided, however, that with respect to Access Persons of
the Subadviser (including any unit or subdivision thereof), "Complex"
means the group of registered investment companies in the Complex
advised by the Subadviser or unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the
Manager, the Adviser/Subadviser, or Principal Underwriter (including
his or her designee) as having responsibility for compliance with the
requirements of the Code.
3
<PAGE>
(g) "Control" will have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/ Trustee
of the Fund who is not an "interested person" of the Fund within the
meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be
deemed to be an Access Person, shall be treated as a Disinterested
Director/Trustee for purposes of compliance with the provisions of the
Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and
other Advisory Persons who provide investment information and/or advice
to the Portfolio Manager(s) and/or help execute the Portfolio
Manager's(s') investment decisions, including securities analysts and
traders ; and (b) any natural person in a control relationship to the
Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management,
LLC.
(l) "Portfolio Manager" means any Advisory Person who has the
direct responsibility and authority to make investment decisions for
the Fund.
(m) "Private placement" means a limited offering that is
exempt from registration under the Securities Act of 1933 pursuant to
section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule
506 under such Securities Act.
(n) "Security" will have the meaning set forth in Section
2(a)(36) of the Act, except that it will not include shares of
registered open-end investment companies, direct obligations of the
Government of the United States, , short-term debt securities which are
"government securities" within the meaning of Section 2(a)(16) of the
Act, bankers' acceptances, bank certificates of deposit, commercial
paper and such other money
4
<PAGE>
market instruments as are designated by the Compliance Officer. For
purposes of the Code, an "equivalent Security" is one that has a
substantial economic relationship to another Security. This would
include, among other things, (1) a Security that is exchangeable for or
convertible into another Security, (2) with respect to an equity
Security, a Security having the same issuer (including a private issue
by the same issuer) and any derivative, option or warrant relating to
that Security and (3) with respect to a fixed-income Security, a
Security having the same issuer, maturity, coupon and rating.
(o) "Security held or to be acquired" means any Security or
any equivalent Security which, within the most recent 15 days: (1) is
or has been held by the Fund; or (2) is being considered by the Fund or
its investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall not
include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private
placement
5
<PAGE>
without prior approval.
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment
opportunity should be reserved for the Fund and its shareholders and
whether the opportunity is being offered to the Investment Personnel by
virtue of his or her position with the Fund. The Adviser/Subadviser
shall maintain a record of such prior approval and reason for same, for
at least 5 years after the end of the fiscal year in which the approval
is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent
consideration of an investment by the Fund in the issuer. In such
circumstances, the Fund's decision to purchase Securities of the issuer
will be subject to an independent review by appropriate personnel with
no personal interest in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during
which any investment
6
<PAGE>
company in the Complex has a pending "buy" or "sell" order in the same
or an equivalent Security and until such time as that order is executed
or withdrawn; provided, however, that this prohibition shall not apply
to Disinterested Directors/Trustees except if they have actual
knowledge of trading by any fund in the Complex and, in any event, only
with respect to those funds on whose boards they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and
sale of Securities for the Fund and are not engaged in the day-to-day
operations of the Fund; provided that Securities investments effected
by such Access Persons during the proscribed period are not effected
with knowledge of the purchase or sale of the same or equivalent
Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to
purchase or sell a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or selling
a Security within seven calendar days before or after the Fund trades
in the same or an equivalent Security. Nevertheless, a personal trade
by any Investment Personnel shall not prevent a Fund in the same
Complex from trading in the same or an equivalent security. However,
such a transaction shall be subject to independent review by the
Compliance Officer.
(iii) If trades are effected during the periods proscribed in
(i) or (ii)
7
<PAGE>
above, except as provided in (iv) below with respect to (i) above, any
profits realized on such trades will be promptly required to be
disgorged to the Fund.
(iv) A transaction by Access Persons (other than Investment
Personnel) inadvertently effected during the period proscribed in (i)
above will not be considered a violation of the Code and disgorgement
will not be required so long as the transaction was effected in
accordance with the preclearance procedures described in Section 6
below and without prior knowledge of trading by any fund in the Complex
in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are
prohibited from profiting from a purchase and sale, or sale and purchase, of the
same or an equivalent Security within any 60 calendar day period. If trades are
effected during the proscribed period, any profits realized on such trades will
be immediately required to be disgorged to the Fund.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund
in the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put
option on a security owned by any Fund in the Complex. Access Persons may
purchase options on securities not held by any Fund in the Complex, or purchase
call options or write put
8
<PAGE>
options on securities owned by any Fund in the Complex, subject to preclearance
and the same restrictions applicable to other Securities. Access Persons may
write covered call options or buy covered put options on a Security owned by any
Fund in the Complex at the discretion of the Compliance Officer.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect
to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account
over which the Access Person has no direct or indirect influence or
control or in any account of the Access Person which is managed on a
discretionary basis by a person other than such Access Person and with
respect to which such Access Person does not in fact influence or
control such transactions.
(b) Purchases or sales of Securities (or their equivalents)
which are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional
on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic
dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by
an issuer PRO RATA to all holders of a class of its Securities, to the
extent such rights were acquired from such issuer, and sales of such
rights so acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500
shares or less in the aggregate, if (i) the Access Person has no prior
knowledge
9
<PAGE>
of activity in such security by any fund in the Complex and (ii) the
issuer is listed on The New York Stock Exchange or has a market
capitalization (outstanding shares multiplied by the current price per
share) greater than $1 billion (or a corresponding market
capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of
related transactions effected over a 30 calendar day period, involving
100 units ($100,000 principal amount) or less in the aggregate, if the
Access Person has no prior knowledge of transactions in such Securities
by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based
index (See Exhibit B.)(1)
(i) Purchases or sales of Securities which receive the prior
approval of the Compliance Officer (such person having no personal
interest in such purchases or sales), based on a determination that no
abuse is involved and that such purchases and sales are not likely to
have any economic impact on any fund in the Complex or on its ability
to purchase or sell Securities of the same class or other Securities of
the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must
preclear all personal Securities investments with the exception of those
identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance
Officer for approval. All approved orders must be executed no later than 5:00
p.m. local time on the business day following the date preclearance is granted.
If any order is not timely executed, a request for preclearance must be
resubmitted.
- -----------------
(1) Exhibit B will be amended by the Compliance Officer as necessary.
10
<PAGE>
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of
the Fund or the Compliance Officer the information described in Section 7(b)
hereof with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security ONLY if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is
not required to make a report with respect to transactions effected in any
account over which such Director/Trustee does not have any direct or indirect
influence or control or in any account of the Disinterested Director/Trustee
which is managed on a discretionary basis by a person other than such
Director/Trustee and with respect to which such Director/Trustee does not in
fact influence or control such transactions. The Secretary of the Fund or the
Compliance Officer shall maintain such reports and such other records to the
extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not
later than ten days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall contain the
following information:
11
<PAGE>
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (I.E., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom
the transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are
required to direct their brokers to supply, on a timely basis, duplicate copies
of confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.
12
<PAGE>
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
13
<PAGE>
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such Investment Personnel serves as a director
through the use of "Chinese Wall" or other procedures designed to address the
potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to
the requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
14
<PAGE>
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and
any changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action
is required.
15
<PAGE>
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors
or officers who are not Directors/Trustees or Officers of the Fund since they
are deemed not to constitute Access Persons or Advisory Persons as defined in
paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
16
<PAGE>
EXHIBIT A
DEFINITION OF BENEFICIAL OWNERSHIP
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own benefit,
whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held by
an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contact,
understanding, relationship, agreement or other arrangement, he obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as an access person may in itself indicate that the access person would
obtain benefits substantially equivalent to those of ownership from securities
held in the name of such relative. Thus, absent countervailing facts, it is
expected that securities held by relatives who share the same home as an access
person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE>
EXHIBIT B
INDEX OPTIONS ON A BROAD-BASED INDEX
<TABLE>
<CAPTION>
TICKER SYMBOL DESCRIPTION
<S> <C>
NIK Nikkei 300 Index CI/Euro
OEX S&P 100 Close/Amer Index
OEW S&P 100 Close/Amer Index
OEY S&P 100 Close/Amer Index
SPB S&P 500 Index
SPZ S&P 500 Open/Euro Index
SPX S&P 500 Open/Euro Index
SXZ S&P 500 (Wrap)
SXB S&P 500 Open/Euro Index
RUZ Russell 2000 Open/Euro Index
RUT Russell 2000 Open/Euro Index
MID S&P Midcap 400 Open/Euro Index
NDX NASDAQ- 100 Open/Euro Index
NDU NASDAQ- 100 Open/Euro Index
NDZ NASDAQ- 100 Open/Euro Index
NDV NASDAQ- 100 Open/Euro Index
NCZ NASDAQ- 100 Open/Euro Index
SML S&P Small Cap 600
TPX U.S. Top 100 Sector
SPL S&P 500 Long-Term Close
ZRU Russell 2000 L-T Open./Euro
VRU Russell 2000 Long-Term Index
</TABLE>
t: \george\bible\20-20\PIFM.PIC.PIMS.Code.Ethics 2-29-00
