<PAGE>
PROSPECTUS MAY 31, 2000
PRUDENTIAL
TAX-MANAGED SMALL-CAP FUND, INC.
FUND TYPE Stock
OBJECTIVE Long-term capital appreciation
BUILD ON THE ROCK
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.
[PRUDENTIAL LOGO]
<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
39 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. 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
------------------------------------------------
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.
While the Fund tries to limit the extent to which shareholders incur taxes
on Fund distributions of income and net realized gains, including through the
use of hedging techniques, the Fund expects to distribute taxable income or
capital gains from time to time.
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 1.01%
BEST QUARTER: 16.80% ( 2nd quarter of 1999)
WORST QUARTER: -23.77% (3rd quarter of 1998)
</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, TOO. THE TOTAL RETURN OF THE CLASS A SHARES FOR THE QUARTER
ENDED 3-31-00 WAS 3.46%.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR SINCE INCEPTION
<S> <C> <C>
Class A shares 18.49% -4.49% (since 11-10-97)
Class B shares 18.91% -4.48% (since 11-10-97)
Class C shares 21.67% -3.56% (since 11-10-97)
Class Z shares 25.07% -2.18% (since 11-10-97)
S&P SmallCap 600 Index(2) 12.41% 5.52% (since 11-10-97)
Lipper Average(3) 6.21% -0.85% (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>
--------------------------------------------------------------------------------
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 .60% .60% .60% .60%
= Total annual Fund operating expenses 1.50% 2.20% 2.20% 1.20%
- Fee waiver .05%(4) None None None
= NET ANNUAL FUND OPERATING EXPENSES 1.45%(4) 2.20% 2.20% 1.20%
</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 $640 $946 $1,273 $2,197
Class B shares $723 $988 $1,280 $2,274
Class C shares $421 $781 $1,268 $2,609
Class Z shares $122 $381 $ 660 $1,455
</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 $640 $946 $1,273 $2,197
Class B shares $223 $688 $1,180 $2,274
Class C shares $321 $781 $1,268 $2,609
Class Z shares $122 $381 $ 660 $1,455
</TABLE>
--------------------------------------------------------------------------------
5
<PAGE>
HOW THE FUND INVESTS
-------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is LONG-TERM CAPITAL APPRECIATION. This means we
seek investments whose price we expect will increase over several years. In
pursuing our objective of long-term capital appreciation, we
normally invest at least 80% of the Fund's total assets in EQUITY-RELATED
SECURITIES of SMALL-CAP COMPANIES, like those found in the S&P SmallCap 600
Index. Part of our goal is to outperform the S&P SmallCap 600 Index on a before
and after-tax basis. 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 March 31, 2000,
the range was from $17 million to $6,080 million, with a weighted average market
value of $466 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 is not
sponsored by or affiliated with S&P. While we make every effort to achieve our
objective, we can't guarantee success.
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.
Convertible securities 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 for
cash management purposes, including commercial paper of
--------------------------------------------------------------------------------
7
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------
a U.S. or foreign company, foreign government securities, certificates of
deposit, bankers' acceptances, time deposits of domestic and foreign banks, and
obligations issued or guaranteed by the U.S. government or its agencies. 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.
Repurchase agreements are used for cash management purposes.
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
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8 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------
increases between the time of the short sale and the date when the Fund 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.
We may use hedging techniques to try to protect the Fund's 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 for cash management purposes (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. The
investment types are listed in the order in which they normally will be used by
the portfolio managers. 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>
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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>
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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%; USUALLY LESS THAN are insured by the -- Principal and interest
10% 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
USUALLY LESS THAN 10% 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>
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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 42 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $76.2 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 19 investment
professionals, eight of whom hold Ph.D.s, with over 200 years of combined
experience. The team is currently responsible for the management of over
$41 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. As permitted by the
Securities and Exchange Commission, 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.
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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.
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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.
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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 PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS A SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000(4) 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 income (loss) (.01) .03 .02
Net realized and unrealized gain (loss) on
investment transactions 1.85 (3.41) .94
TOTAL FROM INVESTMENT OPERATIONS 1.84 (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 $9.28 $7.44 $10.95
TOTAL RETURN(2) 24.73% (31.00)% 9.60%
-------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998(1)
-------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $26,741 $46,736 $115,621
Average net assets (000) $38,047 $82,332 $106,453
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees(5) 1.45% 1.26% 1.22%(3)
Expenses, excluding distribution fees 1.20% 1.01% .97%(3)
Net investment income (.07)% .16% .47%(3)
Portfolio turnover 66% 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 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE YEAR.
5 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 PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS B SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000(4) 1999 1998(1)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.37 $10.93 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.07) (.06) (.01)
Net realized and unrealized gain (loss) on
investment transactions 1.82 (3.37) .94
TOTAL FROM INVESTMENT OPERATIONS 1.75 (3.43) .93
------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized gains -- (.13) --
NET ASSET VALUE, END OF PERIOD $9.12 $7.37 $10.93
TOTAL RETURN(2) 23.91% (31.61)% 9.31%
------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998(1)
------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $69,023 $102,094 $196,671
Average net assets (000) $89,474 $158,085 $170,484
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.20% 2.01% 1.97%(3)
Expenses, excluding distribution fees 1.20% 1.01% .97%(3)
Net investment loss (.82)% (.58)% (.29)%(3)
Portfolio turnover 66% 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.
4 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE YEAR.
</TABLE>
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36 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------
CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS C SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000(4) 1999 1998(1)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.37 $10.93 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.07) (.08) (.01)
Net realized and unrealized gain (loss) on investment
transactions 1.82 (3.35) .94
TOTAL FROM INVESTMENT OPERATIONS 1.75 (3.43) .93
-------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized gains -- (.13) --
NET ASSET VALUE, END OF PERIOD $9.12 $7.37 $10.93
TOTAL RETURN(2) 23.91% (31.61)% 9.31%
-------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998(1)
-------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $8,056 $14,951 $36,628
Average net assets (000) $11,845 $27,182 $34,000
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 2.20% 2.01% 1.97%(3)
Expenses, excluding distribution fees 1.20% 1.01% .97%(3)
Net investment loss (.82)% (.59)% (.29)%(3)
Portfolio turnover 66% 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.
4 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE YEAR.
</TABLE>
--------------------------------------------------------------------------------
37
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL PERIODS ENDED 3-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 2000(4) 1999 1998(1)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.46 $10.96 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.02) .05 .02
Net realized and unrealized gain (loss) on investment
transactions 1.89 (3.42) .95
TOTAL FROM INVESTMENT OPERATIONS 1.87 (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 $9.33 $7.46 $10.96
TOTAL RETURN(2) 25.07% (30.88)% 9.74%
--------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000(1) 1999 1998(1)
--------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $872 $4,121 $4,039
Average net assets (000) $1,847 $5,315 $2,709
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.20% 1.01% .97%(3)
Expenses, excluding distribution fees 1.20% 1.01% .97%(3)
Net investment income .22% .43% .51%(3)
Portfolio turnover 66% 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. 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.
4 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING
DURING THE YEAR.
</TABLE>
-------------------------------------------------------------------
38 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
<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 EQUITY OPPORTUNITY FUND
PRUDENTIAL JENNISON GROWTH 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 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.
--------------------------------------------------------------------------------
39
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
------------------------------------------------
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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40 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
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Notes
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Notes
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42 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
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Notes
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43
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Notes
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44 PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC. [LOGO] (800) 225-1852
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Notes
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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 Numbers: NASDAQ Symbols:
Class A Shares--74437J106 PQVAX
Class B Shares--74437J205 PQVBX
Class C Shares--74437J304 PQVCX
Class Z Shares--74437J403 --
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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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-16
Investment Advisory and Other Services...................... B-16
Brokerage Allocation and Other Practices.................... B-20
Capital Shares, Other Securities and Organization........... B-22
Purchase, Redemption and Pricing of Fund Shares............. B-23
Shareholder Investment Account.............................. B-31
Net Asset Value............................................. B-35
Taxes, Dividends and Distributions.......................... B-36
Performance Information..................................... B-39
Financial Statements........................................ B-41
Report of Independent Accountants........................... B-68
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 30, 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.
STANDARD & POOR'S SMALLCAP 600 INDEX
The S&P 600 Small Capitalization Stock Index (S&P SmallCap 600 Index) is an
unmanaged, market-value weighted index (stock price times the number of shares
outstanding) of 600 smaller company U.S. common stocks that cover all industry
sectors. Inclusion in the S&P SmallCap 600 Index in no way implies an opinion by
Standard & Poor's Corporation (S&P) as to a stock's attractiveness as an
investment. The S&P SmallCap 600 Index currently measures the performance of
selected U.S. stocks with a market value of no greater than $6,080 million (as
of March 31, 2000). "S&P 600-Registered Trademark-," "Standard & Poor's 600" and
"600" are trademarks of McGraw-Hill, Inc. and have been licensed for use by The
Prudential Insurance Company of America (Prudential) and its affiliates and
subsidiaries. The Fund is not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the Fund.
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P. S&P MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE SHAREHOLDERS OF THE FUND
OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN
SECURITIES GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF THE S&P
SMALLCAP 600 INDEX TO TRACK GENERAL STOCK MARKET PERFORMANCE. S&P'S ONLY
RELATIONSHIP TO PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (THE MANAGER) AND ITS
AFFILIATES IS THE LICENSING OF CERTAIN TRADEMARKS AND TRADE NAMES OF S&P AND OF
THE S&P SMALLCAP 600 INDEX WHICH IS DETERMINED, COMPOSED AND CALCULATED BY S&P
WITHOUT REGARD TO THE MANAGER OR THE FUND. S&P HAS NO OBLIGATION TO TAKE THE
NEEDS OF THE MANAGER OR THE SHAREHOLDERS INTO CONSIDERATION IN DETERMINING,
COMPOSING OR CALCULATING THE S&P SMALLCAP 600 INDEX. S&P IS NOT RESPONSIBLE FOR
AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE PRICES AND AMOUNT OF THE
FUND OR THE TIMING OF THE ISSUANCE OR SALE OF THE SHARES OF THE FUND. S&P HAS NO
OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR
TRADING OF THE FUND.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
SMALLCAP 600 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY
FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY THE MANAGER,
SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P SMALLCAP 600
INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES,
AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P SMALLCAP 600 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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
B-2
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deposited in a domestic bank or foreign branch of a United States bank and
traded on a United States exchange or in the over-the-counter market. Generally,
ADRs and ADSs are in registered form. There are no fees imposed on the purchase
or sale of ADRs and ADSs when purchased from the issuing bank or trust company
in the initial underwriting, although the issuing bank or trust company may
impose charges for the collection of dividends and the conversion of ADRs and
ADSs into the underlying securities. Investment in ADRs and ADSs has certain
advantages over direct investment in the underlying foreign securities since:
(1) ADRs and ADSs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (2) issuers whose securities are represented by ADRs and ADSs are
usually subject to auditing, accounting, and financial reporting standards
comparable to those of domestic issuers.
WARRANTS AND RIGHTS. A warrant or right entitles the holder to purchase
equity securities at a specific price for a specific period of time. A warrant
gives the holder thereof the right to subscribe by a specified date to a stated
number of shares of stock of the issuer at a fixed price. Warrants tend to be
more volatile than the underlying stock, and if, at a warrant's expiration date
the stock is trading at a price below the price set in the warrant, the warrant
will expire worthless. Conversely, if at the expiration date, the underlying
stock is trading at a price higher than the price set in the warrant, the Fund
can acquire the stock at a price below its market value. Rights are similar to
warrants but normally have a shorter duration and are distributed directly by
the issuer to shareholders. Rights and warrants have no voting rights, receive
no dividends and have no rights with respect to the corporation issuing them.
CONVERTIBLE SECURITIES. A convertible security is typically a bond,
debenture, corporate note, preferred stock or other similar security that may be
converted at a stated price within a specified period of time into a specified
number of shares of common stock or other equity securities of the same or a
different issuer. The Fund will only invest in investment-grade convertible
securities. Convertible securities are generally senior to common stocks in a
corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock. Convertible securities may
also include preferred stocks which technically are equity securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (that is, its value as a fixed-income security)
or its "conversion value" (that is, its value upon conversion into its
underlying stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the underlying stock. The price of a
convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the underlying
stock declines. While no securities investment is without some risk, investments
in convertible securities generally entail less risk than investments in the
common stock of the same issuer.
In recent years, convertibles have been developed which combine higher or
lower current income with options and other features. The Fund may invest in
these types of convertible securities.
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
B-3
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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.
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
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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 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.
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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 on 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 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.
B-6
<PAGE>
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
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.
B-7
<PAGE>
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 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
B-8
<PAGE>
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.
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
B-9
<PAGE>
loans of portfolio securities will only be made to firms determined to be
creditworthy pursuant to procedures approved by the Board of Directors of the
Fund. On termination of the loan, the borrower is required to return the
securities to the Fund, and any gain or loss in the market price during the loan
would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan. The Fund may pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities or
may share the interest earned on collateral with the borrower.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 20% of
its total assets to secure these borrowings. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action (within 3 days) to
reduce its borrowings. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. The Fund will not purchase portfolio securities when borrowings
exceed 5% of the value of the Fund's total assets.
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 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
B-10
<PAGE>
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.
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.
B-11
<PAGE>
(d) TEMPORARY 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."
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.
B-12
<PAGE>
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.
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; 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 Corporate
Vice President (September 1997-March 1999) of The
Prudential Insurance Company of America
(Prudential), Senior Vice President
(March 1987-May 1999) of Prudential Securities
Incorporated (Prudential Securities) and Chief
Administrative Officer (July 1990-September 1996),
and 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).
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST 5 YEARS
------------------------ ------------------ ---------------------
<S> <C> <C>
*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.
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 (46) 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.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST 5 YEARS
------------------------ ------------------ ---------------------
<S> <C> <C>
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); formerly 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.
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.
B-15
<PAGE>
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+......................................... -- --
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 5, 2000, the Directors and officers of the Fund, as a group, owned
less than 1% of the outstanding shares of the Fund.
As of May 5, 2000, Bost & Company C/F, PO Box 534005, Pittsburgh, PA 15253
was the beneficial owner of 11,945 Class Z shares of the Fund (approximately 13%
of the outstanding Class Z shares).
As of May 5, 2000, Prudential Securities was the record holder for other
beneficial owners of 2,247,060 Class A shares (approximately 81% of such shares
outstanding), 5,919,542 Class B shares (approximately 81% of such shares
outstanding), 742,213 Class C shares (approximately 86% of such shares
outstanding) and 71,603 Class Z shares (approximately 79% 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 $76.2 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.
B-16
<PAGE>
PIFM is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). Prudential Mutual Fund
Services LLC (PMFS or the Transfer Agent), a wholly owned subsidiary of PIFM,
serves as the transfer agent 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' 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 $847,276, $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
B-17
<PAGE>
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.
For the fiscal year ended March 31, 2000, the Distributor received payments
of $95,117 under the Class A Plan. 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 $20,700 in initial sales charges in connection with
the sale of Class A shares.
CLASS B AND CLASS C 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 $894,738 from the Fund under the Class B Plan and spent approximately
$317,300 in distributing the Fund's Class B shares. It is estimated that of the
latter amount approximately 0.2% ($700) was spent on printing and mailing of
prospectuses to other than current shareholders; 10.5% ($33,200) 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
89.3% ($283,500) on the aggregate of (1) payments of commissions and account
servicing fees to financial advisers (70.5%
B-18
<PAGE>
or $223,900) and (2) an allocation on account of overhead and other branch
office distribution-related expenses (18.8% or $59,600). 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
$876,600 in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended March 31, 2000, the Distributor
received $118,446 under the Class C Plan and spent approximately $113,800 in
distributing Class C shares. It is estimated that of the latter amount
approximately 0.1% ($100) was spent on printing and mailing of prospectuses to
other than current shareholders; 1.3% ($1,500) 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 98.6% ($112,200) on the aggregate of
(1) payments of commissions and account servicing fees to financial advisers
(96.4% or $109,800) and (2) an allocation on account of overhead and other
branch office distribution-related expenses (2.2% or $2,400).
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 $4,900 in contingent deferred sales charges attributable
to Class C shares. For the fiscal year ended March 31, 2000, the Distributor
received approximately $3,300 in initial sales charges attributable to Class C
shares.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority of the Directors who are
not interested persons of the Fund and who have no direct or indirect financial
interest in the Class A, Class B, or Class C Plan or in any agreement related to
the Plans (the Rule 12b-1 Directors), at a meeting called for the purpose of
voting on such continuance. A Plan may be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Directors or by the vote of
the holders of a majority of the outstanding shares of the applicable class of
the Fund on not more than 60 days', nor less than 30 days' written notice to any
other party to the Plan. The Plans may not be amended to increase materially the
amounts to be spent for the services described therein without approval by the
shareholders of the applicable class, and all material amendments are required
to be approved by the Board of Directors in the manner described above. Each
Plan will automatically terminate in the event of its assignment. The Fund will
not be obligated to pay expenses incurred under any Plan if it is terminated or
not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report will include an itemization
of the distribution expenses and the purposes of such expenditures. In addition,
as long as the Plans remain in effect, the selection and nomination of
Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager or one of its affiliates, may
make payments to dealers (including Prudential Securities) and other persons
which distribute shares of the Fund (including Class Z shares). Such payments
may be calculated by reference to the net asset value of securities sold by such
persons or otherwise.
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.
B-19
<PAGE>
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.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants, and in that capacity audits
the 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 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
B-20
<PAGE>
accordance with rules of the Commission. This limitation, in the opinion of the
Fund, will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of price and
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 Company Act), except in
accordance with rules of the Commission. This limitation, in the opinion of the
Fund, will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other firms in connection with
comparable transactions involving similar securities or futures being purchased
or sold on an exchange or board of trade during a comparable period of time.
This standard would allow Prudential Securities (or any affiliate) to receive no
more than the remuneration which would be expected to be received by an
unaffiliated firm in a commensurate arm's-length transaction. Furthermore, the
Board of Directors of the Fund, including a majority of the non-interested
Directors have adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to Prudential Securities (or
any affiliate) are consistent with the foregoing standard. In accordance with
Section 11(a) of the Securities Exchange Act of 1934, as amended, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund during
the applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable law.
B-21
<PAGE>
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..................................... $313,261 $1,176,539 $982,575
Total brokerage commissions paid to
Prudential Securities and its foreign
affiliates............................... $ 10,588 $ 4,806 $ 0
Percentage of total brokerage commissions
paid to Prudential Securities and its
foreign affiliates....................... 3.38% .41% 0%
</TABLE>
The Fund effected approximately .93% 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, $7,098 (or 2.27%) 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., Credit Suisse First Boston Corp.,
Greenwich Capital Markets, Inc. and Goldman, Sachs & Co. in the aggregate
amounts of $586,226, $635,078, $488,522 and $488,522, 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,
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.
B-22
<PAGE>
The Directors have the power to alter the number and the terms of office of
the Directors and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Directors have been elected by the
shareholders of the Fund. The voting rights of shareholders are not cumulative,
so that holders of more than 50 percent of the shares voting can, if they
choose, elect all Directors being selected, while the holders of the remaining
shares would be unable to elect any Directors.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares). Class Z
shares of the Fund are offered to a limited group of investors at NAV without
any sales charges. See "How to Buy, Sell and Exchange Shares of the Fund" in the
Prospectus.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, 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.
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...... $9.28
Maximum sales charge (5% of offering price)................. .49
-----
Maximum offering price...................................... $9.77
=====
CLASS B
Net asset value, offering price and redemption price to
public per Class B share*.................................. $9.12
=====
CLASS C
Net asset value and redemption price per Class C share*..... $9.12
Sales charge (1% of offering price)......................... .09
-----
Offering price to public.................................... $9.21
=====
CLASS Z
Net asset value, offering price and redemption price per
Class Z share.............................................. $9.33
=====
</TABLE>
-------------------
* Class B and Class C shares are subject to a contingent
deferred sales charge on certain redemptions.
B-23
<PAGE>
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the
Class B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and 5 years in the case of
Class C shares for the higher cumulative annual distribution-related fee on
those shares plus, in the case of Class C shares, the 1% initial sales charge to
exceed the initial sales charge plus the cumulative annual distribution-related
fees on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class
A shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
- Officers of the Prudential mutual funds (including the Fund)
- Employees of the Distributor, Prudential Securities, 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
B-24
<PAGE>
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.
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.
B-25
<PAGE>
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. If the goal is
exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of Shares--
Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (2) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Prusec; and (3) investors purchasing shares
through other brokers. This waiver is not available to investors who purchase
shares directly from the Transfer Agent. You must notify the Transfer Agent
directly or through your broker if you are entitled to this waiver and provide
the Transfer Agent with such supporting documents as it may deem appropriate.
B-26
<PAGE>
CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and financial planners
who have agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by
the following categories of investors:
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option
- Current and former Director/Trustees of the Prudential mutual funds
(including the Fund)
- Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finder's fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
rights of accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential mutual funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. Rights of accumulation may be applied across the classes
of the Prudential mutual funds. However, the value of shares held directly with
the Transfer Agent and through your broker will not be aggregated to determine
the reduced sales charge. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum offering
price (NAV plus maximum sales charge) as of the previous business day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investor's holdings.
Rights of accumulation are not available to individual participants in any
retirement or group plans.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive 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.
B-27
<PAGE>
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 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
B-28
<PAGE>
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.
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
B-29
<PAGE>
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>
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.
B-30
<PAGE>
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.
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.
B-31
<PAGE>
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. 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)
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
B-32
<PAGE>
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on 60 days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
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)
B-33
<PAGE>
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.
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
B-34
<PAGE>
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 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
B-35
<PAGE>
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 (that is, the excess of
net long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long shareholders
have held their shares in the Fund. Net capital gains of the Fund which are
available for distribution to shareholders will be computed by taking into
account any capital loss carryforward of the Fund. The Fund had a capital loss
carryforward for federal income tax purposes at March 31, 2000 of $3,890,973 and
$28,727,888 which expires in 2007 and 2008, respectively.
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 (1) 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
B-36
<PAGE>
not greater than 5% of the value of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (2) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
government securities); and (c) the Fund distribute to its shareholders at least
90% of its net investment income and net short-term capital gains (that is, the
excess of net short-term capital gains over net long-term capital losses) in
each year.
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 which may, among other things, require the Fund to
defer recognition of losses. In addition, debt securities acquired by the Fund
may be subject to original issue discount and market discount rules which
respectively may cause the Fund to accrue income in advance of the receipt of
cash with respect to interest or cause gains to be treated as ordinary income.
Certain futures contracts and certain listed options (referred to as Section
1256 contracts) held by the Fund will be required to be "marked to market" for
federal income tax purposes; that is, treated as having been sold at their fair
market value on the last day of the Fund's taxable year. Except with respect to
certain foreign currency forward contracts, 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 or losses, referred to under
the Internal Revenue Code as "Section 988" gains or losses, increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary dividend, thereby reducing
each shareholder's basis in his or her Fund shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share of the Fund on the reinvestment
date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or
B-37
<PAGE>
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 distributions 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). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or of any gain from disposition of the stock (collectively, PFIC income),
plus interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. The
Fund may make a "mark-to-market" election with respect to any marketable stock
it holds of a PFIC. If the election is in effect, at the end of the Fund's
taxable year the Fund will recognize the amount of gains, if any, as ordinary
income with respect to PFIC stock. No loss will be recognized on PFIC stock,
except to the extent of gains recognized in prior years. Alternatively, the
Fund, if it meets certain requirements, may elect to treat any PFIC in which it
invests as a "qualified electing fund," in which case, in lieu of the foregoing
tax and interest obligation, the Fund will be required to include in income each
year its PRO RATA share of the qualified electing fund's annual ordinary
earnings and net capital gain, even if they are not distributed to the Fund;
those amounts would be subject to the distribution requirements applicable to
the Fund described above.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary. The Fund does not expect
to 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.
B-38
<PAGE>
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.
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 18.49% N/A N/A (4.49)% (11-10-97)
Class B 18.91% N/A N/A (4.48)% (11-10-97)
Class C 21.67% N/A N/A (3.56)% (11-10-97)
Class Z 25.07% N/A N/A (2.18)% (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 24.73% N/A N/A (5.67)% (11-10-97)
Class B 23.91% N/A N/A (7.36)% (11-10-97)
Class C 23.91% N/A N/A (7.36)% (11-10-97)
Class Z 25.07% N/A N/A (5.14)% (11-10-97)
</TABLE>
B-39
<PAGE>
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-40
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 96.9%
Common Stocks
-------------------------------------------------------------------------------------
<C> <S> <C>
Basic Industries 9.6%
4,600 Alliant Techsystems, Inc.(a) $ 270,825
32,200 AMCOL International Corp. 495,075
9,300 American Freightways Corp. 138,919
600 Applied Industrial Technologies, Inc. 9,600
6,100 Aviation Sales Co.(a) 38,506
2,300 BE Aerospace, Inc.(a) 13,513
25,300 Building Materials Holdings Corp. 229,281
1,800 Caraustar Industries, Inc. 25,425
5,900 Clarcor, Inc. 104,725
8,900 Commercial Metals Co. 245,862
2,600 Fuller (H.B.), Co. 103,838
8,700 Geon Co. 187,050
2,800 Gibraltar Steel Corp. 46,025
1,700 Hughes Supply, Inc. 26,350
18,800 Innovex, Inc. 183,887
34,100 JLG Industries, Inc. 311,162
5,300 Kaman Corp. 51,675
13,100 Landstar Systems, Inc.(a) 717,225
4,100 Libbey, Inc. 112,238
8,900 Lilly Industries, Inc.(a) 110,138
9,200 Mesa Air Group, Inc. 57,500
7,400 Midwest Express Holdings, Inc.(a) 189,625
1,500 Mobile Mini, Inc.(a) 29,250
10,200 Mueller Industries, Inc.(a) 309,825
15,800 Paxar Corp. 152,075
20,500 Pentair, Inc. 759,781
6,700 Pope & Talbot, Inc. 123,112
18,600 Precision Castparts Corp. 678,900
7,150 Reliance Steel & Aluminum Co. 159,981
24,600 Republic Group, Inc. 264,450
5,700 Rock-Tenn Co. 55,575
</TABLE>
See Notes to Financial Statements
B-41
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
21,400 Schulman (A.), Inc. $ 283,550
6,100 Scott Technologies, Inc. 115,138
3,800 Seacor Smit, Inc.(a) 229,425
25,200 Skywest, Inc. 985,950
300 Steel Technologies, Inc. 2,381
1,600 Swift Transportation Co., Inc.(a) 32,800
29,200 Texas Industries, Inc. 908,850
5,400 Tuscarora, Inc. 67,500
2,600 Universal Forest Products, Inc. 32,175
28,500 USFreightways Corp. 1,066,969
3,700 Yellow Corp.(a) 68,219
--------------
9,994,350
<CAPTION>
-------------------------------------------------------------------------------------
Business Services 6.1%
6,200 ABM Industries, Inc. 145,700
10,700 BARRA, Inc.(a) 362,462
1,000 CDI Corp.(a) 19,000
4,200 Diamond Technology Partner, Inc.(a) 276,150
5,300 Insituform Technologies, Inc. 162,312
18,300 Labor Ready, Inc.(a) 180,712
10,900 Lightbridge, Inc.(a) 254,787
21,300 Marchfirst, Inc.(a)(b) 760,144
10,900 MAXIMUS, Inc.(a) 332,450
7,200 Thomas Nelson, Inc. 57,150
17,700 Pegasystems, Inc.(a) 212,400
5,000 Precision Response Corp. 121,250
18,200 Price Communications Corp.(a) 418,600
26,700 Profit Recovery Group International, Inc.(a) 493,950
12,400 Right Management Consultants, Inc.(a) 113,925
2,900 Scholastic Corp.(a) 156,419
22,500 Staffmark, Inc.(a) 178,594
5,400 Standard Register Co. 69,525
4,700 UniFirst Corp. 52,875
24,300 Valassis Communications, Inc.(a) 809,494
14,700 Wackenhut Corrections Corp.(a) 141,488
</TABLE>
See Notes to Financial Statements
B-42
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
6,700 Wallace Computer Services, Inc. $ 79,144
10,800 John Wiley & Sons, Inc. 194,400
15,100 Zebra Technologies Corp.(a) 755,000
--------------
6,347,931
<CAPTION>
-------------------------------------------------------------------------------------
Capital Spending 2.9%
13,200 Applied Power, Inc. 376,200
1,700 Belden, Inc. 46,750
4,000 C&D Technologies, Inc. 236,000
9,400 Cable Design Technologies Corp. 319,012
8,700 Generale Cable Corp. 67,969
6,900 Graco, Inc. 200,100
1,600 Hanover Compressor Co. 91,000
2,200 LSI Industries, Inc. 42,763
23,200 Manitowoc Co., Inc. 627,850
3,500 New Horizons Worldwide, Inc.(a) 62,125
8,300 Ocular Sciences, Inc.(a) 130,595
600 Shaw Group, Inc. 21,150
19,400 SPS Technologies, Inc.(a) 591,700
3,800 Teleflex, Inc. 134,900
6,100 URS Corp. 80,062
5,400 Watsco, Inc. 56,363
--------------
3,084,539
-------------------------------------------------------------------------------------
Conglomerates 0.2%
26,300 Griffon Corp. 205,469
-------------------------------------------------------------------------------------
Consumer Cyclical 5.7%
30,500 Arvin Industries, Inc. 690,062
200 Bassett Furniture Industries, Inc. 2,800
9,400 Carlisle Companies, Inc. 376,000
42,400 D.R. Horton, Inc. 553,850
34,600 Intermet Corp. 315,725
30,300 Kaufman & Broad Home Corp. 649,556
6,500 La-Z-Boy, Inc. 99,938
35,400 Lennar Corp. 767,737
39,300 Lo Jack Corp.(a) 304,575
34,900 MascoTech, Inc. 410,075
</TABLE>
See Notes to Financial Statements
B-43
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
34,700 Meritor Automotive, Inc. $ 548,694
3,600 Monaco Coach Corp. 68,400
200 Oneida Ltd. 3,875
6,200 Pulaski Furniture Corp. 135,237
1,400 Simpson Manufacturing, Inc. 55,300
33,550 Smith AO Corp. 603,900
4,400 Standard Motor Products, Inc. 65,450
3,700 Toro Co. 110,769
8,900 Wabash National Corp. 124,044
8,700 Wynns International, Inc. 120,169
--------------
6,006,156
-------------------------------------------------------------------------------------
Consumer Services 15.2%
4,600 Aaron Rents, Inc. 69,288
27,200 ADVO, Inc. 680,000
11,400 Ames Department Stores, Inc.(a) 280,012
3,800 Anchor Gaming 144,163
8,600 Applebee's International, Inc. 241,875
55,200 Arctic Cat, Inc. 565,800
11,400 Aztar Corp. 108,300
26,800 Brightpoint, Inc.(a) 328,300
8,000 Buffets, Inc.(a) 72,250
28,000 Cato Corp. 329,000
12,200 Cec Entertainment, Inc.(a) 330,925
1,000 Chicos Fas, Inc.(a) 16,953
33,860 CKE Restaurants, Inc. 215,857
21,500 Claire's Stores, Inc. 431,344
7,300 Department 56, Inc.(a) 108,131
7,800 Dress Barn, Inc.(a) 150,150
15,600 Ethan Allen Interiors, Inc. 390,000
10,000 Fleming Co., Inc. 150,625
6,600 Footstar, Inc.(a) 186,450
10,400 Fossil Inc.(a) 243,750
20,800 Genesco, Inc.(a) 273,000
900 Goody's Family Clothing, Inc.(a) 5,456
24,100 Group 1 Automotive, Inc. 280,162
</TABLE>
See Notes to Financial Statements
B-44
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
500 Haverty Furniture Co., Inc. $ 5,313
900 Hot Topic, Inc.(a) 31,500
21,100 Insight Enterprises, Inc.(a) 768,831
2,000 Interface, Inc. Class 'A' Stock 8,500
39,500 Jack In The Box, Inc.(a) 841,844
2,700 Jo-Ann Stores, Inc.(a) 22,613
27,500 Kellwood Co. 482,969
13,400 Linens 'N Things, Inc. 458,950
55,800 Luby's Cafeterias, Inc. 526,612
12,200 Men's Wearhouse, Inc.(a) 361,425
14,600 Michaels Stores, Inc.(a) 594,950
17,700 Midway Games, Inc.(a) 234,525
12,000 Mohawk Industries, Inc.(a) 268,500
25,400 Musicland Stores Corp.(a) 161,925
9,300 Nash Finch Co. 75,563
9,400 O'Reilly Automotive, Inc.(a) 133,363
9,300 OshKosh B'Gosh, Inc. 167,400
3,000 Oxford Industries, Inc. 54,375
29,100 Pier 1 Imports, Inc 298,275
20,200 Polaris Industries, Inc. 608,525
19,700 Pomeroy Computer Resources, Inc. 361,987
21,300 Pre-Paid Legal Services, Inc.(a) 632,344
9,900 Prime Hospitality Corp.(a) 71,775
6,400 Quiksilver, Inc.(a) 112,400
13,000 Regis Corp. 192,563
5,000 Rent-A-Center, Inc.(a) 75,000
3,900 Rex Stores Corp.(a) 99,694
6,700 Ruby Tuesday, Inc. 117,250
6,100 Ryan's Family Steak Houses, Inc.(a) 58,331
9,500 ShopKo Stores, Inc. 168,625
8,900 Shuffle Master, Inc. 105,131
23,000 Sonic Automatic, Inc.(a) 217,062
500 Sonic Corp. 13,625
3,800 Stride Rite Corp. 30,638
400 Taco Cabana, Inc.(a) 2,375
13,500 Tech Data Corp.(a) 443,812
</TABLE>
See Notes to Financial Statements
B-45
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
11,700 Timberland Co. (Class 'A' Stock) $ 596,700
1,600 Trans World Entertainment Corp.(a) 16,000
1,400 Tuesday Morning Corp.(a) 20,125
4,100 Wet Seal, Inc. (Class 'A' Stock)(a) 64,575
200 Wild Oats Markets, Inc.(a) 4,100
100 WMS Industries, Inc. 988
17,400 Zale Corp. 821,062
--------------
15,933,911
-------------------------------------------------------------------------------------
Consumer Staples 3.1%
2,700 Agribrands International, Inc. 106,144
22,700 Canandaigua Brands, Inc. (Class 'A' Stock) 1,157,700
22,900 Herbalife International, Inc. (Class 'A' Stock) 323,462
9,900 International Multifoods Corp. 132,412
3,200 J & J Snack Foods Corp. 63,600
4,300 Natrol, Inc.(a) 22,038
31,600 Schweitzer-Mauduit International, Inc. 408,825
36,200 Smithfields Foods, Inc.(b) 724,000
10,500 Tupperware Corp. 166,031
6,400 Universal Foods Corp. 136,800
7,000 USA Detergents, Inc. 16,188
--------------
3,257,200
-------------------------------------------------------------------------------------
Energy 3.0%
14,200 Atwood Oceanics, Inc.(a) 941,637
13,700 Cross Timbers Oil Co. 178,956
9,300 Helmerich & Payne, Inc. 288,300
10,600 Howell Corp. 72,213
32,000 Seitel, Inc.(a) 254,000
18,800 Tesoro Petroleum Corp.(a) 216,200
25,200 UGI Corp. 544,950
30,500 Vintage Petroleum, Inc. 613,813
--------------
3,110,069
-------------------------------------------------------------------------------------
Finance 11.7%
8,100 Affiliated Managers Group, Inc.(a) 384,750
43,500 Allied Capital Corp.(b) 758,531
63,100 Americredit Corp. 1,029,319
</TABLE>
See Notes to Financial Statements
B-46
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
20,200 Amerus Life Holdings, Inc. ( Class 'A' Stock) $ 366,125
21,400 Astoria Financial Corp. 607,225
1,160 Bank United Corp. (Class 'A' Stock) 36,613
15,400 Community First Bankshares, Inc. 246,400
53,200 Cullen/Frost Bankers, Inc. 1,406,475
306 Delphi Financial Group, Inc.(a) 9,295
26,500 Downey Financial Corp. 563,125
12,600 Eaton Vance Corp. 541,012
56,700 Enhance Financial Services Group, Inc. 800,887
28,183 Fidelity National Financial, Inc. 389,278
50,100 First American Financial Corp. 710,794
43,300 Fremont General Corp. 257,094
7,200 GBC Bancorp 166,950
53,007 Hudson United Bancorp 1,149,589
1,700 Metris Companies, Inc. 66,087
23,200 Radian Group, Inc. 1,104,900
10,000 Raymond James Financial, Inc. 207,500
64,700 Rollins Truck Leasing Corp. 545,906
8,200 Silicon Valley Bancshares 589,375
1,000 WFS Financial, Inc.(a) 19,438
48,500 World Acceptance Corp. 245,531
1,800 XTRA Corp.(a) 68,400
--------------
12,270,599
-------------------------------------------------------------------------------------
Health Care 11.5%
12,200 Alpharma, Inc. 448,350
15,800 Barr Laboratories, Inc.(a) 663,600
29,966 Bindley Western Industries, Inc. 406,414
2,000 Chattem, Inc.(a) 28,250
9,800 Cooper Cos., Inc.(a) 315,437
24,700 Covance, Inc.(a) 265,525
9,500 Coventry Health Care, Inc.(a) 80,750
4,200 Diagnostic Products Corp. 102,638
7,400 Fisher Scientific International, Inc. 329,300
3,800 Hanger Orthopedic Group, Inc.(a) 20,188
1,800 Health Management Systems, Inc.(a) 8,663
14,400 ICN Pharmaceuticals, Inc. 392,400
</TABLE>
See Notes to Financial Statements
B-47
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
3,800 ICU Medical, Inc.(a) $ 68,400
18,400 IDEXX Laboratories, Inc.(a) 428,950
17,600 Invacare Corp. 482,900
17,700 Jones Pharma, Inc. 537,637
5,400 Lincare Holdings, Inc.(a) 153,225
11,700 Magellan Health Services, Inc.(a) 56,306
19,000 MedQuist, Inc.(a) 516,562
17,600 Mentor Corp. 475,200
9,600 Meridian Diagnostics, Inc. 82,800
6,800 Minntech Corp. 51,000
15,300 Noven Pharmaceuticals, Inc.(a) 167,344
43,400 Orthodontic Centers of America, Inc.(a) 813,750
22,300 Owens & Minor, Inc. 236,938
8,000 Parexel International Corp. 75,500
5,300 Pediatrix Medical Group, Inc.(a) 38,425
9,400 Pharmaceutical Product Development, Inc.(a) 159,213
2,900 Polymedica Corp.(a) 170,375
37,100 Prime Medical Services, Inc.(a) 329,262
15,000 Priority Healthcare Corp.(a) 753,750
15,800 RehabCare Corp. 390,062
3,600 ResMed, Inc.(a) 256,950
21,500 Rexall Sundown, Inc.(a) 303,687
15,000 Sola International, Inc.(a) 91,875
8,200 Syncor International Corp.(a) 270,600
26,000 Theragenics Corp.(a) 347,750
14,300 Twinlab Corp. 101,888
19,100 Universal Health Services, Inc. (Class 'B' Stock)(a) 935,900
38,200 US Oncology, Inc.(a) 171,900
8,300 Vital Signs, Inc. 190,381
6,100 Wesley Jessen VisionCare, Inc.(a) 219,219
12,000 X-Rite, Inc. 121,500
--------------
12,060,764
-------------------------------------------------------------------------------------
Technology 26.3%
1,500 Act Manufacturing, Inc. 83,906
15,900 Actel Corp.(a) 567,431
17,200 Advanced Digital Information Corp. 589,100
</TABLE>
See Notes to Financial Statements
B-48
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
8,800 Advanced Energy Industries, Inc.(a) $ 448,800
9,600 Alpha Industries, Inc.(a) 912,000
22,800 American Management Systems, Inc.(a) 998,925
11,250 ANADIGICS, Inc.(a) 742,500
2,600 Anixter International, Inc.(a) 72,475
14,000 ANSYS, Inc.(a) 150,500
14,950 Apex, Inc.(a) 555,019
14,400 Applied Science & Technology, Inc.(a) 435,600
22,800 Artesyn Technologies, Inc.(a) 431,775
1,100 ATMI, Inc.(a) 52,525
7,300 Brady (W.H.) Co. 227,669
4,600 CACI, Inc.(a) 137,713
4,500 Centigram Communications Corp.(a) 85,500
11,200 Citrix Systems, Inc.(a) 742,000
3,000 Comverse Technology, Inc.(a) 567,000
7,500 Consolidated Graphics, Inc.(a) 96,094
4,600 Credence Systems Corp.(a) 575,575
3,400 Davox Corp.(a) 90,950
11,900 DBT Online, Inc.(a) 220,894
1,100 Electro Scientific Industries, Inc.(a) 63,800
8,800 Electroglas, Inc.(a) 301,400
15,000 Esterline Technologies Corp.(a) 195,000
12,200 FileNET Corp.(a) 362,950
14,400 GenRad, Inc. 178,200
5,800 Gerber Scientific, Inc. 112,013
8,400 Herman Miller, Inc. 235,200
4,200 In Focus Systems, Inc.(a) 150,412
15,700 Indus International, Inc.(a) 131,488
83,550 Informix Corp.(a) 1,415,128
7,700 Integrated Device Technology, Inc.(a) 305,112
39,200 International Rectifier Corp.(a) 1,494,500
6,100 Kronos, Inc.(a) 180,712
9,400 Kulicke & Soffa Industries, Inc. 602,187
</TABLE>
See Notes to Financial Statements
B-49
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
38,100 Mail-Well, Inc. $ 330,994
27,000 Mapics, Inc.(a) 430,312
8,500 Micros Systems, Inc.(a) 534,969
4,800 Network Solutions, Inc.(a) 737,775
11,310 Nortel Networks Corp. 1,425,060
4,500 Ontrack Data International, Inc.(a) 46,406
13,300 Park Electrochemical Corp. 325,850
209 Perkinelmer, Inc. 13,899
33,100 Pioneer-Standard Electronics, Inc. 521,325
12,400 Policy Management Systems Corp.(a) 148,800
9,800 Powerwave Technologies, Inc.(a) 1,225,000
6,800 Pri Automation, Inc. 415,650
1,700 Printronix, Inc.(a) 33,788
9,900 QLogic Corp.(a) 1,341,450
2,600 Radisys Corp.(a) 156,325
14,900 Remedy Corp. 627,662
11,900 Robotic Vision Systems, Inc. 190,400
10,700 RWD Technologies, Inc.(a) 89,613
1,900 SBS Technologies, Inc.(a) 54,625
21,500 Technitrol, Inc. 1,252,375
7,700 Three-Five Systems, Inc.(a) 462,000
8,600 Trimble Navigation Ltd.(a) 221,450
28,200 United Stationers, Inc.(a) 1,006,387
31,900 Wolverine Tube, Inc.(a) 408,719
17,000 Xircom, Inc.(a) 629,000
7,400 Zoran Corp.(a) 416,712
--------------
27,558,599
-------------------------------------------------------------------------------------
Utilities 1.6%
40,900 Energen Corp. 651,844
7,600 Hawaiian Electric Industries, Inc. 241,775
27,100 Madison Gas & Electric Co. 484,412
14,800 Minnesota Power & Light Co. 246,050
200 Northwestern Corp. 4,125
--------------
1,628,206
--------------
Total long-term investments (cost $101,122,949) 101,457,793
--------------
</TABLE>
See Notes to Financial Statements
B-50
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS 3.1%
Repurchase Agreement
$ 3,211 Joint Repurchase Agreement Account,
6.15%, 4/3/00
(cost $3,211,000; Note 5) $ 3,211,000
--------------
Total Investments 100.0%
(cost $104,333,949; Note 4) 104,668,793
Other assets in excess of liabilities 22,057
--------------
Net Assets 100% $ 104,690,850
--------------
--------------
</TABLE>
--------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
See Notes to Financial Statements
B-51
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
March 31, 2000
<S> <C>
---------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $104,333,949) $104,668,793
Cash 21,007
Receivable for investments sold 1,122,517
Deferred organization expenses and other assets 83,325
Due from broker - variation margin 52,750
Dividends and interest receivable 49,460
Receivable for Fund shares sold 49,046
--------------
Total assets 106,046,898
--------------
LIABILITIES
Payable for Fund shares reacquired 843,085
Accrued expenses 382,819
Distribution fees payable 74,160
Management fee payable 55,984
--------------
Total liabilities 1,356,048
--------------
NET ASSETS $104,690,850
--------------
--------------
Net assets were comprised of:
Common stock, at par $ 11,432
Paid-in capital in excess of par 149,365,106
--------------
149,376,538
Accumulated net realized loss on investments (44,730,781)
Net unrealized appreciation on investments 45,093
--------------
Net assets, March 31, 2000 $104,690,850
--------------
--------------
</TABLE>
See Notes to Financial Statements
B-52
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
March 31, 2000
<S> <C>
---------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($26,740,873 / 2,883,068 shares of common stock issued and
outstanding) $9.28
Sales charge (5% of offering price) .49
--------------
Maximum offering price to public $9.77
--------------
--------------
Class B:
Net asset value, offering price and redemption price per
share ($69,022,716 / 7,571,512 shares of common stock
issued and outstanding) $9.12
--------------
--------------
Class C:
Net asset value and redemption price per share
($8,055,759 / 883,670 shares of common stock issued and
outstanding) $9.12
Sales charge (1% of offering price) .09
--------------
Offering price to public $9.21
--------------
--------------
Class Z:
Netasset value, offering price and redemption price per share ($871,502 /
93,442 shares of common stock issued and
outstanding) $9.33
--------------
--------------
</TABLE>
See Notes to Financial Statements
B-53
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Year
Ended
March 31, 2000
---------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT LOSS
Income
Dividends $ 1,571,148
Interest 369,784
--------------
Total income 1,940,932
--------------
Expenses
Management fee 847,276
Distribution fee--Class A 95,117
Distribution fee--Class B 894,738
Distribution fee--Class C 118,446
Transfer agent's fees and expenses 282,000
Reports to shareholders 180,000
Custodian's fees and expenses 115,000
Registration fees 85,000
Legal fees and expenses 60,000
Amortization of deferred organization expenses 31,333
Audit fee and expenses 25,000
Directors' fees 16,000
Miscellaneous 47,594
--------------
Total expenses 2,797,504
--------------
Net investment loss (856,572)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (21,273,280)
Financial futures transactions 2,791,962
--------------
(18,481,318)
--------------
Net change in unrealized appreciation/depreciation on:
Investments 50,640,600
Financial futures transactions (363,738)
--------------
50,276,862
--------------
Net gain on investments 31,795,544
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,938,972
--------------
--------------
</TABLE>
See Notes to Financial Statements
B-54
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------
2000 1999
<CAPTION>
-----------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment loss $ (856,572) $ (928,383)
Net realized loss on investments (18,481,318) (26,249,463)
Net change in unrealized
appreciation/depreciation on
investments 50,276,862 (77,150,441)
-------------- ------------------
Net increase (decrease) in net assets
resulting from operations 30,938,972 (104,328,287)
-------------- ------------------
Distributions from net realized gains (Note 1)
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 20,450,947 70,366,132
Net asset value of shares issued to
shareholders in reinvestment of
distributions -- 3,790,396
Cost of shares reacquired (114,601,474) (150,960,828)
-------------- ------------------
Net decrease in net assets from Fund
share transactions (94,150,527) (76,804,300)
-------------- ------------------
Total decrease (63,211,555) (185,056,842)
NET ASSETS
Beginning of year 167,902,405 352,959,247
-------------- ------------------
End of year $ 104,690,850 $ 167,902,405
-------------- ------------------
-------------- ------------------
</TABLE>
See Notes to Financial Statements
B-55
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Notes to Financial Statements
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.
B-56
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Notes to Financial Statements Cont'd.
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
B-57
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Notes to Financial Statements Cont'd.
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 $856,572 and decrease paid in capital in excess of par by $856,572 for
certain non-deductible expenses and net operating loss for the year ended March
31, 2000. 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 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 services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an
annual rate of .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 of the Fund. The Fund compensates PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares
pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly. No distribution or service fees are paid to PIMS as distributor
of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated 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
B-58
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Notes to Financial Statements Cont'd.
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, 2000.
PIMS has advised the Fund that it has received approximately $20,700 and
$3,300 in front-end sales charges resulting from sales of Class A shares and
Class C shares, respectively, during the year ended March 31, 2000. From these
fees, PIMS paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended March 31, 2000, they
received approximately $876,600 and $4,900 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 ('Prudential').
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the year ended March 31, 2000.
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, 2000, the
Fund incurred fees of approximately $251,500 for the services of PMFS. As of
March 31, 2000, approximately $17,800 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, 2000, PSI earned approximately $10,600 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
B-59
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Notes to Financial Statements Cont'd.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended March 31, 2000 were $87,808,557 and $174,397,989,
respectively.
The federal income tax basis of the Fund's investments at March 31, 2000
was $104,503,800 and, accordingly, net unrealized appreciation of investments
for federal income tax purposes was $164,993 (gross unrealized
appreciation--$18,516,995; gross unrealized depreciation--$18,352,002).
For federal income tax purposes, the Fund has a capital loss carryforward
as of March 31, 2000, of approximately, $44,056,981 of which $3,890,973 expires
in 2007 and $40,166,008 expires in 2008. 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 net long-term capital losses of $793,699 incurred in the five months ended
March 31, 2000 as having been incurred in the following fiscal year.
During the year ended March 31, 2000, the Fund entered into financial
futures contracts. Details of open contracts at March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Value at Value at
Number of Expiration Trade March 31, Unrealized
Contracts Type Date Date 2000 (Depreciation)
--------- --------------- ------------ ---------- ---------- ---------------
<C> <C> <S> <C> <C> <C>
Long Positions:
7 Russell 2000 June 2000 $2,111,971 $1,908,725 $(203,246)
3 Russell 2000 June 2000 904,530 818,025 (86,505)
---------------
$(289,751)
---------------
---------------
</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 March 31, 2000, the Fund
has a .5% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund represents $3,211,000 principal amount. As
of such date, the
B-60
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Notes to Financial Statements Cont'd.
repurchase agreements in the joint account and the value of the collateral
therefore were as follows:
Bear Stearns & Co. Inc., 6.10%, in the principal amount of $120,000,000,
repurchase price $120,061,000, due 4/3/00. The value of the collateral including
accrued interest was $123,642,827.
Credit Suisse First Boston Corp., 6.10%, in the principal amount of
$130,000,000, repurchase price $130,066,083, due 4/3/00. The value of the
collateral including accrued interest was $134,450,258.
Greenwich Capital Markets, Inc., 6.15%, in the principal amount of
$100,000,000, repurchase price $100,051,250, due 4/3/00. The value of the
collateral including accrued interest was $102,005,200.
Goldman, Sachs & Co., 6.09%, in the principal amount of $100,000,000,
repurchase price $100,050,750, due 4/3/00. The value of the collateral including
accrued interest was $102,000,425.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 6.25%, in the principal
amount of $207,289,000, repurchase price $207,396,963, due 4/3/00. The value of
the collateral including accrued interest was $211,435,308.
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. 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
B-61
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Notes to Financial Statements Cont'd.
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, 2000:
Shares sold 1,766,896 $ 15,129,661
Shares reacquired (5,195,169) (43,996,626)
----------- -------------
Net decrease in shares outstanding before conversion (3,428,273) (28,866,965)
Shares issued upon conversion from Class B 29,878 257,051
----------- -------------
Net decrease in shares outstanding (3,398,395) $ (28,609,914)
----------- -------------
----------- -------------
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
----------------------------------------------------------
<S> <C> <C>
Year ended March 31, 2000:
Shares sold 454,770 $ 3,782,849
Shares reacquired (6,708,108) (55,819,897)
----------- -------------
Net decrease in shares outstanding before conversion (6,253,338) (52,037,048)
Shares issued upon conversion into Class A (30,287) (257,051)
----------- -------------
Net decrease in shares outstanding (6,283,625) $ (52,294,099)
----------- -------------
----------- -------------
</TABLE>
B-62
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class B Shares Amount
---------------------------------------------------------- ----------- -------------
Year ended March 31, 1999:
<S> <C> <C>
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
----------------------------------------------------------
<S> <C> <C>
Year ended March 31, 2000:
Shares sold 64,274 $ 542,300
Shares reacquired (1,209,740) (9,983,869)
----------- -------------
Net decrease in shares outstanding (1,145,466) $ (9,441,569)
----------- -------------
----------- -------------
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
----------------------------------------------------------
<S> <C> <C>
Year ended March 31, 2000:
Shares sold 118,464 $ 996,137
Shares reacquired (577,137) (4,801,082)
----------- -------------
Net decrease in shares outstanding (458,673) $ (3,804,945)
----------- -------------
----------- -------------
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-63
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Year Ended March 31, November 10, 1997(a)
-------------------------- through
2000(d) 1999 March 31, 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $ 7.44 $ 10.95 $ 10.00
-------------- ------- ----------
Income from investment operations
Net investment income (loss) (0.01) .03 .02
Net realized and unrealized gain
(loss) on investment
transactions 1.85 (3.41) .94
-------------- ------- ----------
Total from investment
operations 1.84 (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 $ 9.28 $ 7.44 $ 10.95
-------------- ------- ----------
-------------- ------- ----------
TOTAL RETURN(c): 24.73% (31.00)% 9.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 26,741 $46,736 $115,621
Average net assets (000) $ 38,047 $82,332 $106,453
Ratios to average net assets:
Expenses, including
distribution fees 1.45% 1.26% 1.22%(b)
Expenses, excluding
distribution fees 1.20% 1.01% 0.97%(b)
Net investment income (loss) (0.07)% .16% .47%(b)
Portfolio turnover rate 66% 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 on weighted average shares outstanding during the year.
See Notes to Financial Statements
B-64
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
----------------------------------------------------
Year Ended March 31, November 10, 1997(a)
--------------------------- through
2000(d) 1999 March 31, 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $ 7.37 $ 10.93 $ 10.00
-------------- -------- ----------
Income from investment operations
Net investment loss (0.07) (.06) (.01)
Net realized and unrealized gain
(loss) on investment
transactions 1.82 (3.37) .94
-------------- -------- ----------
Total from investment
operations 1.75 (3.43) .93
-------------- -------- ----------
Less distributions
Distributions from net realized
gains -- (.13) --
-------------- -------- ----------
Net asset value, end of period $ 9.12 $ 7.37 $ 10.93
-------------- -------- ----------
-------------- -------- ----------
TOTAL RETURN(c): 23.91% (31.61)% 9.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 69,023 $102,094 $196,671
Average net assets (000) $ 89,474 $158,085 $170,484
Ratios to average net assets:
Expenses, including
distribution fees 2.20% 2.01% 1.97%(b)
Expenses, excluding
distribution fees 1.20% 1.01% 0.97%(b)
Net investment income (loss) (0.82)% (.58)% (.29)%(b)
Portfolio turnover rate 66% 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 on weighted average shares outstanding during the year.
See Notes to Financial Statements
B-65
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
---------------------------------------------------
Year Ended March 31, November 10, 1997(a)
-------------------------- through
2000(d) 1999 March 31, 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $ 7.37 $ 10.93 $ 10.00
-------------- ------- --------
Income from investment operations
Net investment loss (0.07) (.08) (.01)
Net realized and unrealized gain
(loss) on investment
transactions 1.82 (3.35) .94
-------------- ------- --------
Total from investment
operations 1.75 (3.43) .93
-------------- ------- --------
Less distributions
Distributions from net realized
gains -- (.13) --
-------------- ------- --------
Net asset value, end of period $ 9.12 $ 7.37 $ 10.93
-------------- ------- --------
-------------- ------- --------
TOTAL RETURN(c): 23.91% (31.61)% 9.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 8,056 $14,951 $ 36,628
Average net assets (000) $ 11,845 $27,182 $ 34,000
Ratios to average net assets:
Expenses, including
distribution fees 2.20% 2.01% 1.97%(b)
Expenses, excluding
distribution fees 1.20% 1.01% 0.97%(b)
Net investment income (loss) (0.82)% (.59)% (.29)%(b)
Portfolio turnover rate 66% 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 on weighted average shares outstanding during the year.
See Notes to Financial Statements
B-66
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
---------------------------------------------------
Year Ended March 31, November 10, 1997(a)
-------------------------- through
2000(d) 1999 March 31, 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $ 7.46 $10.96 $10.00
------- ------- -------
Income from investment operations
Net investment income (loss) (0.02) .05 .02
Net realized and unrealized gain
(loss) on investment transactions 1.89 (3.42 ) .95
------- ------- -------
Total from investment
operations 1.87 (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 $ 9.33 $ 7.46 $10.96
------- ------- -------
------- ------- -------
TOTAL RETURN(c): 25.07% (30.88 )% 9.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 872 $4,121 $4,039
Average net assets (000) $1,847 $5,315 $2,709
Ratios to average net assets:
Expenses, including
distribution fees 1.20% 1.01 % 0.97%(b)
Expenses, excluding
distribution fees 1.20% 1.01 % 0.97%(b)
Net investment income (loss) 0.22% .43 % .51%(b)
Portfolio turnover rate 66% 106 % 39%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Annualized.
(c) 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 on weighted average shares outstanding during the year.
See Notes to Financial Statements
B-67
<PAGE>
Prudential Small-Cap Quantum Fund, Inc.
Report of Independent Accountants
To the Board of Directors and Shareholders of
Prudential Small-Cap Quantum Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Small-Cap Quantum Fund,
Inc. (the 'Fund,') at March 31, 2000, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the two years in the
period then ended and for the period November 10, 1997 (commencement of
investment operations) through March 31, 1998, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as 'financial statements') are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at March 31,
2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
May 23, 2000
See Notes to Financial Statements
B-68
<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 SMALL STOCKS COMMON STOCKS LONG-TERM BONDS TREASURY BILLS INFLATION
<S> <C> <C> <C> <C> <C>
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 500 Composite Stock Price Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<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 "Risk/Return Summary--Fees and Expenses" in the prospectus.
The net effect of the deduction of the operating expenses of a mutual fund on
these historical total returns, including the compounded effect over time, could
be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<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)%
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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
