<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1999
REGISTRATION NOS. 811-3084
2-68723
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 27 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 28 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices)(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7525
MARGUERITE E.H. MORRISON, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service of Process)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/X/ on November 29, 1999 pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
<TABLE>
<S> <C>
Shares of Common Stock, par value $.01 per
Title of Securities Being Registered............... share
</TABLE>
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- --------------------------------------------------------------------------------
<PAGE>
FUND TYPE:
- -------------------------------------
Stock
INVESTMENT OBJECTIVE:
- -------------------------------------
Capital growth
PRUDENTIAL
SMALL COMPANY
VALUE FUND, INC.
[LOGO]
- ---------------------------------------------------------------
PROSPECTUS: NOVEMBER 29, 1999
As with all mutual funds, the Securities
and Exchange Commission has not
approved or disapproved the Fund's
shares, nor has the SEC determined
that this prospectus is complete or
accurate. It is a criminal offense to
state otherwise. [LOGO]
<PAGE>
TABLE OF CONTENTS
- -------------------------------------
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 HOW THE FUND INVESTS
6 Investment Objective and Policies
8 Other Investments and Strategies
10 Investment Risks
13 HOW THE FUND IS MANAGED
13 Board of Directors
13 Manager
13 Investment Adviser
13 Portfolio Manager
14 Distributor
14 Year 2000 Readiness Disclosure
15 FUND DISTRIBUTIONS AND TAX ISSUES
15 Distributions
16 Tax Issues
17 If You Sell or Exchange Your Shares
19 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
19 How to Buy Shares
27 How to Sell Your Shares
31 How to Exchange Your Shares
33 FINANCIAL HIGHLIGHTS
33 Class A Shares
34 Class B Shares
35 Class C Shares
36 Class Z Shares
38 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
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PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------
This section highlights key information about the PRUDENTIAL SMALL COMPANY VALUE
FUND, INC., which we refer to as "the Fund." Additional information follows this
summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is CAPITAL GROWTH, which means we seek investments
whose price will increase over time. We normally invest mostly in common stocks
of small, less well-known U.S. companies that the investment adviser believes
are undervalued. We currently consider small companies to be those with market
capitalizations of less than $1.5 billion. Although we invest primarily in small
companies, we also can invest up to 35% of the Fund's total assets in
equity-related securities of U.S. companies of any size. In addition to common
stocks, equity-related securities in which the Fund mainly invests include
nonconvertible preferred stocks, convertible securities and real estate
investment trusts (REITs). We also can invest up to 15% of total assets in
foreign securities. We can use derivatives for hedging and to improve the Fund's
returns.
While we make every effort to achieve our objective, we can't guarantee
success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since we invest
primarily in common stocks, 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 prices of large company stocks and they also
may present above average risks. This means
- -------------------------------------------------------------------
WE'RE VALUE INVESTORS
In deciding which equity-related securities to buy, we use what is known as a
value investment style. We look for securities whose values we think are
temporarily depressed and which we believe should increase when or if the market
realizes the full value of the company. We invest in companies that we believe
are undervalued given the company's earnings, assets, cash flow, price/ book
value and [private] market value. Generally, we sell a security when we don't
think it is undervalued anymore.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
that when stock prices decline overall, the Fund may decline more than a
broad-based securities market index. The Fund's holdings can vary significantly
from broad market indexes and the performance of the Fund can deviate from the
performance of these indexes. Different parts of a market can react differently
to adverse issuer, market, regulatory, political and economic developments.
There also is the risk that the "value" investment style will be out-of-favor so
that although a sector of the market may have gone up--like growth stocks--value
stocks may not.
Since our objective is capital growth, the companies that we invest in
generally may 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.
Since the Fund can invest in foreign securities, there are additional risks.
Foreign markets often are more volatile than U.S. markets and generally are not
subject to regulatory requirements comparable to those of U.S. issuers. In
addition, changes in currency exchange rates can reduce or increase market
performance.
The Fund may use risk management techniques to try to preserve assets or
enhance return. These strategies may present above-average risks. Derivatives
may not fully offset the underlying positions and this could result in losses to
the Fund that would not otherwise have occurred.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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2 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The following
bar chart shows the Fund's performance for the last ten full calendar years 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 those of a stock index and a
group of similar mutual funds. They demonstrate the risk of investing in the
Fund and how returns can change. Past performance does not mean that the Fund
will achieve similar results in the future.
ANNUAL RETURNS* (CLASS B SHARES)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BEST QUARTER __% (__ quarter of 19__) WORST QUARTER: __% (__ quarter of
19__)
</TABLE>
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES
WERE INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. THE
TOTAL RETURN OF THE CLASS B SHARES FROM 1-1-99 TO 9-30-99 WAS %.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1 YR. 5 YRS. 10 YRS. SINCE INCEPTION
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares % % N/A % (since 1-22-90)
Class B shares % % % % (since 11-30-80)
Class C shares % % N/A % (since 8-1-94)
Class Z shares % N/A N/A % (since 3-1-96)
S&P Small Cap 600(2) % % % % N/A(2)
Lipper Average(3) % % % % N/A(3)
</TABLE>
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 RETURNS WOULD HAVE BEEN LOWER.
2 THE STANDARD & POOR'S SMALLCAP 600 INDEX (S&P SMALLCAP)--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 AND
OPERATING EXPENSES OR OPERATING EXPENSES OF A MUTUAL FUND. THESE RETURNS
WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES. S&P SMALLCAP
RETURNS SINCE THE INCEPTION OF EACH CLASS ARE % FOR CLASS A, % FOR
CLASS B, % FOR CLASS C AND % FOR CLASS Z SHARES. SOURCE: LIPPER INC.
3 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN
THE LIPPER SMALLCAP 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. LIPPER RETURNS SINCE THE INCEPTION OF EACH CLASS
ARE % FOR CLASS A, % FOR CLASS B, % FOR CLASS C AND % FOR CLASS
Z SHARES. SOURCE: LIPPER INC.
- --------------------------------------------------------------------------------
3
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES
These tables shows 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 .70% .70% .70% .70%
+ Distribution and service (12b-1) fees .30%(4) 1.00% 1.00% None
+ Other expenses % % % %
= Total annual Fund operating expenses % % % %
- Fee waiver .05% None None None
= NET ANNUAL FUND OPERATING EXPENSES %(4) % % %
</TABLE>
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 SEPTEMBER 30, 2000, 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.
- -------------------------------------------------------------------
4 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and the cost of investing in the Fund with the cost of investing
in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares during the
first year. Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Z shares $ $ $ $
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Z shares $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
HOW THE FUND INVESTS
- -------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is CAPITAL GROWTH. This means we seek
investments whose price will increase over time. While we make every effort to
achieve our objective, we can't guarantee success.
In pursuing our objective, we normally invest in COMMON STOCKS of SMALL,
LESS WELL-KNOWN U.S. COMPANIES that the investment adviser believes are
undervalued. We currently consider small companies to be those with market
capitalizations of less than $1.5 billion. Market capitalization is measured at
the time of initial purchase so that companies whose capitalization no longer
meets this definition after purchase continue to be considered small for
purposes of achieving our investment objective. We may change what kind of
companies we consider small to reflect industry norms at our discretion. We also
can invest in securities of issuers we don't consider to be small and which may
be well-known.
In addition to common stocks, we may invest in other equity-related
securities including nonconvertible preferred stocks; warrants and rights that
can be exercised to obtain stock; investments in various types of business
ventures, including partnerships and joint ventures; real estate investment
trusts; American Depositary Receipts (ADRs) and other similar securities.
Convertible securities also are equity-related securities. These are
securities--like bonds, corporate notes and preferred stock-- that we can
convert into the company's common stock or some other equity security.
- -------------------------------------------------------------------
OUR VALUE STRATEGY
We look for small companies that we believe are undervalued given the company's
earnings, assets, cash flow, and dividends. These companies might be
inexpensive, ignored or misunderstood in the marketplace and are selling at a
discount from their perceived true worth. We consider selling a security when we
think it has increased in price to the point where it is no longer undervalued
in the opinion of the investment adviser.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
6 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS
We may invest in the securities of real estate investment trusts known as REITS.
REITs are like corporations, except that they do not pay income taxes if they
meet certain IRS requirements. However, while REITs themselves do not pay income
taxes, the distributions they make to investors are taxable. REITs invest
primarily in real estate or real estate mortgages and distribute almost all of
their income--most of which comes from rents, mortgages and gains on sales of
property--to shareholders.
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Fund's returns or
protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Fund will not lose money. Derivatives--such as futures,
options, foreign currency forward contracts and options on futures--involve
costs and can be volatile. With derivatives, the investment adviser tries to
predict whether the underlying investment--a security, market index, currency,
interest rate or some other benchmark-- will go up or down at some future date.
We may use derivatives to try to reduce risk or to increase return consistent
with the Fund's overall investment objective. The investment adviser will
consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use may
not match the Fund's underlying holdings.
OPTIONS The Fund may purchase and sell put and call options on securities and
currencies 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 options may be on equity securities, stock indexes
and foreign currencies. The Fund will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS FOREIGN CURRENCY FORWARD CONTRACTS The
Fund may purchase and sell 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. The Fund also
may enter into foreign currency forward contracts to try to
- --------------------------------------------------------------------------------
7
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
protect the value of its assets against future changes in the level of foreign
currency exchange rates. A foreign currency forward contract is an obligation to
buy or sell a given currency on a future date and at a set price.
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 15% of its total assets in equity-related securities
and fixed-income obligations of foreign issuers. For the 15% limit, we do not
consider ADRs and other similar receipts or shares to be foreign securities.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in cash or high quality,
money market instruments. Money market instruments include commercial paper of
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic banks, and short term obligations issued or guaranteed
by the U.S. government or its agencies or instrumentalities, repurchase
agreements and cash. 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.
The Fund also may temporarily hold cash or invest in high quality money
market instruments pending investment of proceeds from new sales of Fund shares
or during periods of portfolio restructuring.
- -------------------------------------------------------------------
8 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
REPURCHASE AGREEMENTS
The Fund also 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.
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) 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, those without a readily
available market, 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.
- --------------------------------------------------------------------------------
9
<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-based
securities market indexes, performance of the Fund can deviate from performance
of the indexes. This chart outlines the key risks and potential rewards of the
Fund's principal investments and certain other non-principal investments the
Fund may make. See, too, "Description of the Fund, Its Investments and Risks" in
the SAI.
INVESTMENT TYPE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
STOCKS OF SMALL U.S. -- Individual stocks could lose -- Historically, stocks have
COMPANIES value outperformed other investments
-- The equity markets could go over the long term
AT LEAST 65% down, resulting in a decline in -- Generally, economic growth means
value of the Fund's investments higher corporate profits, which
-- Stocks of small companies are leads to an increase in stock
more volatile and may decline prices, known as capital
more than those in the S&P 500 appreciation
Index -- Highly successful small
-- Small companies are more likely companies can outperform larger
to reinvest earnings and not ones
pay dividends -- Value style may perform better
-- Changes in interest rates may than growth style
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
-- Value style is out-of-favor
- ------------------------------------------------------------------------------------
STOCKS OF LARGER U.S. -- Similar risks to small U.S. -- Not as likely to lose value as
COMPANIES companies stocks of small companies
-- Companies that pay dividends may -- May be a source of dividend
UP TO 35% not do so if they don't have income
profits or adequate cash flow
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
10 PRUDENTIAL SMALL COMPANY VALUE 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>
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
FOREIGN SECURITIES -- Foreign markets, economies and -- Investors can participate in
political systems may not be as foreign markets and companies
UP TO 15% stable as in the U.S., operating in those markets
particularly those in -- Changing value of foreign
developing countries currencies
-- Currency risk-- changing values -- Opportunities for
of foreign currencies can cause diversification
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
-- Year 2000 conversion may be more
of a problem for some foreign
issuers
- ------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as futures, -- The Fund could make money and
options and foreign currency protect against losses if the
PERCENTAGE VARIES forward contracts may not fully investment analysis proves
offset the underlying positions correct
and this could result in losses -- Derivatives that involve
to the Fund that would not have leverage could generate
otherwise occurred substantial gains at low cost
-- Derivatives used for risk -- One way to manage the Fund's
management may not have the risk/return balance is to lock
intended effects and may result in the value of an investment
in losses or missed ahead of time
opportunities
-- The other party to a derivatives
contract could default
-- Derivatives that involve
leverage could magnify losses
-- Certain types of derivatives
involve costs to the Fund that
can reduce returns
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT -- Performance depends on the -- Real estate holdings can
TRUSTS (REITS) strength of real estate generate good returns from
markets, REIT management and rents, rising market values,
PERCENTAGE VARIES property management, which can etc.
be affected by many factors, -- Greater diversification than
including national and regional direct ownership
economic conditions
- ------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for capital -- May preserve the Fund's assets
appreciation
UP TO 100% ON A TEMPORARY -- Credit risk--the risk that the
BASIS default of an issuer would
leave the Fund with unpaid
interest or principal. The
lower a bond'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
- ------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to value -- May offer a more attractive
precisely yield or potential for growth
UP TO 15% OF NET ASSETS -- May be difficult to sell at the than more widely traded
time or price desired securities
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
12 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- -------------------------------------
BOARD OF DIRECTORS
The Board of Directors oversees the actions of the Manager, Investment Adviser
and Distributor and decides on general policies. The Board also oversees the
Fund's officers who conduct and supervise the daily business operations of the
Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM is also
responsible for supervising the Fund's investment adviser. For the fiscal year
ended September 30, 1999, the Fund paid PIFM management fees of .70 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 October 31, 1999, PIFM served as the
Manager to all of the Prudential mutual funds, and as Manager or administrator
to 22 closed-end investment companies, with aggregate assets of approximately
$ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
PORTFOLIO MANAGER
JAY S. KAPLAN, CFA, a Managing Director of Prudential Investments, has been a
manager of the Fund since January 1996. He has been a portfolio manager or
analyst for a number of value-oriented equity portfolios at Prudential since
1993.
Mr. Kaplan looks for stocks of attractively priced companies that are
ignored or misanalyzed by the market and are selling at a discount from their
perceived true worth. His bottom-up selection process identifies companies with
low price to earnings, price to cash flow, price to book value and price to
private market value ratios. He focuses on companies with solid balance sheets
and strong or improving management with significant stock ownership.
- --------------------------------------------------------------------------------
13
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------
Mr. Kaplan has a B.S. from the State University of New York at Binghamton
and an M.B.A in Finance from New York University. He also holds a Chartered
Financial Analyst (CFA) designation.
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.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000. The Fund and its Board receive, and have
received since early 1998, satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the services providers (or other securities
market participants) will successfully complete the necessary changes in a
timely manner or that there will be no adverse impact on the Fund. Moreover, the
Fund at this time has not considered retaining alternative service providers or
directly undertaken efforts to achieve year 2000 readiness, the latter of which
would involve substantial expenses without an assurance of success.
Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Fund.
- -------------------------------------------------------------------
14 PRUDENTIAL SMALL COMPANY VALUE 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, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA), or some other qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to shareholders
typically twice a year. For example, if the Fund owns ACME Corp. stock and the
stock pays a dividend, the Fund will pay out a portion of this dividend to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from the Fund will be taxed as ordinary income,
whether or not they are reinvested in the Fund.
The Fund also distributes realized net CAPITAL GAINS to shareholders--
typically once a year--which are generated when the Fund sells its assets for a
profit. For example, if the Fund bought 100 shares of ACME Corp. stock for a
total of $1,000 and more than one year later sold the shares for a total of
$1,500, the Fund has net long-term capital gains of $500, which it will pass on
to shareholders (assuming the Fund's total gains are greater than any losses it
may have). Capital gains are taxed differently depending on how long the Fund
holds the security--if a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at ordinary income
rates of up to 39.6%. Different rates apply to corporate shareholders.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-
- --------------------------------------------------------------------------------
15
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
deferred plan or account. For more information about automatic reinvestment and
other shareholder services, see "Step 4: Additional Shareholder Services" in the
next section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Fund as part of a qualified tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified tax-deferred plan or
account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your distributions and sale
proceeds. If you are subject to backup withholding, we will withhold and pay to
the U.S. Treasury 31% of your distributions. Dividends of net investment income
and short-term capital gains paid to a nonresident foreign shareholder generally
will be subject to a U.S. withholding tax of 30%. This rate may be lower,
depending on any tax treaty the U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well since you bought shares one day and
soon thereafter received a distribution. That is not so because when dividends
are paid out, the value of each share of the Fund decreases
- -------------------------------------------------------------------
16 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
by the amount of the dividend and the market changes (if any) to reflect the
payout. The distribution you receive makes up for the decrease in share value.
However, the timing of your purchase does mean that part of your investment came
back to you as taxable income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
- -------------------------------------------------------------------
RECEIPTS FROM SALE --> +$ CAPITAL GAIN
(taxes owed)
$ OR
--> -$ CAPITAL LOSS
(offset against gain)
- -------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
17
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
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.
- -------------------------------------------------------------------
18 PRUDENTIAL SMALL COMPANY VALUE 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 the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
the varying distribution fees
-- The different sales charges that apply to each share class-- Class
A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front-end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges
-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
- --------------------------------------------------------------------------------
19
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial sales 5% of the None 1% of the None
charge public offering public offering
price price
Contingent Deferred None If sold 1% on sales None
Sales Charge (CDSC)(2) during: made within 18
Year 1 5% months of
Year 2 4% purchase(2)
Year 3 3%
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1% None
service (12b-1) fees (.25 of 1%
shown as a percentage currently)
of average net
assets(3)
</TABLE>
1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM
INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC
INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES-- CONTINGENT DEFERRED SALES CHARGE (CDSC)." CLASS C SHARES
BOUGHT BEFORE NOVEMBER 2, 1998, HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
3 THESE DISTRIBUTION FEES ARE PAID FROM THE FUND'S ASSETS ON A CONTINUOUS
BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR INVESTMENT AND
MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES. THE SERVICE FEE
FOR CLASS A, CLASS B AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE
FOR CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING THE .25 OF 1% SERVICE
FEE) AND IS .75 OF 1% FOR CLASS B AND CLASS C SHARES. FOR THE FISCAL YEAR
ENDING SEPTEMBER 30, 2000, 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.
- -------------------------------------------------------------------
20 PRUDENTIAL SMALL COMPANY VALUE 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 you
how the sales charge decreases as the amount of your investment
increases.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above* None None None
</TABLE>
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES.
To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of related investors
-- Buy the Class A shares of two or more Prudential mutual funds at the
same time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the
applicable sales charge (note: you must notify the Transfer Agent if
you qualify for Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares
in the Fund and other Prudential mutual funds within 13 months.
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
- --------------------------------------------------------------------------------
21
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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. 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, or
-- 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 real estate
brokerage companies affiliated with The Prudential Real Estate Affiliates, Inc.
and clients of brokers that have entered into a selected dealer agreement with
the Distributor. To qualify for a reduction or waiver of the sales charge, you
must notify the Transfer Agent or your broker at the time of purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
- -------------------------------------------------------------------
22 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated (Prudential Securities) or one of its affiliates. These
purchases must be made within 60 days of the redemption. To qualify for this
waiver, you must do one of the following:
-- Purchase your shares through an account at Prudential Securities
-- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
-- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
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, or
-- 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.
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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 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), and
-- 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."
- -------------------------------------------------------------------
24 PRUDENTIAL SMALL COMPANY VALUE 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 national holidays and Good Friday. [Because the Fund
invests in foreign securities, its NAV can 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.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial adviser will help you
determine which retirement plan best meets your needs. Complete instructions
about how to establish and maintain your plan and how to open accounts for you
and your employees will be included in the retirement plan kit you receive in
the mail.
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
- -------------------------------------------------------------------
26 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, 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.
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records, or you are a business or a
trust and you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order guaranteed by a financial institution.
For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
- -------------------------------------------------------------------
28 PRUDENTIAL SMALL COMPANY VALUE 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 (or one year for Class C shares if
purchased before November 2, 1998). For both Class B and Class C shares, the
CDSC is calculated based on the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy (with rights of survivorship), provided the shares were
purchased before the death or disability
-- To provide for certain distributions--made without IRS penalty-- from
a tax-deferred retirement plan, IRA or Section 403(b) custodial
account
-- On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B Shares."
WAIVER OF THE CDSC--CLASS C SHARES
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
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
Prudential and its affiliates. For more information, call Prudential at (800)
353-2847.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA, or some
other tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number 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
- -------------------------------------------------------------------
30 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
additional information, see the SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase, or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding period for CDSC
liability.
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
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------
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.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The Fund may
notify a market timer of rejection of an exchange 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.
- -------------------------------------------------------------------
32 PRUDENTIAL SMALL COMPANY VALUE 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 report of independent
accountants which appear in the annual report and the SAI and are available upon
request. Additional performance information for each share class is contained in
the annual report, which you can receive at no charge.
CLASS A SHARES
The financial highlights were audited by ,
independent accountants, whose report was unqualified.
CLASS A SHARES (FISCAL YEAR ENDED 9-30)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999(1) 1998(1) 1997(1) 1996(1) 1995(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $18.95 $15.30 $14.18 $12.40
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .02 .04 .05
Net realized and unrealized gain
(loss) on investment transactions (3.31) 6.06 1.75 2.57
TOTAL FROM INVESTMENT OPERATIONS (3.31) 6.08 1.79 2.62
- --------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- -- -- --
Distributions from net realized
capital gains on investment
transactions (1.85) (2.43) (.67) (.84)
TOTAL DISTRIBUTIONS (1.85) (2.43) (.67) (.84)
NET ASSET VALUE, END OF YEAR $13.79 $18.95 $15.30 $14.18
TOTAL RETURN(2) (18.90)% 45.92% 13.38% 23.29%
- --------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999(1) 1998(1) 1997(1) 1996(1) 1995(1)
- --------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $365,431 $412,980 $237,306 $242,231
Average net assets (000)
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 1.17%(3) 1.21%(3) 1.24%(3) 1.33%(3)
Expenses, excluding distribution
fees .92% .96% .99% 1.08%
Net investment income -- .15% .33% .30%
Portfolio turnover 36% 58% 53% 64%
</TABLE>
1 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
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.
3 THE DISTRIBUTOR OF THE FUND VOLUNTARILY AGREED TO LIMIT ITS DISTRIBUTION
FEE TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
- --------------------------------------------------------------------------------
33
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS B SHARES
The financial highlights were audited by ,
independent accountants, whose report was unqualified.
CLASS B SHARES (FISCAL YEAR ENDED 9-30)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999(1) 1998(1) 1997(1) 1996(1) 1995(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.64 $14.49 $13.56 $11.99
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.12) (.09) (.06) (.06)
Net realized and unrealized gain
(loss) on investment transactions (3.04) 5.67 1.66 2.47
TOTAL FROM INVESTMENT OPERATIONS (3.16) 5.58 1.60 2.41
- --------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- -- -- --
Distributions from net realized
capital gains on investment
transactions (1.85) (2.43) (.67) (.84)
TOTAL DISTRIBUTIONS (1.85) (2.43) (.67) (.84)
NET ASSET VALUE, END OF YEAR $12.63 $17.64 $14.49 $13.56
TOTAL RETURN(2) (19.52)% 44.91% 12.56% 22.37%
- --------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999(1) 1998(1) 1997(1) 1996(1) 1995(1)
- --------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $514,159 $645,579 $378,861 $361,873
Average net assets (000)
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 1.92% 1.96% 1.99% 2.08%
Expenses, excluding distribution
fees .92% .96% .99% 1.08%
Net investment income (loss) (.75)% (.60)% (.42)% (.51)%
Portfolio turnover 36% 58% 53% 64%
</TABLE>
1 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
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.
- -------------------------------------------------------------------
34 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS C SHARES
The financial highlights were audited by ,
independent accountants, whose report was unqualified.
CLASS C SHARES (FISCAL YEAR ENDED 9-30)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999(1) 1998(1) 1997(1) 1996(1) 1995(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.64 $14.49 $13.56 $11.99
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.12) (.09) (.06) (.06)
Net realized and unrealized gain
(loss) on investment transactions (3.04) 5.67 1.66 2.47
TOTAL FROM INVESTMENT OPERATIONS (3.16) 5.58 1.60 2.41
- -------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized
capital gains on investment
transactions (1.85) (2.43) (.67) (.84)
NET ASSET VALUE, END OF YEAR $12.63 $17.64 $14.49 $13.56
TOTAL RETURN(2) (19.52)% 44.91% 12.56% 22.37%
- -------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999(1) 1998(1) 1997(1) 1996(1) 1995(1)
- -------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $26,804 $22,049 $4,323 $1,545
Average net assets (000)
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 1.92% 1.96% 1.99% 2.08%
Expenses, excluding distribution
fees .92% .96% .99% 1.08%
Net investment income (loss) (.75)% (.60)% (.42)% (.46)%
Portfolio turnover 36% 58% 53% 64%
</TABLE>
1 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
- --------------------------------------------------------------------------------
35
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by ,
independent accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL PERIOD ENDED 9-30)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999(2) 1998(2) 1997(2) 1996(1),(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $19.04 $15.32 $13.69
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .04 .06 .05
Net realized and unrealized gain
(loss) on investment transactions (3.31) 6.09 1.58
TOTAL FROM INVESTMENT OPERATIONS (3.27) 6.15 1.63
- --------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized
capital gains on investment
transactions (1.85) (2.43) --
NET ASSET VALUE, END OF PERIOD $13.92 $19.04 $15.32
TOTAL RETURN(3) (18.58)% 46.38% 11.91%
- --------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999(2) 1998(2) 1997(2) 1996(1),(2)
- --------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $125,770 $151,215 $68,516
Average net assets (000)
RATIOS TO AVERAGE NET ASSETS:
Expenses .92% .96% .99%(4)
Net investment income (loss) .25% .40% .58%(4)
Portfolio turnover 36% 58% 53%
</TABLE>
1 INFORMATION SHOWN IS FOR THE PERIOD 3-1-96 (WHEN SHARES WERE FIRST OFFERED)
THROUGH 9-30-96.
2 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
3 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN A FULL YEAR ARE NOT
ANNUALIZED.
4 ANNUALIZED.
- -------------------------------------------------------------------
36 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
[This page has been left blank intentionally.]
- --------------------------------------------------------------------------------
37
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Please read the prospectus carefully before you invest or
send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH
& INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
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.
GLOBAL SERIES
INTERNATIONAL STOCK SERIES
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
LIMITED MATURITY PORTFOLIO
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
- -------------------------------------------------------------------
38 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. [LOGO] (800) 225-1852
<PAGE>
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
SHORT-INTERMEDIATE TERM SERIES
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
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
- --------------------------------------------------------------------------------
39
<PAGE>
FOR MORE INFORMATION:
- ---------------------------------------------------------------------------
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- ------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- --------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
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 (202) 942-8090
Via the Internet:
on the EDGAR Database at
http://www.sec.gov
- --------------------------------
CUSIP Numbers and trading symbols:
Class A: 743968-10-9
Class B: 743968-20-8
Class C: 743968-30-7
Class Z: 743968-40-6
Investment Company Act File No:
811-3084
MF109A [LOGO] Printed on Recycled Paper
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 29, 1999
Prudential Small Company Value Fund, Inc. (the Fund), is an open-end,
diversified, management investment company whose objective is capital growth.
The Fund intends to invest primarily in a carefully selected portfolio of common
stocks, generally stocks of small, less well known U.S. companies that typically
have valuations which, in the investment adviser's view, are temporarily low
relative to the companies' earnings, assets, cash flow, price/book value and
[private] market value. The Fund's purchase and sale of put and call options and
related short-term trading may be considered speculative and may result in
higher risks and costs to the Fund. The Fund also may buy and sell options on
stocks, stock indexes and foreign currencies, foreign currency forward contracts
and futures contracts on stock indexes and foreign currencies and options
thereon in accordance with the limits described herein. 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 Fund's Prospectus, dated November 29, 1999. A copy
of the Prospectus may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fund History.......................................... B-2
Description of the Fund, Its Investments and Risks.... B-2
Investment Restrictions............................... B-14
Management of the Fund................................ B-15
Control Persons and Principal Holders of Securities... B-18
Investment Advisory and Other Services................ B-19
Brokerage Allocation and Other Practices.............. B-23
Capital Shares, Other Securities and Organization..... B-25
Purchase, Redemption and Pricing of Fund Shares....... B-25
Shareholder Investment Account........................ B-35
Net Asset Value....................................... B-39
Performance Information............................... B-40
Taxes, Dividends and Distributions.................... B-42
Financial Statements.................................. B-
Report of Independent Accountants..................... B-
Appendix I -- General Investment Information.......... I-1
Appendix II -- Historical Performance Data............ II-1
Appendix III -- Information Relating to Prudential.... III-1
</TABLE>
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MF109B
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FUND HISTORY
The Fund was established as a Maryland corporation on July 28, 1980. By an
amendment to the Fund's Articles of Incorporation filed with the Maryland
Secretary of State on June 10, 1996, the Fund's name was changed from Prudential
Growth Opportunity Fund, Inc. (originally, the Fund's name was Prudential-Bache
Growth Opportunity Fund, Inc.), to Prudential Small Companies Fund, Inc. At a
meeting of the Fund's Board of Directors held on May 21, 1997, an amendment to
the Fund's Articles of Incorporation was approved to change the Fund's name from
Prudential Small Companies Fund, Inc. to Prudential Small Company Value Fund,
Inc.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(A) CLASSIFICATION. The Fund is an open-end, diversified, management
investment company.
(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's
investment objective is capital growth. It attempts to achieve that objective by
investing primarily in a carefully selected portfolio of common stocks generally
of small, less well known U.S. companies that typically have valuations which,
in the Subadviser's view, are temporarily low relative to the companies'
earnings, assets, cash flow, price/book value and private market value. This
section describes the Fund's principal and non-principal investment strategies
and risks of the Fund.
The Fund generally has invested in common stocks with smaller market
capitalizations than those of the stocks included in the Dow Jones Industrial
Average or the largest stocks included in the Standard & Poor's 500 Composite
Stock Index. As a result, the Fund's portfolio generally will be made up of
common stocks issued by companies whose market capitalizations typically is less
than $1.5 billion or a corresponding market capitalization in foreign markets.
Market capitalization is measured at the time of initial purchase. The Fund may,
however, invest in the securities of any issuer without regard to its size or
the market capitalization of its common stock. Companies in which the Fund is
likely to invest may have limited product lines, markets or financial resources
and may lack management depth. The securities of these companies may have
limited marketability and may be subject to more abrupt or erratic market
movements than securities of larger, more established companies or the market
averages in general. Investment income is of incidental importance, and the Fund
may invest in securities that do not produce any income. There can be no
assurance that the Fund's investment objective will be achieved.
The Subadviser believes that, in seeking to attain capital appreciation, it
is important to attempt to minimize losses. Accordingly, the Subadviser will
attempt to anticipate periods when stock prices generally decline. When, in the
Subadviser's judgment, such a period is imminent, the Fund will take defensive
measures, such as investing all or part of the Fund's assets in money market
instruments during this period. The Fund may also engage in various derivative
transactions, such as the purchase and sale of options on stocks, stock indexes
and foreign currencies, the purchase and sale of foreign currency forward
contracts and futures contracts on stock indexes and foreign currencies and
options thereon to hedge its portfolio and to attempt to enhance return.
EQUITY-RELATED SECURITIES
The equity-related securities in which the Fund may invest include common
stocks, preferred stocks, securities convertible or exchangeable for common
stocks or preferred stocks, equity investments in partnerships, joint ventures,
other forms of non-corporate investments, American Depositary Receipts (ADRs),
American Depositary Shares (ADSs) and warrants and rights exercisable for equity
securities.
CONVERTIBLE SECURITIES. The Fund may invest in preferred stocks or debt
securities that either have warrants attached or are otherwise convertible into
common stocks. A convertible security is typically a corporate bond (or
preferred stock) that may be converted at a stated price within a specified
period of time into a specified number of shares of common stock of the same or
a different issuer. Convertible securities are generally senior to common stocks
in a corporation's capital structure but are usually subordinated to similar
non-convertible 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 non-convertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in capital appreciation dependent upon a market price advance in the
convertible security's underlying common stock. Convertible securities also
include preferred stock which is technically an equity security.
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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 common stock). 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 security's underlying common 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.
AMERICAN DEPOSITARY RECEIPTS AND AMERICAN DEPOSITARY SHARES. ADRs and ADSs
are U.S. dollar-denominated certificates or shares issued by a United States
bank or trust company and represent the right to receive securities of a foreign
issuer deposited in a domestic bank or foreign branch of a United States bank
and traded on a United States exchange or in the over-the-counter market.
Generally, ADRs and ADSs are in registered form. There are no fees imposed on
the purchase or sale of ADRs and ADSs when purchased from the issuing bank or
trust company in the initial underwriting, although the issuing bank or trust
company may impose charges for the collection of dividends and the conversion of
ADRs and ADSs into the underlying securities. Investment in ADRs and ADSs has
certain advantages over direct investment in the underlying foreign securities
since: (1) ADRs and ADSs are denominated in U.S. dollars, registered
domestically, easily transferable, and market quotations are readily available
for them; 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 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.
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 than direct ownership of a handful of
properties, as well as greater income potential than an investment in common
stocks. 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.
FOREIGN SECURITIES
The Fund may invest up to 15% of its total assets in foreign equity and debt
securities. For purposes of this limitation, ADRs and ADSs are not deemed to be
foreign securities. In many instances, foreign securities may provide higher
yields but may be subject to greater fluctuations in price than securities of
domestic issuers which have similar maturities or quality.
Investing in securities of foreign companies and countries involves certain
considerations and risks that are not typically associated with investing in
U.S. government securities and securities of domestic companies. There may be
less publicly available information about a foreign issuer than a domestic one,
and foreign companies are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than exists in the
United States. Interest and dividends paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on such
investments as compared to dividends and interest paid to the Fund by domestic
companies or the U.S. government. There may be the possibility of
expropriations, seizure or nationalization of foreign deposits, confiscatory
taxation, political, economic or social instability or diplomatic developments
which could affect assets of the Fund held in foreign countries. Finally, the
establishment of exchange controls or other foreign governmental laws or
restrictions could adversely affect the payment of obligations.
To the extent the Fund's currency exchange transactions do not fully protect
the Fund against adverse changes in currency exchange rates, decreases in the
value of currencies of the foreign countries in which the Fund will invest
relative to the U.S. dollar will result in a corresponding decrease in the U.S.
dollar value of the Fund's assets denominated in those currencies (and
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possibly a corresponding increase in the amount of securities required to be
liquidated to meet distribution requirements). Conversely, increases in the
value of currencies of the foreign countries in which the Fund invests relative
to the U.S. dollar will result in a corresponding increase in the U.S. dollar
value of the Fund's assets (and possibly a corresponding decrease in the amount
of securities to be liquidated).
There may be less publicly available information about foreign companies and
governments compared to reports and ratings published about U.S. companies.
Foreign securities markets have substantially less volume than the New York
Stock Exchange and securities of some foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES
On January 1, 1999, 11 of the 15 member states of the European Monetary
Union introduced the "euro" as a common currency. During a three-year
transitional period, the euro will coexist with each participating state's
currency and, on July 1, 2002, the euro is expected to become the sole currency
of the participating states. During the transition period, the Fund will treat
the euro as a separate currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that may occur at
the time of the conversion, such as accrual periods, holiday conventions,
indexes, and other features may require the realization of a gain or loss by the
Fund as determined under existing tax law.
The Fund's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Fund's other service providers to address the
conversion. The Fund has not borne any expenses relating to these actions.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund also may engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to attempt
to enhance return but not for speculation. These strategies currently include
the use of options on stocks, stock indexes and foreign currencies. The Fund
also may purchase futures contracts on foreign currencies and stock indexes and
options thereon. 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 these strategies will
succeed. The Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. 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.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDEXES AND
STOCK INDEX FUTURES
CALL OPTIONS ON STOCK. The Fund may, from time to time, write (that is,
sell) call options on its portfolio securities. The Fund may only write call
options which are "covered," meaning that the Fund (1) owns an offsetting
position in the underlying security or (2) segregates cash or other liquid
assets in an amount equal to or greater than its obligation under the option.
Under the first circumstance, the Fund's losses are limited because it owns the
underlying position; under the second circumstance, in the case of a written
call option, the Fund's losses are potentially unlimited. There is no limitation
on the amount of call options the Fund may write. In addition, the Fund will not
permit the call to become uncovered prior to the expiration of the option or
termination through a closing purchase transaction as described below. The Fund
may write put and call options to generate additional
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income through the receipt of premiums, purchase put options in an effort to
protect the value of securities that it owns against a decline in market value
and purchase call options in an effort to protect against an increase in the
price of securities (or currencies) it intends to purchase. The Fund may also
purchase put and call options to offset previously written put and call options
of the same series.
A call option on equity securities gives the purchaser, in exchange for a
premium paid, the right for a specified period of time to purchase the
securities subject to the option at a specified price (the "exercise price" or
"strike price"). The writer of a call option, in return for the premium, has the
obligation, upon exercise of the option, to deliver, depending upon the terms of
the option contract, the underlying securities to the purchaser upon receipt of
the exercise price. The Fund's obligation to deliver the underlying security
against payment of the exercise price would terminate either upon expiration of
the option or earlier if the Fund were to effect a "closing purchase
transaction" through the purchase of an equivalent option on an exchange. There
can be no assurance that a closing purchase transaction can be effected.
In order to write a call option on an exchange, the Fund is required to
comply with the rules of The Options Clearing Corporation and the various
exchanges with respect to collateral requirements. The Fund may not purchase
call options except in connection with a closing purchase transaction. It is
possible that the cost of effecting a closing purchase transaction may be
greater than the premium received by the Fund for writing the option.
Generally, the Subadviser intends to write listed covered call options
during periods when it anticipates declines in the market values of portfolio
securities because the premiums received may offset to some extent the decline
in the Fund's net asset value (NAV) occasioned by such declines in market value.
Except as part of the "sell discipline" described below, the Subadviser will
generally not write listed covered call options when it anticipates that the
market values of the Fund's portfolio securities will increase.
One reason for the Fund to write call options is as part of a "sell
discipline." If the Subadviser decides that a portfolio security would be
overvalued and should be sold at a certain price higher than the current price,
the Fund could write an option on the stock at the higher price. Should the
stock subsequently reach that price and the option be exercised, the Fund would,
in effect, have increased the selling price of that stock, which it would have
sold at that price in any event, by the amount of the premium. In the event the
market price of the stock declined and the option were not exercised, the
premium would offset all or some portion of the decline. It is possible that the
price of the stock could increase beyond the exercise price; in that event, the
Fund would forego the opportunity to sell the stock at that higher price.
In addition, call options may be used as part of a different strategy in
connection with sales of portfolio securities. If, in the judgment of the
Subadviser, the market price of a stock is overvalued and it should be sold, the
Fund may elect to write a call option with an exercise price substantially below
the current market price. As long as the value of the underlying security
remains above the exercise price during the term of the option, the option will,
in all probability, be exercised, in which case the Fund will be required to
sell the stock at the exercise price. If the sum of the premium and the exercise
price exceeds the market price of the stock at the time the call option is
written, the Fund would, in effect, have increased the selling price of the
stock. The Fund would not write a call option in these circumstances if the sum
of the premium and the exercise price were less than the current market price of
the stock.
PUT OPTIONS ON STOCK. The Fund also may write listed put options. A put
option on equity securities gives the purchaser, in return for a premium, the
right, for a specified period of time, to sell the securities subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities underlying the option at the exercise
price. The Fund as the writer of a put option might, therefore, be obligated to
purchase underlying securities for more than their current market price.
Writing listed put options is a useful portfolio investment strategy when
the Fund has cash or other reserves available for investment as a result of
sales of Fund shares or, more importantly, because the Subadviser believes a
more defensive and less fully invested position is desirable in light of market
conditions. If the Fund wishes to invest its cash or reserves in a particular
security at a price lower than current market value, it may write a put option
on that security at an exercise price which reflects the lower price it is
willing to pay. The buyer of the put option generally will not exercise the
option unless the market price of the underlying security declines to a price
near or below the exercise price. If the Fund writes a listed put, the price of
the underlying stock declines and the option is exercised, the premium, net of
transaction charges, will reduce the purchase price paid by the Fund for the
stock. The price of the stock may decline by an amount in excess of the premium,
in which event the Fund would have foregone an opportunity to purchase the stock
at a lower price.
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If, prior to the exercise of a put option, the Subadviser determines that it
no longer wishes to invest in the stock on which the put option had been
written, the Fund may be able to effect a closing purchase transaction on an
exchange by purchasing a put option of the same series as the one which it has
previously written. The cost of effecting a closing purchase transaction may be
greater than the premium received on writing the put option and there is no
guarantee that a closing purchase transaction can be effected.
At the time a put option is written, the Fund will be required to segregate
until the put is exercised or has expired, with its custodian, State Street Bank
and Trust Company (the Custodian), cash or other liquid assets, marked-to-market
daily, equal in value to the amount the Fund will be obligated to pay upon
exercise of the put option.
STOCK INDEX OPTIONS. Except as described below, the Fund will write call
options on indexes only if on such date it holds a portfolio of stocks at least
equal to the value of the index times the multiplier times the number of
contracts. When the Fund writes a call option on a broadly-based stock market
index, the Fund will segregate or pledge to a broker as collateral for the
option, cash or other liquid assets, marked-to-market daily, with a market value
at the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate with the Fund's Custodian or pledge to a broker as collateral for
the option, at least ten "qualified securities," which are securities of an
issuer in such industry or market segment, with a market value at the time the
option is written of not less than 100% of the current index value times the
multiplier times the number of contracts. Those securities will include stocks
which represent at least 50% of the weighting of the industry or market segment
index and will represent at least 50% of the Fund's holdings in that industry or
market segment. No individual security will represent more than 25% of the
amount so segregated or pledged. If at the close of business on any day the
market value of such qualified securities so segregated or pledged falls below
100% of the current index value times the multiplier times the number of
contracts, the Fund will segregate or pledge an amount in cash or other liquid
assets equal in value to the difference. In addition, when the Fund writes a
call on an index which is in-the-money at the time the call is written, the Fund
will segregate with the Custodian or pledge to the broker as collateral cash or
other liquid assets, marked-to-market daily, equal in value to the amount by
which the call is in-the-money times the multiplier times the number of
contracts. Any amount segregated pursuant to the foregoing sentence may be
applied to the Fund's obligation to segregate additional amounts in the event
that the market value of the qualified securities falls below 100% of the
current index value times the multiplier times the number of contracts. A
"qualified security" is an equity security that is listed on a national
securities exchange or listed on the National Association of Securities Dealers
Automated Quotation System against which the Fund has not written a stock call
option and which has not been hedged by the Fund by the sale of stock index
futures. However, if the Fund holds a call on the same index as the call written
where the exercise price of the call held is equal to or less than the exercise
price of the call written or greater than the exercise price of the call written
if the difference is segregated by the Fund in cash or other liquid assets with
the Fund's Custodian, it will not be subject to the requirements described in
this paragraph.
STOCK INDEX FUTURES. The Fund will engage in transactions in stock index
futures contracts as a hedge against changes resulting from market conditions in
the values of securities which are held in the Fund's portfolio or which it
intends to purchase. The Fund will engage in those transactions when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Fund or for return enhancement. The Fund may not purchase or
sell stock index futures if, immediately thereafter, more than one-third of its
net assets would be hedged and, in addition, except as described above in the
case of a call written and held on the same index, will write call options on
indices or sell stock index futures only if the amount resulting from the
multiplication of the then current level of the index (or indexes) upon which
the option or future contract(s) is based, the applicable multiplier(s), and the
number of futures or options contracts which would be outstanding, would not
exceed one-third of the value of the Fund's net assets. In instances involving
the purchase of stock index futures contracts by the Fund, an amount of cash or
other liquid assets, marked-to-market daily, having a value equal to the market
value of the futures contracts, will be segregated with the Fund's Custodian, a
futures commissions merchant, and/or in a margin account with a broker to
collateralize the position and thereby insure that the use of such futures is
unleveraged.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the Investment
Company Act), are exempt from the definition of "commodity pool operator,"
provided all of the Fund's commodity futures or commodity options transactions
constitute BONA FIDE hedging transactions within the meaning of the regulations
of the Commodity Futures Trading Commission (CFTC). The Fund will use stock
index futures and options on futures as described herein in a manner consistent
with this requirement.
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RISKS OF TRANSACTIONS IN STOCK 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 its
investors, may lose money if the Fund is unsuccessful in its use of these
strategies.
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
Stock 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 upon movements in the level of
the index rather than the price of a particular stock, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of stock prices in the stock market generally or in
an industry or market segment rather than movements in the price of a particular
stock. Accordingly, successful use by the Fund of options on indexes would be
subject to the Subadviser's ability to predict correctly movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price 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
securities included in the index. If this occurred, the Fund would not be able
to close out options that 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 that 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 those 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 Subadviser's
opinion, the market for those options has developed sufficiently that the risk
in connection with those 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 like the Fund cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Fund will write call options on indices only under the
circumstances described above under "Limitations on Purchase and Sale of Stock
Options, Options on Stock Indexes and Stock Index Futures."
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 that event, the Fund would bear a loss on the
call that is not completely offset by movements in the price of the Fund's
portfolio. It also is 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 that is not offset by an increase in the value of its portfolio and
might also experience a loss in its portfolio. However, because the value of a
diversified portfolio will, over time, tend to move in the same direction as the
market, movements in the value of the Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if the Fund fails to anticipate an
exercise, it may have to borrow (in amounts not exceeding 20% of the Fund's
total assets) pending settlement of the sale of securities in its portfolio and
would incur interest charges thereon.
When the Fund has written a call, there also is 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
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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 stock portfolio in order to make settlement in cash, and the
price of those 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 that 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. Purchase and sale of OTC options
subject the Fund to risks not present with exchange traded options. OTC options
also are subject to certain additional risks. 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, as amended (Securities Act), 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 currently are 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 those 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.
RISKS OF OPTIONS ON FOREIGN CURRENCIES
The Fund may purchase and write put and call options on foreign currencies
traded on securities exchanges or boards of trade (foreign and domestic) for
hedging purposes in a manner similar to that in which foreign currency forward
contracts and futures contracts on foreign currencies will be employed. Options
on foreign currencies are similar to options on stock, except that the Fund has
the right to take or make delivery of a specified amount of foreign currency,
rather than stock.
The Fund may purchase and write options to hedge the Fund's portfolio
securities denominated in foreign currencies. If there is a decline in the
dollar value of a foreign currency in which the Fund's portfolio securities are
denominated, the dollar value of such securities will decline even though the
foreign currency value remains the same. To hedge against the decline of the
foreign currency, the Fund may purchase put options on that foreign currency. If
the value of the foreign currency declines, the
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gain realized on the put option would offset, in whole or in part, the adverse
effect such decline would have on the value of the portfolio securities.
Alternatively, the Fund may write a call option on the foreign currency. If the
value of the foreign currency declines, the option would not be exercised and
the decline in the value of the portfolio securities denominated in that foreign
currency would be offset in part by the premium the Fund received for the
option.
If, on the other hand, the Subadviser anticipates purchasing a foreign
security and also anticipates a rise in the value of that foreign currency
(thereby increasing the cost of such security), the Fund may purchase call
options on the foreign currency. The purchase of such options could offset, at
least partially, the effects of the adverse movements of the exchange rates.
Alternatively, the Fund could write a put option on the currency and, if the
exchange rates move as anticipated, the option would expire unexercised.
Because there are two currencies involved, developments in either or both
countries can affect the values of options on foreign currencies. Risks include
those described above under "Foreign Securities," including government actions
affecting currency valuation and the movements of currencies from one country to
another. The quantities of currency underlying option contracts represent odd
lots in a market dominated by transactions between banks; this can mean extra
transaction costs upon exercise. Option markets may be closed while
round-the-clock interbank currency markets are open, and this can create price
and rate discrepancies.
RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS
A foreign currency forward contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (typically large commercial banks)
and their customers. A forward contract generally has no deposit requirements
and commissions are charged for such trades.
The Fund's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although there
are no limits on the number of forward contracts that the Fund may enter into,
the Fund may not position hedge (including cross hedges) with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of forward currency) of the
securities being hedged. The Fund may not use forward contracts to generate
income, although the use of those contracts may incidentally generate income.
The Fund will not speculate in forward contracts.
The Fund may enter into foreign currency forward contracts in several
circumstances. When the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when the Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
that it holds, the Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, the Fund may be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the foreign currency during the period between the date on which
the security is purchased or sold, or on which the dividend or interest payment
is declared, and the date on which such payments are made or received.
Additionally, when the Subadviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract for a fixed amount of dollars, to sell
the amount of foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. If the Fund enters into a position hedging
transaction, the transaction will be "covered" by the position being hedged, or
the Fund's Custodian will segregate cash or other liquid assets in an amount
equal to the value of the Fund's total assets committed to the consummation of
such forward contracts (less the value of the "covering" positions, if any). The
assets segregated will be marked-to-market daily, and if the value of the assets
segregated declines, additional cash or other liquid
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assets will be placed in the account so that the value of the account will, at
all times, equal the amount of the Fund's net commitment with respect to such
contract. The Fund's ability to enter into foreign currency forward contracts
may be limited by certain requirements for qualification as a regulated
investment company under the Internal Revenue Code. See "Taxes, Dividends and
Distributions."
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in foreign currency forward contracts generally will be
limited to the transactions described above. Of course, the Fund is not required
to enter into such transactions with regard to its foreign currency-denominated
securities. It also should be recognized that this method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities that are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
RISKS OF TRANSACTIONS IN 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 CFTC. The Fund, and thus its investors, may lose money
through any unsuccessful use of these strategies. These futures contracts and
related options will be on stock indexes and foreign currencies. A futures
contract is an agreement to purchase or sell an agreed amount of securities or
currencies at a set price for delivery in the future. 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. The Fund may purchase and sell futures contracts or related options as a
hedge against changes in market conditions.
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
contract forecast of equity prices, currency rates, market trends or
international political trends by the Subadviser may still not result in a
successful hedging transaction. The use of these instruments will hedge only the
currency risks associated with investments in foreign securities, not market
risk.
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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 on 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 that 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.
Futures contracts and related options are generally subject to segregation
requirements of the Commission and 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. The
Fund may also enter into futures or related options contracts for income
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.
Successful use of futures contracts by the Fund also is subject to the
ability of the Subadviser to predict correctly movements in the direction of
markets and other factors affecting equity securities and currencies generally.
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 those 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. Certain futures exchanges or boards of trade have
established daily limits on the amount that the price of futures contracts or
related options may vary, either up or down, from the previous day's settlement
price. These daily limits may restrict the Fund's ability to purchase or sell
certain futures contracts or related options on any particular day.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures market and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
the Subadviser's predictions of movements in the direction of the securities or
foreign currency markets are inaccurate, the adverse consequences to the Fund
may leave the Fund in a worse position than if such strategies were not used.
Risks inherent in the use of these strategies include: (1) dependence on the
Subadviser's ability to predict correctly movements in the direction of
securities prices and currency markets; (2) imperfect correlation between the
price of options and futures contracts and options thereon and movements in the
prices of the securities or currencies being hedged; (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; (5) the 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.
SEGREGATED ASSETS
The Fund will segregate with its Custodian 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
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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.
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 usually is quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money is
invested in the security. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss. The Fund participates in a joint repurchase
account with other investment companies managed by the Manager, pursuant to an
order of the Commission.
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 Custodian will likewise
segregate securities sold on a delayed delivery basis. 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 NAV.
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, emergency or extraordinary
purposes or for the clearance of transactions. The Fund may pledge up to 20% of
its total assets to secure these borrowings. However, the Fund will not purchase
portfolio securities when borrowings exceed 5% of the value of the Fund's total
assets.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an equal
amount of such securities (or securities convertible into or exchangeable for
such securities of the same issuer) as the securities sold short (a short sale
against-the-box). No more than 25% of the Fund's net assets (determined at the
time of the short sale) may be subject to such sales.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in illiquid
securities, including repurchase agreements that 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
applicable 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, securities that are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities that 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
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and might thereby experience difficulty satisfying redemptions within seven
days. A mutual fund also might have to register such restricted securities 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 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 Subadviser 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.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market are treated as liquid only when deemed liquid under procedures
established by the Board of Directors. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. The Subadviser will monitor the liquidity of
such restricted securities subject to the supervision of the Board of Directors.
In reaching liquidity decisions, the Subadviser 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 Subadviser; and (b)
it must not be "traded flat" (that is, without accrued interest) or in default
as to principal or interest. If the investment adviser determines that a
security is no longer liquid, it shall review the portfolio to determine whether
the Fund must take any action to ensure that its portfolio complies with the
liquidity limitation.
The staff of the Commission has taken the position that purchased
over-the-counter options and the assets used as "cover" for written
over-the-counter options are illiquid securities unless the Fund and the
counterparty have provided for the Fund, at the Fund's election, to unwind the
over-the-counter option. The exercise of such an option ordinarily would involve
the payment by the Fund of an amount designed to reflect the counterparty's
economic loss from an early termination, but does allow the Fund to treat the
assets used as "cover" as "liquid."
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in shares of other
investment companies. Generally, the Fund does not intend to invest more than 5%
of its total assets in such securities. To the extent the Fund does invest in
securities of other investment companies, shareholders may be subject to
duplicate management and advisory fees.
(D) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When adverse market or economic conditions dictate a defensive strategy, the
Fund may temporarily invest without limit in money market instruments, including
commercial paper of U.S. corporations, certificates of deposit, bankers'
acceptances and other obligations of domestic banks, and obligations issued or
guaranteed by the U.S. Government, its agencies or its instrumentalities. Money
market instruments typically have a maturity of one year or less as measured
from the date of purchase.
The Fund also may temporarily hold cash or invest in money market
instruments pending investment of proceeds from new sales of Fund shares or
during periods of portfolio restructuring.
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(E) PORTFOLIO TURNOVER
The Fund anticipates that its annual portfolio turnover rate will not exceed
100% in normal circumstances. For the years ended September 30, 1999 and 1998,
the Fund's portfolio turnover rate was % and 36%, respectively. The portfolio
turnover rate generally is 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 such portfolio securities. 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 that 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 the lesser of (1) 67% of the voting 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) With respect to 75% of the Fund's total assets, invest more than 5% of
the value of its total assets in the securities of any one issuer (other than
obligations issued or guaranteed by the United States Government, its agencies
or instrumentalities). It is the current policy (but not a fundamental policy)
of the Fund not to invest more than 5% of the value of its total assets in
securities of any one issuer.
(2) Purchase more than 10% of the outstanding voting securities of any one
issuer.
(3) Invest more than 25% of the value of its total assets in securities of
issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities.
(4) Purchase or sell real estate or interests therein, although the Fund may
purchase securities of issuers which engage in real estate operations and
securities which are secured by real estate or interests therein.
(5) Purchase or sell commodities or commodity futures contracts, except that
transactions in foreign currency financial futures contracts and forward
contracts and related options are not considered to be transactions in
commodities or commodity contracts.
(6) Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest in the
securities of companies which operate, invest in or sponsor such programs.
(7) Purchase securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which not more than 10% of its total assets (determined at the time of
investment) would be invested in such securities or except in connection with a
merger, consolidation, reorganization or acquisition of assets.
(8) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of the 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. Secured borrowings may take the form of
reverse repurchase agreements, pursuant to which the Fund would sell portfolio
securities for cash and simultaneously agree to repurchase them at a specified
date for the same amount of cash plus an interest component. For purposes of
this restriction, obligations of the Fund to Directors pursuant to deferred
compensation arrangements, the purchase and sale of securities on a when-issued
or delayed delivery basis, the purchase and sale of forward foreign currency
exchange contracts and financial futures contracts and related options and
collateral arrangements with respect to margins for financial futures contracts
and with respect to options are not deemed to be the issuance of a senior
security or a pledge of assets.
(9) Make loans of money or securities, except by the purchase of debt
obligations in which the Fund may invest consistently with its investment
objective and policies or by investment in repurchase agreements.
B-14
<PAGE>
(10) Make short sales of securities except short sales against-the-box.
(11) Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. (For the
purpose of this restriction, the deposit or payment by the Fund of initial or
maintenance margin in connection with financial futures contracts is not
considered the purchase of a security on margin.)
(12) Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act, in disposing of a
portfolio security.
(13) Invest for the purpose of exercising control or management of any other
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>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (74) Director President and Director of BMC Fund, Inc., a closed-end investment
company; formerly, Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the
Board of Trustees of Mars Hill College; Director of The High
Yield Income Fund, Inc.; Director or Trustee of 44 funds within
the Prudential Mutual Funds.
Delayne Dedrick Gold (60) Director Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.; Director or Trustee of 44 funds within the
Prudential Mutual Funds.
*Robert F. Gunia (52) Vice President and Director Vice President (since September 1997) of Prudential; Executive
Vice President and Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM); Senior Vice President
(since March 1987) of Prudential Securities Incorporated
(Prudential Securities); formerly Chief Administrative Officer
(July 1990-September 1996), Director (January 1989-September
1996); Executive Vice President, Treasurer and Chief Financial
Officer (June 1987-September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Director of The Asia
Pacific Fund, Inc. (since May 1989); Director of The High Yield
Income Fund, Inc.; Director or Trustee of 44 funds within the
Prudential Mutual Funds.
Douglas H. McCorkindale (59) Director Vice Chairman (since March 1984) and President (since September
1997) of Gannett Co. Inc. (publishing and media) (since March
1984); Director of Gannett Co. Inc., Frontier Corporation and
Continental Airlines, Inc.; Director or Trustee of 23 funds
within the Prudential Mutual Funds.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Thomas T. Mooney (57) Director President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for
Governmental Research, Inc.; Director of Blue Cross of
Rochester, Monroe County Water Authority, Rochester Jobs, Inc.,
Executive Service Corps of Rochester, Monroe County Industrial
Development Corporation and Northeast Midwest Institute;
President, Director and Treasurer of First Financial Fund, Inc.
and The High Yield Plus Fund, Inc.; Director or Trustee of 33
other funds within the Prudential Mutual Funds.
Stephen P. Munn (56) 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); Director or Trustee of 18 funds within the Prudential
Mutual Funds.
*David R. Odenath, Jr. (42) Director Officer in Charge, President, Chief Executive Officer and Chief
Operating Officer (since June 1999), PIFM; Senior Vice President
(since June 1999), Prudential; Senior Vice President (August
1993-May 1999), PaineWebber Group Inc.
Richard A. Redeker (55) Director Formerly President, Chief Executive Officer and Director (October
1993-September 1996), Prudential Mutual Fund Management, Inc.;
Executive Vice President, Director and Member of Operating
Committee (October 1993-September 1996), Prudential Securities.
Director (October 1993-September 1996) of Prudential Securities
Group, Inc., Executive Vice President, The Prudential Investment
Corporation (January 1994-September 1996); Director (January
1994-September 1996) of Prudential Mutual Fund Distributors,
Inc. and Prudential Mutual Fund Services, Inc. and Senior
Executive Vice President and Director of Kemper Financial
Services, Inc. (September 1978-September 1993); and Director or
Trustee of 30 funds within the Prudential Mutual Funds.
Robin B. Smith (59) Director Chairman and Chief Executive Officer (since August 1996) of
Publisher's Clearing House; 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;
Director or Trustee of 32 funds within the Prudential Mutual
Funds.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
*John R. Strangfeld, Jr. (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 The Prudential Insurance Company of America
(Prudential); President and Director or Trustee of 44 funds
within the Prudential Mutual Funds.
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 of Time Magazine (May 1989-March 1991); President,
Publisher and Chief Executive Officer of The Detroit News
(February 1986-August 1989); and Member of the Advisory Board,
Chase Manhattan Bank-Westchester; Director or Trustee of 30
funds within the Prudential Mutual Funds.
Clay T. Whitehead (60) Director President of National Exchange Inc. (new business development
firm) (since May 1983); Director or Trustee of 18 funds within
the Prudential Mutual Funds.
Grace C. Torres (40) Treasurer and Principal First Vice President (since December 1996) of PIFM; First Vice
Financial and President (since March 1993) of Prudential Securities; formerly
Accounting Officer First Vice President (March 1994-September 1996) of Prudential
Mutual Fund Management, Inc.
Stephen M. Ungerman (45) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments;
formerly First Vice President of Prudential Mutual Fund
Management, Inc. (February 1993-September 1996).
Marguerite E. H. Morrison (43) Secretary Vice President (since December 1996) of PIFM; Vice President and
Associate General Counsel (since September 1987) of Prudential
Securities; formerly Vice President and Associate General
Counsel (June 1991-September 1996) of Prudential Mutual Fund
Management, Inc.
</TABLE>
- ------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
his 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 Fund has Directors who, in addition to overseeing the actions of the
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Fund's officers who conduct
and supervise the daily business operations of the Fund.
The Board of Directors has 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. Mr. Beach is scheduled to retire on December 31, 1999.
B-17
<PAGE>
Pursuant to 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 annual compensation of $3,000, 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 Director's fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee which accrues 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 the Fund (the Fund rate). Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Director. The Fund's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Fund.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended September 30, 1999 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's board and that of all other funds managed by
the Manager (Fund Complex) for the calendar year ended December 31, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM FUND
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF DIRECTOR FROM FUND TO DIRECTORS
- ------------------------------------------------- ------------- -----------------
<S> <C> <C>
Edward D. Beach $ $ 135,000(44/71)*
Delayne Dedrick Gold $ $ 135,000(44/71)*
Robert F. Gunia+ -- --
Douglas H. McCorkindale** $ $ 70,000(23/40)*
Thomas T. Mooney** $ $ 115,000(35/70)*
Stephen P. Munn $ $ 45,000(18/24)*
Richard A. Redeker -- --
Robin B. Smith** $ $ 90,000(32/41)*
John R. Strangfeld, Jr.+ -- --
Louis A. Weil, III $ $ 90,000(30/54)*
Clay T. Whitehead $ $ 45,000(18/24)*
</TABLE>
- ------------------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
** Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1997, includes amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest, total compensation amounted to $71,145, $119,740 and $116,225 for
Douglas H. McCorkindale, Thomas T. Mooney and Robin B. Smith, respectively.
+ Interested Directors do not receive compensation from the Fund or any other
fund in the Fund Complex.
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 November , 1999, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of November , 1999, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest
were
As of November , 1999, Prudential Securities was the record holder for
other beneficial owners of Class A shares (or % of the outstanding
Class A shares), Class B shares (or % of the outstanding Class B
shares),
B-18
<PAGE>
Class C shares (or % of the outstanding Class C shares), and
Class Z shares (or % of the outstanding Class Z shares) of the Fund. In the
event of any meetings of shareholders, Prudential Securities will forward, or
cause the forwarding of, proxy materials to the 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
(formerly, Prudential Mutual Fund Management LLC), Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077. The Manager serves as manager to
all of the other open-end management investment companies that, together with
the Fund, comprise the Prudential Mutual Funds. See "How the Fund is
Managed--Manager" in the Prospectus. As of October 31, 1999, the Manager managed
and/or administered open-end and closed-end management investment companies with
assets of approximately $ billion. According to the Investment Company
Institute, as of , 1999, the Prudential Mutual Funds were the largest
family of mutual funds in the United States.
The Manager is a subsidiary of Prudential Securities and The Prudential
Insurance Company of America (Prudential). Prudential Mutual Fund Services LLC
(the Transfer Agent), a wholly owned subsidiary of the Manager serves as the
transfer agent for the Prudential Mutual Funds and, in addition, provides
customer service, recordkeeping and management and administration services to
qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), the Manager, 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, the Manager is obligated to keep certain
books and records of the Fund. PIFM has hired The Prudential Investment
Corporation to provide subadvisory services to the Fund. The Manager also
administers the Fund's corporate affairs and, in connection therewith, furnishes
the Fund with office facilities, together with those ordinary clerical and
bookkeeping services which are not being furnished by the Fund's Custodian and
the Transfer Agent. The services of the Manager for the Fund are not exclusive
under the terms of the Management Agreement and the Manager is free to, and
does, render management services to others.
For its services, the Manager receives, pursuant to the Management
Agreement, a fee at an annual rate of .70 of 1% of the Fund's average daily net
assets. The fee is computed daily and payable monthly. The Management Agreement
also provides that, in the event the expenses of the Fund (including the fees of
the Manager, but excluding interest, taxes, brokerage commissions, distribution
fees and litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business) for any
fiscal year exceed the lowest applicable annual expense limitation established
and enforced pursuant to the statutes or regulations of any jurisdiction in
which the Fund's shares are qualified for offer and sale, the compensation due
to the Manager will be reduced by the amount of such excess. Reductions in
excess of the total compensation payable to the Manager will be paid by the
Manager to the Fund. No jurisdiction currently limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund, the
Manager bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of the
Manager;
(b) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments, pursuant to the subadvisory agreement
between the Manager and the Subadviser (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (1) the fees payable to the Manager, (2) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Subadviser, (3) 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, (4) the charges and expenses of legal counsel and independent
accountants for the Fund, (5) brokerage commissions and any issue or
B-19
<PAGE>
transfer taxes chargeable to the Fund in connection with its securities
transactions, (6) all taxes and corporate fees payable by the Fund to
governmental agencies, (7) the fees of any trade associations of which the Fund
may be a member, (8) the cost of stock certificates representing shares of the
Fund, (9) the cost of fidelity and liability insurance, (10) the fees and
expenses involved in registering and maintaining registration of the Fund and of
its shares with the Commission and the states, including the preparation and
printing of the Fund's registration statements and prospectuses for such
purposes, (11) 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, (12)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business, and (13) distribution
fees.
The Management Agreement provides that the Manager 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 fiscal years ended September 30, 1999, 1998 and 1997, the Fund
incurred management fees of $ , $9,138,728, and $5,864,087, respectively.
The Manager has entered into the Subadvisory Agreement with the Subadviser.
The Subadvisory Agreement provides that the Subadviser will furnish investment
advisory services in connection with the management of the Fund. In connection
therewith, the Subadviser is obligated to keep certain books and records of the
Fund. The Manager continues to have responsibility for all investment advisory
services pursuant to the Management Agreement and supervises the Subadviser's
performance of such services. The Subadviser is reimbursed by the Manager for
the reasonable costs and expenses incurred by the Subadviser in furnishing
investment advisory services.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, the Manager or the Subadviser 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 (the Distributor), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts as the
distributor of 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 expense of distributing
the Fund's Class A, Class B and Class C shares. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which are paid for or reimbursed 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.
B-20
<PAGE>
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 expenses with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares.
The Class A Plan provides that (1) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. The Distributor has
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
for the fiscal year ending September 30, 2000 and contractually limited its
distribution-related fees for the fiscal year ended September 30, 1999 to .25 of
1% of the average daily net assets of the Class A shares.
For the fiscal year ended September 30, 1999, the Distributor received
payments of $ under the Class A Plan and spent approximately $ in
distributing the Fund's shares. This amount was primarily expended for payment
of account servicing fees to financial advisers and other persons who sell Class
A shares. For the fiscal year ended September 30, 1999, the Distributor also
received approximately $ in initial sales charges.
CLASS B PLAN AND CLASS C PLANS. Under the Class B and Class C Plans, the
Fund pays the Distributor for its distribution-related expenses with respect to
Class B and Class C shares at an annual rate of 1% of the average daily net
assets of each of the Class B and Class C shares. The Class B and Class C Plans
provide for the payment to the Distributor of (1) an asset-based sales charge of
.75 of 1% of the average daily net assets of each of the Class B and Class C
shares, respectively, and (2) a service fee of .25 of 1% of the average daily
net assets of each of the Class B and Class C shares. The service fee is used to
pay for personal service and/or the maintenance of shareholder accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders and, with respect to Class C shares, an initial sales
charge.
CLASS B PLAN. For the fiscal year ended September 30, 1999, the Distributor
received $ from the Fund under the Class B Plan and spent approximately
$ in distributing the Class B shares. It is estimated that of the latter
amount, approximately % ($ ) was spent on printing and mailing of
prospectuses to other than current shareholders; % ($ ) was spent on
compensation to broker-dealers for commissions to its representatives and other
expenses, including an allocation on account of overhead and other branch office
distribution-related expenses, incurred for distribution of Class B shares; and
% ($ ) was spent on the aggregate of (1) payments of commissions and
account servicing fees to financial advisers ( % or $ ) and (2) an
allocation on account of overhead and other branch office distribution-related
expenses ( % or $ ). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' and Pruco Securities Corporation's (Prusec's) branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. For the
fiscal year ended September 30, 1999, the Distributor received approximately
$ in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended September 30, 1999, the Distributor
received $ from the Fund under the Class C Plan and spent approximately
$ in distributing the Fund's Class C shares. It is estimated that of the
latter amount, approximately % ($ ) was spent on printing and mailing of
prospectuses to other than current shareholders; % ($ ) was spent on
compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation on account of overhead and other branch office
distribution-related expenses, incurred for distribution of Class C shares; and
% ($ ) was spent on the aggregate of (1) commission credits to
Prudential Securities branch offices, for payments of commissions and account
servicing fees to financial advisers ( % or $ ) and (2) an allocation
on account of overhead and other branch office distribution-related expenses
( % or $ ).
B-21
<PAGE>
The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. For the fiscal year ended September 30, 1999, the Distributor
received approximately $ in contingent deferred sales charges
attributable to Class C shares. For the fiscal year ended September 30, 1999,
the Distributor also received approximately $ in initial sales charges.
Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of the Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the Class A, Class B and Class C Plan or in any agreement related to
the Plans (the Rule 12b-1 Directors), cast in person at a meeting called for the
purpose of voting on such continuance. The Plans may each be terminated at any
time, without penalty, by the vote of a majority of the Rule 12b-1 Directors or
by the vote of the holders of a majority of the outstanding shares of the
applicable class on not more than 30 days' written notice to any other party to
the Plans. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders of
the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), 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 contractually 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 the 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 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 who
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons or
otherwise.
FEE WAIVERS/SUBSIDIES
The Manager may from time to time waive all or a portion of its management
fee and subsidize all or a portion of the operating expenses of the Fund. In
addition, the Distributor has contractually agreed to waive a portion of its
distribution fees for the Class A shares as described above. Fee waivers and
subsidies will increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
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 included in the calculation of the 6.25%
limitation. The annual asset-based sales charge 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.
B-22
<PAGE>
(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.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
PMFS is a wholly-owned subsidiary of 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 $10.00, a new account set-up fee for each manually established
account of $2.00 and a monthly inactive zero balance account fee per shareholder
account of $.20. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.
[Independent Accountants], 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.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, options
on securities and futures contracts for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section, the
term "Manager" includes the Subadviser. Purchases and sales of securities or
futures contracts on a securities exchange or board of trade are effected
through brokers or futures commission merchants who charge a commission for
their services. On foreign securities exchanges, commissions may be fixed.
Orders may be directed to any broker or futures commission merchant, including,
to the extent and in the manner permitted by applicable law, Prudential
Securities and its affiliates. 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.
In the over-the-counter markets, securities 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 may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities (or any affiliate)
acts as principal. Thus it will not deal in over-the-counter securities 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.
In placing orders for portfolio securities or futures contracts of the Fund,
the Manager's overriding objective is to obtain the best possible combination of
favorable 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 products and/or services, such as
research reports, research compilations, statistical and economic data, computer
data bases, 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
B-23
<PAGE>
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 identity 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 provides 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 or 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, the Manager may use Prudential
Securities 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 or futures
commission merchants 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 or futures commission
merchant in a commensurate arm's-length transaction. Furthermore, the Board of
Directors of the Fund, including a majority of the non-interested Directors, has
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Prudential Securities (or any
affiliate) are consistent with the foregoing standard. In accordance with
Section 11(a) of the Securities Exchange Act of 1934, Prudential Securities may
not retain compensation for effecting transactions on a national securities
exchange for 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) also are subject to such fiduciary standards as may be
imposed upon Prudential Securities (or such affiliate) by applicable law.
The table presented below shows certain information regarding the payment of
commissions by the Fund, including the amount of such commissions paid to
Prudential Securities for the three-year period ended September 30, 1999.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................... $ $1,812,871 $1,594,915
Total brokerage commissions paid to
Prudential Securities.................. $ $ 2,049 $ 1,380
Percentage of total brokerage
commissions paid to Prudential
Securities.............................% .001% .09%
</TABLE>
Of the total brokerage commissions paid by the Fund for the fiscal year
ended September 30, 1999, $ ( % of gross brokerage transactions) was
paid to firms which provided research, statistical or other services provided to
the Manager on behalf of the Fund. The Manager 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 September 30, 1999. As of September 30, 1999, the Fund held
securities of in the aggregate amount of .
B-24
<PAGE>
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 1 billion shares of common stock, $.01 par
value per share divided into four classes, designated Class A, Class B, Class C
and Class Z shares. Class A, Class B, Class C and Class Z shares each consist of
250 million authorized shares. 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 by the majority vote of shareholders of that series or class.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share of
each class is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of the Fund is
entitled to its portion of all of the Fund's assets after all debt and expenses
of the Fund have been paid. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon the vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business.
Under the Articles of Incorporation, the Directors may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. All consideration received by
the Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Under the Investment Company Act, shareholders of any
additional series of shares would normally have to approve the adoption of any
advisory contract relating to such series and of any changes in the investment
policies related therein. The Directors do not intend to authorize the creation
of additional series at the present time.
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
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.
B-25
<PAGE>
PURCHASE BY WIRE
For an initial purchase of shares of the Fund by wire, you must complete an
application and telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Small Company Value Fund, Inc., specifying on
the wire the account number assigned by PMFS and your name and identifying the
class in which you are eligible to invest (Class A, Class B, Class C or Class Z
shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York Time) on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Small Company
Value 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 of
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 at 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 Fund's NAV at September 30, 1999, the maximum offering price
of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share................... $
Maximum sales charge (5% of offering price)..............................
---------
Maximum offering price................................................... $
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*.................................................................. $
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*.................................................................. $
Sales charge (1% of offering price)......................................
---------
Offering price...........................................................
---------
---------
CLASS Z
Net asset value, offering price and redemption price per Class Z share... $
---------
---------
--------------------
* Class B and Class C shares are subject to a contingent
deferred sales charge on certain redemptions.
</TABLE>
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 a 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.
B-26
<PAGE>
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 for more than 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 CHARGES--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, the Manager and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent,
- employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,
- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service
with Prudential or one of its subsidiaries,
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases at
NAV are permitted by such person's employer,
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one year
in the case of Benefit Plans, (2) the purchase is made with proceeds of a
redemption of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (3) the financial
adviser served as the client's broker on the previous purchase,
- investors in Individual Retirement Accounts, provided the purchase is made
in a directed rollover to such Individual Retirement Account or with the
proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential provides administrative or recordkeeping services and further
provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution,
B-27
<PAGE>
- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services (for example, mutual
fund "wrap" or asset allocation programs), and
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or financial
planner charges the clients a separate fee for its services (for example,
mutual fund "supermarket programs").
Class A shares also may be purchased at NAV by members of the Board of
Directors of Prudential.
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
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the 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 charges are 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 charges applicable to
larger purchases. See the table of breakpoints under "How to Buy, Sell and
Exchange Shares of the Fund--Reducing or Waiving Class A's Initial Sales Charge"
in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual
- the individual's spouse, their children and their parents
- the individual's and spouse's Individual Retirement Account (IRA)
- any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a corporation
will be deemed to control the corporation, and a partnership will be deemed
to be controlled by each of its general partners)
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse and
- one or more employee benefit plans of a company controlled by an
individual.
Also, 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 charges will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges also are 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.
B-28
<PAGE>
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent or
its affiliates and through your broker will not be aggregated to determine the
reduced sales charge.
An Investment Letter of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales charge applicable to the amount represented by the goal, as if it
were a single investment. Escrowed Class A shares totaling 5% of the dollar
amount of the Letter of Intent will be held by the Transfer Agent in the name of
the purchaser. The effective date of an Investment Letter of Intent may be
back-dated up to 90 days, in order that any investments made during this 90-day
period, valued at the purchaser's cost, can be applied to the fulfillment of the
Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser is required
to pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charge actually paid. Such payment
may be made directly to the Distributor or, if not paid, the Distributor will
liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of Shares--
Contingent Deferred Sales Charge" below.
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-29
<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 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, or
- 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 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 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 also are 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 shares 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.
B-30
<PAGE>
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence of
authority acceptable to the Transfer Agent must be 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 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.
B-31
<PAGE>
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 purchased
before November 2, 1998) will be subject to a 1% CDSC. The CDSC will be deducted
from the redemption proceeds and reduce the amount paid to you. The CDSC will be
imposed on any redemption by you which reduces the current value of your Class B
or Class C shares to an amount which is lower than the amount of all payments by
you for shares during the preceding six years, in the case of Class B shares,
and 18 months, in the case of Class C shares (one year for Class C shares
purchased before November 2, 1998). A CDSC will be applied on the lesser of the
original purchase price or the current value of the shares being redeemed.
Increases in the value of your shares or shares acquired through reinvestment of
dividends or distributions are not subject to a CDSC. The amount of any CDSC
will be paid to and retained by the Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund.
The following table sets forth the rates of the CDSC applicable to
redemption 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 Class B 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; then of amounts representing the cost of Class B shares acquired prior
to July 1, 1985; 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 decide to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain, or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
B-32
<PAGE>
The CDSC also will be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential Mutual Funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable Value
Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or,
in the case of a trust, a copy of the grantor's
death certificate, plus a copy of the trust
agreement identifying the grantor.
Disability--An individual will be A copy of the Social Security Administration award
considered disabled if he or she is letter or a letter from a physician on the
unable to engage in any substantial physician's letterhead stating that the shareholder
gainful activity by reason of any (or, in the case of a trust, the grantor) is
medically determinable physical or permanently disabled. The letter must also indicate
mental impairment which can be expected the date of disability.
to result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the custodial
Custodial Account firm indicating (1) the date of birth of the
shareholder and (2) 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
B-33
<PAGE>
following formula: (1) 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 (2)
multiplied by the total number of Class B shares purchased and then held in your
account. Each time any Eligible Shares in your account convert to Class A
shares, all shares or amounts representing Class B shares then in your account
that were acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares 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.
B-34
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor 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 the
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than five full business days
prior to the record date to have subsequent dividends and/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 a cash
payment representing a dividend or distribution may reinvest such distribution
at NAV by returning the check or the proceeds to the Transfer Agent within 30
days after the payment date. Such investment will be made at the NAV per share
next determined after receipt of the check or proceeds by the Transfer Agent.
Such shareholder will receive credit for any CDSC paid in connection with the
amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. Shares may be exchanged for shares of another fund only if shares of
such fund may legally be sold under applicable state laws. For retirement and
group plans having a limited menu of Prudential Mutual Funds, the exchange
privilege is available for those funds eligible for investment in the particular
program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A 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.
B-35
<PAGE>
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 Jersey Money Market Series)
(New York 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
shares and Class C shares of the Fund for Class B and Class C shares 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 an
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
first day of the month after 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
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after re-
exchange into the Fund, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the NAV above the total
amount of
B-36
<PAGE>
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 NAV.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 401(k) Plan following separation
from service (that is, voluntary or involuntary termination of employment or
retirement) will have their Class Z shares exchanged for Class A shares at NAV.
Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's 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)
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
See "Automatic Investment Plan."
</TABLE>
- ------------------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of 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. Share 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.
B-37
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Distributor, the Transfer Agent or your broker. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan.
The Distributor, the Transfer Agent or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and Prudential Securities reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charge applicable to (1)
the purchase of Class A 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 systematic withdrawal plan, particularly if used
in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax-sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through Prudential
Securities. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details is available from the 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
<FN>
- ------------------------
(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.
</TABLE>
B-38
<PAGE>
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 advisor
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 or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of shares outstanding. 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 the 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 indices) are valued at the
last sales price on the day of valuation or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service or principal market maker. 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 sales 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 forward currency exchange 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 in consultation with the Manager or Subadviser including its
portfolio managers, 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, the investment adviser, Board of Directors or
Valuation Committee to materially affect the value of the security. Short-term
debt securities are valued at
B-39
<PAGE>
cost, with interest accrued or discount amortized to the date of maturity, if
their original maturity was 60 days or less, unless this is determined by the
Board of Directors not to represent fair value. Short-term securities with
remaining maturities of 60 days or more, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs. The NAV of Class B and Class C shares will generally be lower than the NAV
of Class A or Class Z 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 as a
result of the fact that Class Z shares are not subject to any distribution
and/or service fee. It is expected however that the NAV per share of the four
classes 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.
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:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 investment
made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent 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 September 30, 1999.
<TABLE>
<CAPTION>
1 YEAR 5 YRS 10 YRS SINCE INCEPTION
--------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Class A........................................ % % N/A % (1/22/90)
Class B........................................ % % % % (11/30/80)
Class C........................................ % % N/A % (8/1/94)
Class Z........................................ % N/A N/A % (3/1/96)
</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 $1000.
ERV = ending redeemable value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
investment made at the beginning of the 1, 5 or 10 year
periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-40
<PAGE>
Below are the average annual total returns for the Fund's share classes for
the periods ended September 30, 1999.
<TABLE>
<CAPTION>
1 YEAR 5 YRS 10 YRS SINCE INCEPTION
--------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Class A........................................ % % N/A % (1/22/90)
Class B........................................ % % % % (11/30/80)
Class C........................................ % % N/A % (8/1/94)
Class Z........................................ % N/A N/A % (3/1/96)
</TABLE>
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd
Where: a=dividends and interest earned during the period.
b=expenses accrued for the period (net of reimbursements).
c=the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d=the maximum offering price per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include data from
Lipper, Inc., Morningstar Publications, Inc. and other industry publications,
business periodicals and market indexes. Set forth below is a chart which
compares the performance of different types of investments over the long-term
and the rate of inflation.(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
<S> <C> <C>
(12/31/25-12/31/98)
Long-Term Gov't.
Common Stocks Bonds Inflation
11.2% 5.3% 3.1%
</TABLE>
- ------------
(1)Source: Ibbotson Associates. All rights reserved. Common stock returns are
based on the Standard & Poor's 500 Stock Index, a market-weighted,
unmanaged index of 500 common stocks in a variety of industry
sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only and is not
intended to represent the performance of any particular investment or
fund. Investors cannot invest directly in an index. Past performance
is not a guarantee of future results.
B-41
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund expects to pay dividends of net investment income, if any,
semi-annually. The Board of Directors of the Fund will determine at least once a
year whether to distribute any net capital gains of the Fund (that is, the
excess of net long-term capital gains over net short-term capital losses). In
determining amounts of capital gains to be distributed, any capital loss
carryforwards from prior years will offset capital gains. Distributions will be
paid in additional Fund shares based on the net asset value at the close of
business on the record date, unless the shareholder elects in writing not less
than five full business days prior to the record date to receive such
distributions in cash.
The Fund is qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. This
relieves the Fund (but not its shareholders) from paying federal income tax on
income and capital gains which are distributed to shareholders, and permits net
capital gains to the Fund to be treated as long-term capital gains of the
shareholders, regardless of how long shareholders have held their shares in the
Fund.
Qualification of the Fund as a regulated investment company under the
Internal Revenue Code requires, among other things, that (a) the Fund derives at
least 90% of its annual gross income, without reduction for losses from the sale
or other disposition of securities or foreign currencies be derived from
dividends, interest, 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 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 distributes to its shareholders at least 90% of its net investment
income and net short-term gains (that is the excess of net short-term capital
gains over net long-term capital losses) in each year. A 4% nondeductible excise
tax will be imposed on the Fund to the extent the Fund does not meet certain
minimum distribution requirements by the end of each calendar year. For this
purpose, any income or gain retained by the Fund which is subject to tax will be
considered to have been distributed by year-end. In addition, dividends declared
in October, November and December payable to shareholders of record on a
specified date in October, November and December and paid in the following
January will be treated as having been paid by the Fund and received by each
shareholder in such prior year. Under this rule, therefore, a shareholder may be
taxed in one year on dividends or distributions actually received in January of
the following year. (The Fund intends to make timely distributions of the Fund's
income in compliance with these requirements. As a result, it is expected that
the Fund will not be subjected to the excise tax.)
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lease 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 lapses or is terminated
through a closing transaction, such as a repurchase by the Fund of the option
from its holder, the Fund will realize a 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 sales proceeds
of the securities delivered in determining the amount of gain or loss on the
sale. If securities are purchased by the Fund pursuant to the exercise of a put
option written by it, the Fund will subtract the premium received from its cost
basis in the securities purchased. Certain transactions of the Fund may be
subject to wash sale, short sale, constructive sale, straddle and anti-
conversion 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. 60% of any gain or loss
recognized on these 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. Under the "straddle" rules, the Fund may be required to
defer the recognition of losses on securities and options and futures contracts
to
B-42
<PAGE>
the extent of any unrecognized gain on offsetting positions held by the Fund.
Other special rules may apply to positions held as part of a straddle; in
particular, the deductibility of interest or other charges incurred to purchase
or carry such positions will be subject to limitations.
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 or distribution 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.
The per share dividends on Class B and Class C shares, if any, will be lower
than the per share dividends on Class A or Class Z shares as a result of the
higher distribution-related fee applicable with 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."
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share of the Fund on the reinvestment
date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Prior to purchasing shares of the Fund,
therefore, the investor should carefully consider the impact of dividends or
capital gains distributions which are expected to be or have been announced.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of the
Fund, the investor should carefully consider the impact of dividends or capital
gains distributions which are expected to be or have been announced.
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: (1) at least 75% of its gross income is passive
or (2) 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 on 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. Dividends and distributions also may be subject to
state and local taxes.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or ordinary
loss. Similarly, gains or losses on forward foreign currency exchange contracts
or dispositions of debt securities denominated in a foreign currency
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition also may be
treated as ordinary gain or loss. These gains, referred to under the Internal
Revenue Code as "Section 988" gains or losses, increase or decrease the amount
of the Fund's investment company taxable income available to be distributed to
its shareholders as ordinary income, rather than increasing or decreasing the
amount of the Fund's net capital gain. If Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to
B-43
<PAGE>
make any ordinary dividend distributions, or distributions made before the
losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his or her Fund shares.
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 is not known.
Foreign shareholders are advised to consult their own tax advisors with
respect to particular tax consequences to them of an investment in the Fund.
B-44
<PAGE>
PRUDENTIAL SMALL COMPANY
Portfolio of Investments as of September 30, 1998 VALUE FUND, INC.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--94.1%
COMMON STOCKS--93.7%
- ------------------------------------------------------------
Aerospace/Defense--1.5%
443,600 Doncasters PLC (ADR)
(United Kingdom)(a) $ 4,935,050
444,100 DRS Technologies, Inc. 4,302,219
153,800 Precision Castparts Corp. 6,344,250
--------------
15,581,519
- ------------------------------------------------------------
Apparel--0.5%
507,600 Phillips-Van Heusen Corp. 4,822,200
- ------------------------------------------------------------
Automotive--3.0%
514,600 Excel Industries, Inc. 6,432,500
198,800 Midas, Inc. 4,820,900
401,600 Simpson Industries, Inc. 4,041,100
348,000 Standard Products Co. 6,090,000
363,400 Strattec Security Corp.(a) 9,630,100
--------------
31,014,600
- ------------------------------------------------------------
Banks--0.3%
118,700 Commercial Federal Corp. 2,796,869
- ------------------------------------------------------------
Building & Construction--2.8%
365,300 Crossmann Communities, Inc.(a) 7,351,662
235,400 Nortek Incorporated 6,414,650
449,900 NVR, Inc.(a) 14,846,700
--------------
28,613,012
- ------------------------------------------------------------
Building & Products--0.7%
661,700 Cameron Ashley Building
Products(a) 7,402,769
- ------------------------------------------------------------
Business Services--0.7%
589,600 World Fuel Services Corp. 7,333,150
- ------------------------------------------------------------
Cellular Communications--1.2%
391,700 Centennial Cellular Corp.(a) 12,534,400
Chemicals--1.1%
1,297,300 Agrium, Inc. (Canada) $ 11,027,050
- ------------------------------------------------------------
Coal--0.5%
329,300 Arch Coal Inc. 4,898,338
- ------------------------------------------------------------
Computer Software & Services--1.4%
1,004,300 Banctec, Inc.(a) 14,311,275
- ------------------------------------------------------------
Containers & Packaging--1.6%
366,500 ACX Technologies, Inc.(a) 4,718,687
338,400 Shorewood Packaging Corp.(a) 4,568,400
463,400 U.S. Can Corp.(a) 6,777,225
--------------
16,064,312
- ------------------------------------------------------------
Electrical Equipment--0.6%
495,200 Belden, Inc. 6,654,250
- ------------------------------------------------------------
Electrical Utilities--0.8%
247,200 TNP Enterprises, Inc. 8,636,550
- ------------------------------------------------------------
Electronics--1.6%
463,200 Marshall Industries(a) 10,219,350
1,050,400 Pioneer-Standard Electronics,
Inc. 6,630,650
--------------
16,850,000
- ------------------------------------------------------------
Environmental Services--0.2%
141,197 BHA Group, Inc. 1,659,065
- ------------------------------------------------------------
Food Distribution--1.5%
248,500 Dominicks Supermarkets, Inc.(a) 10,623,375
346,600 Richfood Holdings, Inc. 5,328,975
--------------
15,952,350
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>
PRUDENTIAL SMALL COMPANY
Portfolio of Investments as of September 30, 1998 VALUE FUND, INC.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Food/Drug Retail--0.5%
165,300 Suiza Foods Corp.(a) $ 5,165,625
- ------------------------------------------------------------
Furniture--0.7%
284,000 Furniture Brands International,
Inc.(a) 5,538,000
108,500 Stanley Furniture Company,
Inc.(a) 1,885,188
--------------
7,423,188
- ------------------------------------------------------------
Gas Distribution--2.3%
251,900 Eastern Enterprises, Inc. 10,611,287
570,400 UGI Corp. 13,190,500
--------------
23,801,787
- ------------------------------------------------------------
Health Services--2.8%
781,832 Mariner Post-Acute Network, Inc. 4,006,889
646,800 Raytel Medical Corp.(a) 2,951,025
867,350 Sierra Health Services, Inc.(a) 17,075,953
757,700 Sun Healthcare Group, Inc. 4,925,050
--------------
28,958,917
- ------------------------------------------------------------
Hospital Management--2.0%
499,700 Universal Health Services, Inc.,
Class B(a) 20,862,475
- ------------------------------------------------------------
Household Products--1.8%
666,000 Premark International, Inc. 18,689,625
- ------------------------------------------------------------
Insurance--10.4%
475,027 Amerus Life Holdings, Inc. 10,420,905
257,700 ARM Financial, Inc. 4,574,175
580,000 Capital Re Corp. 15,877,500
378,100 CNA Surety Corp. 5,482,450
606,200 Enhance Financial Services Group,
Inc. 17,920,787
565,700 Financial Security Assurance
Holdings, Ltd. 27,577,875
473,900 Harleysville Group, Inc. 9,774,188
77,611 Liberty Corp. $ 3,225,707
681,600 MMI Cos., Inc. 12,226,200
--------------
107,079,787
- ------------------------------------------------------------
Lodging/Gaming--1.4%
852,100 Red Roof Inns, Inc.(a) 14,325,931
- ------------------------------------------------------------
Machinery--2.0%
594,780 Allied Products Corp. 3,717,375
829,800 CTB International Corp.(a) 5,704,875
193,000 Gleason Corp. 3,100,063
864,500 Omniquip International, Inc.(a) 8,104,687
--------------
20,627,000
- ------------------------------------------------------------
Media--3.0%
647,500 Century Communications Corp.,
Class A(a) 15,459,062
749,290 Granite Broadcasting Corp.(a) 4,776,724
309,300 Young Broadcasting, Inc., Class
A(a) 10,516,200
--------------
30,751,986
- ------------------------------------------------------------
Metals Processing--3.2%
441,450 Chase Industries, Inc.(a) 6,263,072
557,900 Hawk Corporation 5,369,787
685,900 Ladish Co., Inc. 6,044,494
454,900 Ryerson Tull, Inc., Class A(a) 5,998,994
447,500 Wolverine Tube, Inc.(a) 9,425,469
--------------
33,101,816
- ------------------------------------------------------------
Miscellaneous Industrial--14.9%
62,414 American Woodmark Corp. 1,583,755
567,787 Applied Industrial Technologies,
Inc. 9,262,026
986,000 Blount International, Inc., Class
A 23,417,500
134,200 Carlisle Companies, Inc. 5,225,413
348,950 Clarcor, Inc. 5,365,106
590,000 Coinmach Laundry Corp.(a) 5,826,250
621,200 DT Industries, Inc. 10,560,400
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
PRUDENTIAL SMALL COMPANY
Portfolio of Investments as of September 30, 1998 VALUE FUND, INC.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Miscellaneous Industrial (cont'd.)
325,700 Graco, Inc. $ 7,572,525
605,800 Griffon Corp. 5,300,750
457,000 Kimball International, Inc.,
Class B 7,026,375
464,500 Lincoln Electric Holdings, Inc. 10,799,625
523,046 Mark IV Industries, Inc. 7,616,857
311,600 Pentair, Inc. 10,049,100
597,200 Regal Beloit Corp. 13,287,700
370,735 Robbins & Myers, Inc. 7,854,948
602,600 Servico, Inc. 4,519,500
737,400 United Dominion Industries, Ltd.
(Canada) 13,365,375
567,700 Vari-Lite International, Inc.(a) 1,561,175
120,915 Varlen Corp. 3,355,391
--------------
153,549,771
- ------------------------------------------------------------
Oil & Gas Exploration/Production--6.1%
715,200 Bellwether Exploration Co. 4,335,900
1,213,900 Comstock Resources, Inc.(a) 7,131,662
620,900 Louis Dreyfus Natural Gas
Corp.(a) 9,003,050
358,200 Pioneer Natural Resources Co. 5,037,188
1,172,000 Santa Fe Energy Resources,
Inc.(a) 11,060,750
274,100 Snyder Oil Corp. 4,368,469
423,300 St. Mary Land & Exploration Co. 10,106,287
1,019,100 Vintage Petroleum, Inc. 11,719,650
--------------
62,762,956
- ------------------------------------------------------------
Paper & Packaging--1.1%
544,300 Schweitzer-Mauduit International,
Inc. 11,838,525
- ------------------------------------------------------------
Printing & Publishing--3.4%
824,600 Big Flower Holdings, Inc.(a) 19,275,025
499,100 World Color Press, Inc.(a) 15,472,100
--------------
34,747,125
- ------------------------------------------------------------
Regional Banks--1.1%
233,800 Community First Bankshares, Inc. 4,149,950
388,000 Peoples Heritage Financial Group 6,959,750
--------------
11,109,700
Restaurants--3.6%
791,000 Host Marriott Services Corp. $ 7,217,875
565,600 Ruby Tuesday, Inc.(a) 8,554,700
1,215,300 Ryan's Family Steak Houses,
Inc.(a) 14,507,644
470,100 VICORP Restaurants, Inc.(a) 6,375,731
--------------
36,655,950
- ------------------------------------------------------------
Retail--4.0%
512,300 BJ's Wholesale Club, Inc.(a) 18,827,025
520,100 Dress Barn, Inc.(a) 6,306,212
395,800 Reebok International, Ltd. 5,368,038
209,450 Regis Corp. 6,597,675
209,500 Tractor Supply Co.(a) 4,137,625
--------------
41,236,575
- ------------------------------------------------------------
Savings & Loan--1.7%
420,200 Astoria Financial Corp. 17,700,925
- ------------------------------------------------------------
Specialty Chemicals--2.3%
422,500 Cambrex Corp. 9,955,156
464,400 Lilly Industries, Inc., Class A 8,185,050
527,500 M.A. Hanna Co. 5,934,375
--------------
24,074,581
- ------------------------------------------------------------
Steel - Producers--0.8%
221,900 Northwest Pipe Co.(a) 4,105,150
223,600 Quanex Corp. 4,430,075
--------------
8,535,225
- ------------------------------------------------------------
Telecommunication Services--1.7%
919,400 Vanguard Cellular Systems, Inc. 17,468,600
- ------------------------------------------------------------
Textiles--1.9%
593,300 Dan River Inc., Class A(a) 6,526,300
268,700 Dixie Group, Inc. 1,746,550
754,800 Guilford Mills, Inc. 11,227,650
--------------
19,500,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
PRUDENTIAL SMALL COMPANY
Portfolio of Investments as of September 30, 1998 VALUE FUND, INC.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Tobacco--0.4%
429,500 Dimon, Inc. $ 4,536,594
- ------------------------------------------------------------
Trucking & Shipping--0.6%
517,800 Interpool, Inc. 6,116,513
--------------
Total common stocks
(cost $1,050,561,367) 966,773,386
--------------
- ------------------------------------------------------------
PREFERRED STOCK--0.2%
197,500 DECS Trust, Convertible, 8.50%
(Industrial)
(cost $4,665,937) 2,357,656
--------------
CONVERTIBLE BOND--0.2%
$ 2,679 Robbins & Myers, Inc.,
Convertible to 36.7 shares per
1,000 Par until 9/1/03
6.50%, 9/1/03
(Misc. Industrial)
(cost $2,679,000) $ 2,539,692
--------------
Total long-term investments
(cost $1,057,906,304) 971,670,734
--------------
------------------------------------------------------------
SHORT-TERM INVESTMENT--5.9%
60,297 Joint Repurchase Agreement
Account,
5.52%, 10/1/98
(cost $60,297,000; Note 5) 60,297,000
--------------
- ------------------------------------------------------------
Total Investments--100.0%
(cost $1,118,203,304; Note 4) 1,031,967,734
Other assets in excess of
liabilities 196,322
--------------
Net Assets--100% $1,032,164,056
--------------
--------------
</TABLE>
- ---------------
ADR--American Depository Receipt.
(a) Non-income producing security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
PRUDENTIAL SMALL COMPANY
Statement of Assets and Liabilities VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1998
------------------
<S> <C>
Investments, at value (cost $1,118,203,304)............................................................ $1,031,967,734
Receivable for investments sold........................................................................ 4,766,114
Receivable for Fund shares sold........................................................................ 2,542,588
Dividends and interest receivable...................................................................... 964,119
Deferred expense and other assets...................................................................... 23,826
------------------
Total assets........................................................................................ 1,040,264,381
------------------
Liabilities
Bank overdraft......................................................................................... 100,625
Payable for Fund shares reacquired..................................................................... 4,250,456
Payable for investments purchased...................................................................... 2,124,120
Management fee payable................................................................................. 609,885
Distribution fee payable............................................................................... 536,557
Accrued expenses....................................................................................... 478,682
------------------
Total liabilities................................................................................... 8,100,325
------------------
Net Assets............................................................................................. $1,032,164,056
------------------
------------------
Net assets were comprised of:
Common stock, at par................................................................................ $ 783,552
Paid-in capital in excess of par.................................................................... 980,743,580
------------------
981,527,132
Accumulated net realized gain on investments........................................................ 136,872,494
Net unrealized depreciation on investments.......................................................... (86,235,570)
------------------
Net assets, September 30, 1998......................................................................... $1,032,164,056
------------------
------------------
Class A:
Net asset value and redemption price per share
($365,431,000 / 26,498,663 shares of common stock issued and
outstanding)........................ $13.79
Maximum sales charge (5% of offering price)......................................................... .73
------------------
Maximum offering price to public.................................................................... $14.52
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share
($514,158,573 / 40,696,869 shares of common stock issued and outstanding)........................ $12.63
------------------
------------------
Class C:
Net asset value, offering price and redemption price per share
($26,804,222 / 2,121,574 shares of common stock issued and outstanding).......................... $12.63
------------------
------------------
Class Z:
Net asset value, offering price and redemption price per share
($125,770,261 / 9,038,120 shares of common stock issued and outstanding)......................... $13.92
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1998
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $48,147)..................... $ 9,857,636
Interest................................. 5,397,823
------------------
Total income.......................... 15,255,459
------------------
Expenses
Management fee........................... 9,138,728
Distribution fee--Class A................ 1,107,973
Distribution fee--Class B................ 6,784,624
Distribution fee--Class C................ 292,592
Transfer agent's fees and expenses....... 2,042,000
Reports to shareholders.................. 275,000
Registration fees........................ 256,000
Custodian's fees and expenses............ 230,000
Legal fees and expenses.................. 22,000
Audit fee and expenses................... 25,000
Directors' fees.......................... 24,000
Miscellaneous............................ 3,595
------------------
Total expenses........................ 20,201,512
------------------
Net investment income (loss)................ (4,946,053)
------------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on investment
transactions............................. 150,641,304
Net change in unrealized appreciation
(depreciation) on investments............ (392,297,749)
------------------
Net loss on investments..................... (241,656,445)
------------------
Net Decrease in Net Assets
Resulting from Operations................... $ (246,602,498)
------------------
------------------
</TABLE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended September 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income
(loss).................. $ (4,946,053) $ (1,914,727)
Net realized gain on
investments............. 150,641,304 138,255,423
Net change in unrealized
appreciation
(depreciation) on
investments............. (392,297,749) 201,444,620
------------------ --------------
Net increase (decrease) in
net assets resulting
from operations......... (246,602,498) 337,785,316
------------------ --------------
Distributions from net
realized gains (Note 1)
Class A.................... (40,869,566) (35,968,641)
Class B.................... (70,405,034) (62,311,718)
Class C.................... (2,549,512) (737,555)
Class Z.................... (14,791,748) (10,814,701)
------------------ --------------
(128,615,860) (109,832,615)
------------------ --------------
Fund share transactions (net
of conversions) (Note 6)
Proceeds from shares
sold.................... 864,798,421 1,508,723,401
Net asset value of shares
issued in reinvestment
of distributions........ 124,093,166 105,395,777
Cost of shares
reacquired.............. (813,331,700) (1,299,254,732)
------------------ --------------
Net increase in net assets
from Fund share
transactions............ 175,559,887 314,864,446
------------------ --------------
Total increase (decrease)..... (199,658,471) 542,817,147
Net Assets
Beginning of year............. 1,231,822,527 689,005,380
------------------ --------------
End of year................... $1,032,164,056 $1,231,822,527
------------------ --------------
------------------ --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
PRUDENTIAL SMALL COMPANY
Notes to Financial Statements VALUE FUND, INC.
- --------------------------------------------------------------------------------
Prudential Small Company Value Fund, Inc. is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The investment objective of the Fund is to achieve capital growth by investing
in a carefully selected portfolio of common stocks. Investment income is of
incidental importance, and the Fund may invest in securities which do not
produce any income.
- ------------------------------------------------------------
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 Valuations: Investments traded on a national securities exchange are
valued at the last reported sales price on the primary exchange on which they
are traded. Securities traded in the over-the-counter market (including
securities listed on exchanges whose primary market is believed to be
over-the-counter) and listed securities for which no sale was reported on that
date are valued at the mean between the last reported bid and asked prices. 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
based upon current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost.
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.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; 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 (loss), other than distribution fees, and unrealized and
realized gains or losses are allocated daily to each class of shares of the Fund
based upon the relative proportion of net assets of each class at the beginning
of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income 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.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income, if any, semi-annually and make distributions at least annually of any
net capital gains. 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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants 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 increase undistributed net investment income and decrease
accumulated net realized gain on investments by $4,946,053 for net operating
losses during the fiscal year ended September 30, 1998. Net investment income,
net realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. Pursuant to a subadvisory agreement between PIFM and The Prudential
Investment Corporation ('PIC'), PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .70 of 1% of the Fund's average daily net assets.
- --------------------------------------------------------------------------------
B-51
<PAGE>
PRUDENTIAL SMALL COMPANY
Notes to Financial Statements VALUE FUND, INC.
- --------------------------------------------------------------------------------
The Fund had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ('PIMS') became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the arrangement with PSI. The Fund compensated PSI and PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution, (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly. No distribution or service fees are paid to PIMS as distributor
of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI and 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 were .25 of 1%, 1% and 1% of the average daily net assets of the
Class A, Class B and Class C shares, respectively, for the year ended September
30, 1998.
PSI and PIMS have advised the Fund that they received approximately $1,354,000
in front-end sales charges resulting from sales of Class A shares during the
year ended September 30, 1998. From these fees, PSI and PIMS paid such sales
charges to affiliated broker-dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended September 30, 1998,
they received approximately $901,000 and $26,000 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purposes of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund did not borrow any amounts pursuant to the Agreement during the year ended
September 30, 1998. The Funds pay a commitment fee at an annual rate of .055 of
1% on the unused portion of the credit facility. The commitment fee is accrued
and paid quarterly on a pro rata basis by the Funds. The Agreement expired on
December 30, 1997 and has been extended through December 29, 1998 under the same
terms.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended September 30, 1998,
the Fund incurred fees of approximately $1,770,000 for the services of PMFS. As
of September 30, 1998, approximately $155,000 of such fees were due to PMFS.
Transfer agent fees and expenses in Statement of Operations include certain
out-of-pocket expenses paid to nonaffliates.
For the year ended September 30, 1998, PSI earned approximately $2,000 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended September 30, 1998 were $533,194,027 and $426,319,234,
respectively.
The federal income tax basis of the Fund's investments at September 30, 1998 was
$1,118,616,469 and, accordingly, net unrealized appreciation for federal income
tax purposes was $86,648,735 (gross unrealized appreciation--$126,808,356 gross
unrealized depreciation--$213,457,091).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of September 30, 1998, the
Fund had an 8.17% undivided interest in the joint account. The undivided
interest for the Fund represents $60,297,000 in the principal amount. As of such
date, each repurchase agreement in the joint account and the collateral therefor
were as follows:
Bear Stearns & Co., 5.58%, in the principal amount of $210,000,000, repurchase
price $210,032,550, due 10/1/98. The value of the collateral including accrued
interest was $214,893,617.
Credit Suisse First Boston Corp., 5.55%, in the principal amount of
$107,606,000, repurchase price $107,622,589, due 10/1/98. The value of the
collateral including accrued interest was $111,084,883.
- --------------------------------------------------------------------------------
B-52
<PAGE>
PRUDENTIAL SMALL COMPANY
Notes to Financial Statements VALUE FUND, INC.
- --------------------------------------------------------------------------------
Goldman Sachs & Co., 5.45%, in the principal amount of $210,000,000, repurchase
price $210,031,792, due 10/1/98. The value of the collateral including accrued
interest was $214,200,293.
Warburg Dillon Read LLC, 5.52%, in the principal amount of $210,000,000,
repurchase price $210,032,200, due 10/1/98. The value of the collateral
including accrued interest was $214,255,819.
- ------------------------------------------------------------
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 to 5%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Prior to November 2, 1998, Class C
shares are sold with a contingent deferred sales charge of 1% during the first
year. Effective November 2, 1998, Class C shares 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 qualify to purchase Class A
shares at net asset value. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
There are 750 million shares of common stock authorized $.01 par value per
share, divided into four classes, designated Class A, Class B, Class C and Class
Z common stock. Class A, Class B and Class Z shares each consist of 200 million
authorized shares. Class C shares consist of 150 million authorized shares.
Transactions in shares of common stock for the years ended September 30, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 16,276,703 $ 281,232,761
Shares issued in reinvestment of
distributions.................... 2,427,115 39,246,447
Shares reacquired.................. (15,693,393) (272,105,329)
----------- -------------
Net increase in shares outstanding
before conversion................ 3,010,425 48,373,879
Shares issued upon conversion from
Class B.......................... 1,693,186 28,221,380
----------- -------------
Net increase in shares
outstanding...................... 4,703,611 $ 76,595,259
----------- -------------
----------- -------------
<CAPTION>
Class A Shares Amount
- ----------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1997:
Shares sold........................ 58,541,824 $ 901,368,248
Shares issued in reinvestment of
distributions.................... 2,537,905 34,540,892
Shares reacquired.................. (56,528,491) (869,785,004)
----------- -------------
Net increase in shares outstanding
before conversion................ 4,551,238 66,124,136
Shares issued upon conversion from
Class B.......................... 1,732,321 27,796,514
----------- -------------
Net increase in shares
outstanding...................... 6,283,559 $ 93,920,650
----------- -------------
----------- -------------
<CAPTION>
Class B
- -----------------------------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 20,431,318 $ 330,294,528
Shares issued in reinvestment of
distributions.................... 4,531,677 67,567,307
Shares reacquired.................. (19,026,353) (301,792,212)
----------- -------------
Net increase in shares outstanding
before conversion................ 5,936,642 96,069,623
Shares reacquired upon conversion
into Class A..................... (1,842,451) (28,221,380)
----------- -------------
Net increase in shares
outstanding...................... 4,094,191 $ 67,848,243
----------- -------------
----------- -------------
Year ended September 30, 1997:
Shares sold........................ 20,787,255 $ 309,922,681
Shares issued in reinvestment of
distributions.................... 4,656,202 59,320,016
Shares reacquired.................. (13,133,974) (187,564,507)
----------- -------------
Net increase in shares outstanding
before conversion................ 12,309,483 181,678,190
Shares reacquired upon conversion
into Class A..................... (1,856,230) (27,796,514)
----------- -------------
Net increase in shares
outstanding...................... 10,453,253 $ 153,881,676
----------- -------------
----------- -------------
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 1,868,621 $ 30,323,339
Shares issued in reinvestment of
distributions.................... 167,005 2,490,049
Shares reacquired.................. (1,164,216) (18,657,047)
----------- -------------
Net increase in shares
outstanding...................... 871,410 $ 14,156,341
----------- -------------
----------- -------------
Year ended September 30, 1997:
Shares sold........................ 1,398,968 $ 20,854,398
Shares issued in reinvestment of
distributions.................... 56,529 720,186
Shares reacquired.................. (503,684) (7,062,824)
----------- -------------
Net increase in shares
outstanding...................... 951,813 $ 14,511,760
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
B-53
<PAGE>
PRUDENTIAL SMALL COMPANY
Notes to Financial Statements VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z Shares Amount
- ----------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 12,690,019 $ 222,947,793
Shares issued in reinvestment of
distributions.................... 908,438 14,789,363
Shares reacquired.................. (12,501,837) (220,777,112)
----------- -------------
Net increase in shares
outstanding...................... 1,096,620 $ 16,960,044
----------- -------------
----------- -------------
Year ended September 30, 1997:
Shares sold........................ 17,575,451 $ 276,578,074
Shares issued in reinvestment of
distributions.................... 792,865 10,814,683
Shares reacquired.................. (14,899,669) (234,842,397)
----------- -------------
Net increase in shares
outstanding...................... 3,468,647 $ 52,550,360
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
B-54
<PAGE>
PRUDENTIAL SMALL COMPANY
Financial Highlights VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of year...... $ 18.95 $ 15.30 $ 14.18 $ 12.40 $ 13.06
-------- -------- -------- -------- --------
Income from investment operations
Net investment income (loss)............ -- .02 .04 .05 --
Net realized and unrealized gain (loss)
on investment transactions........... (3.31) 6.06 1.75 2.57 .13
-------- -------- -------- -------- --------
Total from investment operations..... (3.31) 6.08 1.79 2.62 .13
-------- -------- -------- -------- --------
Less distributions
Distributions from net realized gains... (1.85) (2.43) (.67) (.84) (.79)
-------- -------- -------- -------- --------
Net asset value, end of year............ $ 13.79 $ 18.95 $ 15.30 $ 14.18 $ 12.40
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):........................ (18.90)% 45.92% 13.38% 23.29% 1.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $365,431 $412,980 $237,306 $242,231 $103,078
Average net assets (000)................ $443,189 $287,894 $223,091 $174,449 $ 97,877
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.17% 1.21% 1.24% 1.33% 1.33%
Expenses, excluding distribution
fees.............................. .92% .96% .99% 1.08% 1.09%
Net investment income (loss)......... -- .15% .33% .30% .00%
For Class A, B, C and Z shares:
Portfolio turnover................... 36% 58% 53% 64% 82%
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) 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 year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-55
<PAGE>
PRUDENTIAL SMALL COMPANY
Financial Highlights VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of year...... $ 17.64 $ 14.49 $ 13.56 $ 11.99 $ 12.74
-------- -------- -------- -------- --------
Income from investment operations
Net investment income (loss)............ (.12) (.09) (.06) (.06) (.09)
Net realized and unrealized gain (loss)
on investment transactions........... (3.04) 5.67 1.66 2.47 .13
-------- -------- -------- -------- --------
Total from investment operations..... (3.16) 5.58 1.60 2.41 .04
-------- -------- -------- -------- --------
Less distributions
Distributions from net realized gains... (1.85) (2.43) (.67) (.84) (.79)
-------- -------- -------- -------- --------
Net asset value, end of year............ $ 12.63 $ 17.64 $ 14.49 $ 13.56 $ 11.99
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):........................ (19.52)% 44.91% 12.56% 22.37% .34%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $514,159 $645,579 $378,861 $361,873 $425,502
Average net assets (000)................ $678,462 $443,761 $355,636 $349,929 $399,920
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.92% 1.96% 1.99% 2.08% 2.09%
Expenses, excluding distribution
fees.............................. .92% .96% .99% 1.08% 1.09%
Net investment income (loss)......... (.75)% (.60)% (.42)% (.51)% (.76)%
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) 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 year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-56
<PAGE>
PRUDENTIAL SMALL COMPANY
Financial Highlights VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
------------------------------------------------------------ ---------------------
August 1,
1994(d) Year Ended
Year Ended September 30, Through September 30,
------------------------------------------ September 30, ---------------------
1998 1997 1996 1995 1994 1998 1997
-------- ------- ------ ------ ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of period.... $ 17.64 $ 14.49 $13.56 $11.99 $ 11.61 $ 19.04 $ 15.32
-------- ------- ------ ------ ----- -------- --------
Income from investment operations
Net investment income (loss)............ (.12) (.09) (.06) (.06) (.01) .04 .06
Net realized and unrealized gain (loss)
on investment transactions........... (3.04) 5.67 1.66 2.47 .39 (3.31) 6.09
-------- ------- ------ ------ ----- -------- --------
Total from investment operations..... (3.16) 5.58 1.60 2.41 .38 (3.27) 6.15
-------- ------- ------ ------ ----- -------- --------
Less distributions
Distributions from net realized gains... (1.85) (2.43) (.67) (.84) -- (1.85) (2.43)
-------- ------- ------ ------ ----- -------- --------
Net asset value, end of period.......... $ 12.63 $ 17.64 $14.49 $13.56 $ 11.99 $ 13.92 $ 19.04
-------- ------- ------ ------ ----- -------- --------
-------- ------- ------ ------ ----- -------- --------
TOTAL RETURN(b):........................ (19.52)% 44.91% 12.56% 22.37% 3.19% (18.58)% 46.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 26,804 $22,049 $4,323 $1,545 $ 269 $125,770 $151,215
Average net assets (000)................ $ 29,259 $ 8,762 $2,786 $ 784 $ 179 $154,623 $ 97,310
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.92% 1.96% 1.99% 2.08% 2.22%(c) .92% .96%
Expenses, excluding distribution
fees.............................. .92% .96% .99% 1.08% 1.22%(c) .92% .96%
Net investment income (loss)......... (.75)% (.60)% (.42)% (.46)% (.31)%(c) .25% .40%
<CAPTION>
March 1,
1996(e)
Through
September 30,
1996
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of period.... $ 13.69
------
Income from investment operations
Net investment income (loss)............ .05
Net realized and unrealized gain (loss)
on investment transactions........... 1.58
------
Total from investment operations..... 1.63
------
Less distributions
Distributions from net realized gains... --
------
Net asset value, end of period.......... $ 15.32
------
------
TOTAL RETURN(b):........................ 11.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $68,516
Average net assets (000)................ $66,228
Ratios to average net assets:
Expenses, including distribution
fees.............................. .99%(c)
Expenses, excluding distribution
fees.............................. .99%(c)
Net investment income (loss)......... .58%(c)
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the period.
(b) 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.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
<PAGE>
PRUDENTIAL SMALL COMPANY
Report of Independent Accountants VALUE FUND, INC.
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Prudential Small Company Value 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 Company Value
Fund, Inc., at September 30, 1998, 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 periods
presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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
September 30, 1998 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
November 20, 1998
- --------------------------------------------------------------------------------
B-58
<PAGE>
Portfolio of Investments as of PRUDENTIAL SMALL COMPANY
March 31, 1999 (Unaudited) VALUE FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--96.7%
COMMON STOCKS--96.4%
- ------------------------------------------------------------
Aerospace/Defense--0.8%
443,600 Doncasters PLC (ADR)
(United Kingdom)(a) $ 6,820,350
- ------------------------------------------------------------
Apparel--3.5%
244,300 Cole National Corp.(a) 4,458,475
192,600 Kellwood Co. 4,249,237
382,700 Nautica Enterprises, Inc.(a) 4,329,294
1,050,700 Phillips-Van Heusen Corp. 7,289,231
659,200 Reebok International, Ltd. 10,464,800
------------
30,791,037
- ------------------------------------------------------------
Automotive--2.4%
95,000 Borg-Warner Automotive, Inc. 4,542,187
130,800 Midas, Inc. 4,365,450
242,300 Simpson Industries, Inc. 2,332,138
355,800 Strattec Security Corp.(a) 10,006,875
------------
21,246,650
- ------------------------------------------------------------
Banks--0.8%
306,200 Commercial Federal Corp. 7,100,013
- ------------------------------------------------------------
Building & Construction--3.6%
365,300 Crossmann Communities, Inc.(a) 7,283,168
240,500 Giant Cement Holding Inc.(a) 4,133,594
235,400 Nortek Inc. 5,826,150
346,800 NVR, Inc.(a) 14,608,950
------------
31,851,862
- ------------------------------------------------------------
Building & Products--0.7%
661,700 Cameron Ashley Building Products
Inc.(a) 6,038,013
Business Services--0.8%
584,200 World Fuel Services Corp. $ 6,791,325
- ------------------------------------------------------------
Chemicals--1.9%
1,297,300 Agrium, Inc. (Canada) 11,918,944
267,100 Arch Chemicals Inc.(a) 4,473,925
------------
16,392,869
- ------------------------------------------------------------
Coal--0.5%
329,300 Arch Coal Inc. 4,363,225
- ------------------------------------------------------------
Computer Software & Services--2.5%
478,000 Banctec, Inc.(a) 5,885,375
448,200 Platinum Technology, Inc.(a) 11,429,100
230,700 Wang Laboratories, Inc.(a) 4,527,488
------------
21,841,963
- ------------------------------------------------------------
Containers & Packaging--1.5%
363,700 ACX Technologies, Inc.(a) 4,773,563
274,200 Shorewood Packaging Corp.(a) 5,381,175
217,800 U.S. Can Corp.(a) 3,212,550
------------
13,367,288
- ------------------------------------------------------------
Diversified Resources--0.1%
62,600 Amcol International Corp. 626,000
- ------------------------------------------------------------
Electrical Utilities--1.3%
129,100 Sierra Pacific Resources Inc. Co. 4,542,706
247,200 TNP Enterprises, Inc. 7,107,000
------------
11,649,706
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
<PAGE>
Portfolio of Investments as of PRUDENTIAL SMALL COMPANY
March 31, 1999 (Unaudited) VALUE FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Electrical Equipment--0.9%
441,300 Belden, Inc. $ 7,529,681
- ------------------------------------------------------------
Electronics--1.2%
355,900 Marshall Industries(a) 4,804,650
946,200 Pioneer-Standard Electronics, Inc. 6,209,438
------------
11,014,088
- ------------------------------------------------------------
Food Distribution--1.6%
66,200 Fleming Cos., Inc. 566,837
632,400 Richfood Holdings, Inc. 13,636,125
------------
14,202,962
- ------------------------------------------------------------
Foods--1.9%
395,600 International Home Foods Inc.(a) 6,354,325
303,200 Suiza Foods Corp.(a) 10,214,050
------------
16,568,375
- ------------------------------------------------------------
Furniture--1.2%
284,000 Furniture Brands International,
Inc.(a) 6,283,500
201,100 Stanley Furniture Company, Inc.(a) 3,921,450
------------
10,204,950
- ------------------------------------------------------------
Gas Distribution--1.1%
278,000 Eastern Enterprises, Inc. 10,112,250
- ------------------------------------------------------------
Health Services--3.7%
969,700 Beverly Enterprises, Inc.(a) 4,969,713
835,500 Foundation Health Systems, Inc.(a) 10,182,656
627,600 Raytel Medical Corp.(a) 2,588,850
1,124,250 Sierra Health Services, Inc.(a) 14,615,250
------------
32,356,469
- ------------------------------------------------------------
Hospital Management--3.4%
837,200 Quorum Health Group, Inc.(a) 8,372,000
499,700 Universal Health Services, Inc.
Class B(a) $ 21,612,025
------------
29,984,025
- ------------------------------------------------------------
Hotel/Motel--2.7%
1,174,700 Lodgian, Inc.(a) 5,212,731
483,400 Prime Hospitality Corp.(a) 4,803,788
852,100 Red Roof Inns, Inc.(a) 13,420,575
------------
23,437,094
- ------------------------------------------------------------
Household Products--1.9%
499,100 Premark International, Inc. 16,439,106
- ------------------------------------------------------------
Insurance--10.6%
567,427 Amerus Life Holdings, Inc. Class A 13,618,248
291,700 ARM Financial, Inc. 4,357,269
578,700 Capital Re Corp. 9,982,575
563,700 CNA Surety Corp. 6,975,788
551,400 Enhance Financial Services Group,
Inc. 12,544,350
512,300 Financial Security Assurance
Holdings, Ltd. 25,422,887
538,600 Harleysville Group, Inc. 10,435,375
681,600 MMI Cos., Inc. 10,479,600
------------
93,816,092
- ------------------------------------------------------------
Machinery--1.9%
278,580 Allied Products Corp. 835,740
829,800 CTB International Corp.(a) 5,289,975
864,500 Omniquip International, Inc.(a) 10,157,875
------------
16,283,590
- ------------------------------------------------------------
Media--2.2%
749,290 Granite Broadcasting Corp.(a) 4,964,046
309,300 Young Broadcasting, Inc., Class
A(a) 14,111,813
------------
19,075,859
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60
<PAGE>
Portfolio of Investments as of PRUDENTIAL SMALL COMPANY
March 31, 1999 (Unaudited) VALUE FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Metals Processing--2.5%
441,450 Chase Industries, Inc.(a) $ 3,366,056
557,900 Hawk Corporation 4,463,200
685,900 Ladish Co., Inc. 4,715,563
447,500 Wolverine Tube, Inc.(a) 9,453,437
------------
21,998,256
- ------------------------------------------------------------
Miscellaneous Industrial--12.2%
1,118,400 Aztec Corp.(a) 5,382,300
702,300 Blount International, Inc., Class A 20,278,912
272,650 Clarcor, Inc. 4,652,091
790,900 Coinmach Laundry Corp.(a) 8,106,725
610,100 DT Industries, Inc. 4,308,831
325,700 Graco, Inc. 7,185,756
641,500 Griffon Corp. 4,410,313
302,900 Kimball International, Inc. Class B 4,505,637
227,300 Lincoln Electric Holdings, Inc. 4,233,463
197,446 Mark IV Industries, Inc. 2,579,138
204,000 Pentair, Inc. 6,885,000
544,300 Regal Beloit Corp. 9,831,419
370,735 Robbins & Myers, Inc. 6,395,179
582,100 United Dominion Industries, Ltd.
(Canada) 11,569,237
471,000 Vari-Lite International, Inc.(a) 1,265,813
248,400 Varian Associates Inc.(a) 4,331,475
47,543 Varlen Corp. 1,045,946
------------
106,967,235
- ------------------------------------------------------------
Oil & Gas Exploration/Production--6.5%
1,055,000 Bellwether Exploration Co. 3,758,438
345,900 Cabot Oil & Gas Corp. 4,993,931
1,213,900 Comstock Resources, Inc.(a) 3,717,569
211,900 Devon Energy Corp. 5,840,494
620,900 Louis Dreyfus Natural Gas Corp.(a) 9,003,050
650,900 Santa Fe Energy Resources, Inc.(a) 4,759,706
501,700 Snyder Oil Corp. 7,431,431
442,300 St. Mary Land & Exploration Co. 7,684,962
1,133,900 Vintage Petroleum, Inc. 10,205,100
------------
57,394,681
Paper & Packaging--0.7%
544,300 Schweitzer-Mauduit International,
Inc. $ 6,259,450
- ------------------------------------------------------------
Printing & Publishing--3.7%
658,500 Big Flower Holdings, Inc.(a) 20,495,812
578,000 World Color Press, Inc.(a) 12,282,500
------------
32,778,312
- ------------------------------------------------------------
Regional Banks--1.5%
235,300 Community First Bankshares, Inc. 4,706,000
466,600 Peoples Heritage Financial Group 8,398,800
------------
13,104,800
- ------------------------------------------------------------
Restaurants--3.7%
114,300 CKE Restaurants, Inc. 2,257,425
944,800 Host Marriott Services Corp. 6,377,400
84,500 Ruby Tuesday, Inc.(a) 1,468,187
1,184,000 Ryan's Family Steak Houses, Inc.(a) 14,282,000
480,600 VICORP Restaurants, Inc.(a) 7,689,600
------------
32,074,612
- ------------------------------------------------------------
Retail--3.6%
659,800 Bon-Ton Stores, Inc.(a) 4,866,025
587,600 Dress Barn, Inc.(a) 8,152,950
465,600 Pier 1 Imports, Inc. 3,783,000
892,500 Stage Stores, Inc.(a) 6,470,625
795,800 Stein Mart, Inc.(a) 7,958,000
------------
31,230,600
- ------------------------------------------------------------
Savings & Loan--2.6%
462,100 Astoria Financial Corp. 23,105,000
- ------------------------------------------------------------
Specialty Chemicals--2.3%
277,300 Cambrex Corp. 6,135,262
464,400 Lilly Industries, Inc., Class A 7,169,175
527,500 M.A. Hanna Co. 6,758,594
------------
20,063,031
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61
<PAGE>
Portfolio of Investments as of PRUDENTIAL SMALL COMPANY
March 31, 1999 (Unaudited) VALUE FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Steel - Producers--0.5%
176,700 Northwest Pipe Co.(a) $ 2,915,550
85,389 Ryerson Tull, Inc. 1,254,151
------------
4,169,701
- ------------------------------------------------------------
Textiles--1.2%
685,100 Dan River Inc., Class A(a) 5,823,350
493,700 Guilford Mills, Inc. 4,319,875
------------
10,143,225
- ------------------------------------------------------------
Trucking & Shipping--0.7%
466,300 Interpool, Inc. 6,295,050
------------
Total common stocks
(cost $948,940,942) 845,488,795
- ------------------------------------------------------------
CORPORATE BOND--0.3%
Principal
Amount
(000)
$ 2,679 Robbins & Myers, Inc.,
Convertible to 36.7 shares per
1,000 par 6.50%, 9/1/03
(Misc. Industrial)
(cost $2,679,000) 2,411,100
------------
Total long-term investments
(cost $951,619,942) 847,899,895
SHORT-TERM INVESTMENT--3.3%
- ------------------------------------------------------------
28,567 Joint Repurchase Agreement Account,
4.91%, 4/1/99
(cost $28,567,000; Note 5) 28,567,000
- ------------------------------------------------------------
Total Investments--100.0%
(cost $980,186,942; Note 4) 876,466,895
Liabilities in excess of other
assets (73,789)
------------
Net Assets--100% $876,393,106
------------
------------
</TABLE>
- ---------------
ADR--American Depository Receipt.
(a) Non-income producing security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-62
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL SMALL COMPANY
(Unaudited) VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets March 31, 1999
<S> <C>
Investments, at value (cost $980,186,942).................................................................. $ 876,466,895
Cash....................................................................................................... 100,491
Receivable for investments sold............................................................................ 9,946,241
Receivable for Fund shares sold............................................................................ 1,188,187
Dividends and interest receivable.......................................................................... 961,597
Deferred expense and other assets.......................................................................... 13,649
--------------
Total assets............................................................................................ 888,677,060
--------------
Liabilities
Payable for Fund shares reacquired......................................................................... 7,123,423
Payable for investments purchased.......................................................................... 3,978,797
Management fee payable..................................................................................... 531,950
Distribution fee payable................................................................................... 445,468
Accrued expenses........................................................................................... 194,361
Withholding tax payable.................................................................................... 9,955
--------------
Total liabilities....................................................................................... 12,283,954
--------------
Net Assets................................................................................................. $ 876,393,106
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................................... $ 758,489
Paid-in capital in excess of par........................................................................ 964,239,724
--------------
964,998,213
Net investment loss..................................................................................... (1,352,925)
Accumulated net realized gain on investments............................................................ 16,467,865
Net unrealized depreciation on investments.............................................................. (103,720,047)
--------------
Net assets, March 31, 1999................................................................................. $ 876,393,106
--------------
--------------
Class A:
Net asset value and redemption price per share
($333,674,338 / 27,489,227 shares of common stock issued and outstanding)............................ $12.14
Maximum sales charge (5% of offering price)............................................................. .64
--------------
Maximum offering price to public........................................................................ $12.78
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($399,234,893 / 36,427,505 shares of common stock issued and outstanding)............................ $10.96
--------------
--------------
Class C:
Net asset value and redemption price per share
($24,911,585 / 2,272,957 shares of common stock issued and outstanding).............................. $10.96
Sales charge (1% of offering price)..................................................................... .11
--------------
Offering price to public................................................................................ $11.07
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($118,572,290 / 9,659,187 shares of common stock issued and outstanding)............................. $12.28
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-63
<PAGE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income (Loss) March 31, 1999
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $30,586).............................. $ 4,846,515
Interest.................................... 1,837,943
--------------
Total income............................. 6,684,458
--------------
Expenses
Management fee.............................. 3,567,185
Distribution fee--Class A................... 462,545
Distribution fee--Class B................... 2,457,244
Distribution fee--Class C................... 139,775
Transfer agent's fees and expenses.......... 1,103,000
Reports to shareholders..................... 90,000
Registration fees........................... 80,000
Custodian's fees and expenses............... 73,000
Legal fees and expenses..................... 19,000
Insurance expense........................... 15,500
Audit fees and expenses..................... 12,500
Directors' fees and expenses................ 12,500
Miscellaneous............................... 5,134
--------------
Total expenses........................... 8,037,383
--------------
Net investment income (loss)................... (1,352,925)
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on investment transactions... 1,272,594
Net change in unrealized appreciation
(depreciation) on investments............... (17,484,477)
--------------
Net loss on investments........................ (16,211,883)
--------------
Net Decrease in Net Assets
Resulting from Operations...................... $(17,564,808)
--------------
--------------
</TABLE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended
Increase (Decrease) Ended September 30,
in Net Assets March 31, 1999 1998
<S> <C> <C>
Operations
Net investment income
(loss)................... $ (1,352,925) $ (4,946,053)
Net realized gain on
investments.............. 1,272,594 150,641,304
Net change in unrealized
appreciation
(depreciation) on
investments.............. (17,484,477) (392,297,749)
-------------- --------------
Net decrease in net assets
resulting from
operations............... (17,564,808) (246,602,498)
-------------- --------------
Distributions from net realized
gains (Note 1)
Class A..................... (41,109,661) (40,869,566)
Class B..................... (62,450,536) (70,405,034)
Class C..................... (3,389,932) (2,549,512)
Class Z..................... (14,727,094) (14,791,748)
-------------- --------------
(121,677,223) (128,615,860)
-------------- --------------
Fund share transactions (net of
conversions) (Note 6)
Proceeds from shares sold... 280,995,930 864,798,421
Net asset value of shares
issued in reinvestment of
distributions............ 117,928,503 124,093,166
Cost of shares reacquired... (415,453,352) (813,331,700)
-------------- --------------
Net increase (decrease) in
net assets from Fund
share transactions....... (16,528,919) 175,559,887
-------------- --------------
Total decrease................. (155,770,950) (199,658,471)
Net Assets
Beginning of period............ 1,032,164,056 1,231,822,527
-------------- --------------
End of period.................. $ 876,393,106 $1,032,164,056
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-64
<PAGE>
Notes to Financial Statements PRUDENTIAL SMALL COMPANY
(Unaudited) VALUE FUND, INC.
- --------------------------------------------------------------------------------
Prudential Small Company Value Fund, Inc. is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The investment objective of the Fund is to achieve capital growth by investing
in a carefully selected portfolio of common stocks. Investment income is of
incidental importance, and the Fund may invest in securities which do not
produce any income.
- ------------------------------------------------------------
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 Valuations: Investments traded on a national securities exchange are
valued at the last reported sales price on the primary exchange on which they
are traded. Securities traded in the over-the-counter market (including
securities listed on exchanges whose primary market is believed to be
over-the-counter) and listed securities for which no sale was reported on that
date are valued at the mean between the last reported bid and asked prices. 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
based upon current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost.
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.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; 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 (loss), other than distribution fees, and unrealized and
realized gains or losses are allocated daily to each class of shares of the Fund
based upon the relative proportion of net assets of each class at the beginning
of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income 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.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income, if any, semi-annually and make distributions at least annually of any
net capital gains. 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.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. Pursuant to a subadvisory agreement between PIFM and The Prudential
Investment Corporation ('PIC'), PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .70 of 1% of the Fund's average daily net assets.
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.
- --------------------------------------------------------------------------------
B-65
<PAGE>
Notes to Financial Statements PRUDENTIAL SMALL COMPANY
(Unaudited) VALUE FUND, INC.
- --------------------------------------------------------------------------------
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses were .25 of 1%, 1% and 1% of the average daily net assets of the
Class A, Class B and Class C shares, respectively, for the six months ended
March 31, 1999.
PIMS has advised the Fund that it received approximately $251,000 in front-end
sales charges resulting from sales of Class A and Class C shares during the six
months ended March 31, 1999. From these fees, PIMS paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PIMS has advised the Fund that for the six months ended March 31, 1999, it
received approximately $879,000 and $8,702 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Company along with other unaffiliated registered
investment companies (the 'Funds'), entered into a syndicated agreement ('SCA')
with an unaffiliated lender. The maximum commitment under the SCA is $1 billion.
The Funds pay a commitment fee at an annual rate of .065 of 1% on the unused
portion of the credit facility, which is accrued and paid quarterly on a pro
rata basis by the Funds. The SCA expires on March 10, 2000. Prior to March 11,
1999, the Funds had a credit agreement with a maximum commitment of
$200,000.000. The commitment fee was .055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the six months ended March 31, 1999. The purpose of the
agreements is to serve as an alternative source of funding for capital share
redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended March 31, 1999,
the Fund incurred fees of approximately $1,125,000 for the services of PMFS. As
of March 31, 1999, approximately $201,000 of such fees were due to PMFS.
Transfer agent fees and expenses in Statement of Operations include certain
out-of-pocket expenses paid to nonaffliates.
For the six months ended March 31, 1999, PSI earned approximately $4,000 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended March 31, 1999 were $190,832,827 and $297,119,189,
respectively.
The federal income tax basis of the Fund's investments at March 31, 1999 was
$980,392,030 and, accordingly, net unrealized depreciation for federal income
tax purposes was $103,925,135 (gross unrealized appreciation--$100,691,899 gross
unrealized depreciation--$204,617,034).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of March 31, 1999, the Fund
had an 5.14% undivided interest in the joint account. The undivided interest for
the Fund represents $28,567,000 in the principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:
Bear Stearns & Co., 4.92%, in the principal amount of $170,000,000, repurchase
price $170,023,233, due 4/1/99. The value of the collateral including accrued
interest was $174,282,442.
Salomon Smith Barney, Inc., 4.90%, in the principal amount of $170,000,000,
repurchase price $170,023,139, due 4/1/99. The value of the collateral including
accrued interest was $174,947,170.
Morgan Stanley Dean Witter, 4.90%, in the principal amount of $170,000,000,
repurchase price $170,023,139, due 4/1/99. The value of the collateral including
accrued interest was $173,474,773.
SBC Warburg Dillon Read, Inc., 4.97%, in the principal amount of $44,773,000,
repurchase price $44,779,181, due 4/1/99. The value of the collateral including
accrued interest was $45,668,747.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to to 5%. Class B shares are sold with
a contingent deferred sales charge which declines from 5%
- --------------------------------------------------------------------------------
B-66
<PAGE>
Notes to Financial Statements PRUDENTIAL SMALL COMPANY
(Unaudited) VALUE FUND, INC.
- --------------------------------------------------------------------------------
to zero depending on the period of time the shares are held. Class C shares are
sold with a front-end sales charge of 1% and a contingent deferred sales charge
of 1% during the first 18 months. Prior to November 2, 1998, Class C shares were
sold with a contingent deferred sales charge of 1% during the first year. Class
B shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is also
available for shareholders who qualify to purchase Class A shares at net asset
value. Class Z shares are not subject to any sales or redemption charge and are
offered exclusively for sale to a limited group of investors.
There are 750 million shares of common stock authorized $.01 par value per
share, divided into four classes, designated Class A, Class B, Class C and Class
Z common stock. Class A, Class B and Class Z shares each consist of 200 million
authorized shares. Class C shares consist of 150 million authorized shares.
Transactions in shares of common stock for the six months ended March 31, 1999
and year ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ----------- -------------
<S> <C> <C>
Six months ended March 31, 1999:
Shares sold........................ 9,957,438 $ 128,651,038
Shares issued in reinvestment of
distributions.................... 2,977,458 39,600,186
Shares reacquired.................. (13,448,570) (172,012,109)
----------- -------------
Net decrease in shares outstanding
before conversion................ (513,674) (3,760,885)
Shares issued upon conversion from
Class B.......................... 1,504,238 18,860,136
----------- -------------
Net increase in shares
outstanding...................... 990,564 $ 15,099,251
----------- -------------
----------- -------------
Year ended September 30, 1998:
Shares sold........................ 16,276,703 $ 281,232,761
Shares issued in reinvestment of
distributions.................... 2,427,115 39,246,447
Shares reacquired.................. (15,693,393) (272,105,329)
----------- -------------
Net increase in shares outstanding
before conversion................ 3,010,425 48,373,879
Shares issued upon conversion from
Class B.......................... 1,693,186 28,221,380
----------- -------------
Net increase in shares
outstanding...................... 4,703,611 $ 76,595,259
----------- -------------
----------- -------------
<CAPTION>
Class B Shares Amount
- ----------------------------------- ----------- -------------
<S> <C> <C>
Six months ended March 31, 1999:
Shares sold........................ 6,943,591 $ 83,002,073
Shares issued in reinvestment of
distributions.................... 5,000,512 60,256,172
Shares reacquired.................. (14,549,690) (168,114,652)
----------- -------------
Net decrease in shares outstanding
before conversion................ (2,605,587) (24,856,407)
Shares reacquired upon conversion
into Class A..................... (1,663,777) (18,860,136)
----------- -------------
Net decrease in shares
outstanding...................... (4,269,364) $ (43,716,543)
----------- -------------
----------- -------------
Year ended September 30, 1998:
Shares sold........................ 20,431,318 $ 330,294,528
Shares issued in reinvestment of
distributions.................... 4,531,677 67,567,307
Shares reacquired.................. (19,026,353) (301,792,212)
----------- -------------
Net increase in shares outstanding
before conversion................ 5,936,642 96,069,623
Shares reacquired upon conversion
into Class A..................... (1,842,451) (28,221,380)
----------- -------------
Net increase in shares
outstanding...................... 4,094,191 $ 67,848,243
----------- -------------
----------- -------------
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
Six months ended March 31, 1999:
Shares sold........................ 748,985 $ 8,981,444
Shares issued in reinvestment of
distributions.................... 278,300 3,353,512
Shares reacquired.................. (875,902) (10,106,527)
----------- -------------
Net increase in shares
outstanding...................... 151,383 $ 2,228,429
----------- -------------
----------- -------------
Year ended September 30, 1998:
Shares sold........................ 1,868,621 $ 30,323,339
Shares issued in reinvestment of
distributions.................... 167,005 2,490,049
Shares reacquired.................. (1,164,216) (18,657,047)
----------- -------------
Net increase in shares
outstanding...................... 871,410 $ 14,156,341
----------- -------------
----------- -------------
<CAPTION>
Class Z
- -----------------------------------
<S> <C> <C>
Six months ended March 31, 1999:
Shares sold........................ 4,538,022 $ 60,361,375
Shares issued in reinvestment of
distributions.................... 1,095,136 14,718,633
Shares reacquired.................. (5,012,091) (65,220,064)
----------- -------------
Net increase in shares
outstanding...................... 621,067 $ 9,859,944
----------- -------------
----------- -------------
Year ended September 30, 1998:
Shares sold........................ 12,690,019 $ 222,947,793
Shares issued in reinvestment of
distributions.................... 908,438 14,789,363
Shares reacquired.................. (12,501,837) (220,777,112)
----------- -------------
Net increase in shares
outstanding...................... 1,096,620 $ 16,960,044
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
B-67
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------
Six Months
Ended Year Ended September 30,
March 31, -----------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 13.79 $ 18.95 $ 15.30 $ 14.18 $ 12.40
---------- -------- -------- -------- --------
Income from investment operations
Net investment income (loss)................................. .01 --(a) .02(a) .04(a) .05(a)
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.13) (3.31) 6.06 1.75 2.57
---------- -------- -------- -------- --------
Total from investment operations.......................... (.12) (3.31) 6.08 1.79 2.62
---------- -------- -------- -------- --------
Less distributions
Distributions from net realized gains........................ (1.53) (1.85) (2.43) (.67) (.84)
---------- -------- -------- -------- --------
Net asset value, end of period............................... $ 12.14 $ 13.79 $ 18.95 $ 15.30 $ 14.18
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
TOTAL RETURN(b):............................................. (27.14)% (18.90)% 45.92% 13.38% 23.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $333,674 $365,431 $412,980 $237,306 $242,231
Average net assets (000)..................................... $371,053 $443,189 $287,894 $223,091 $174,449
Ratios to average net assets:
Expenses, including distribution fees..................... 1.23%(c) 1.17% 1.21% 1.24% 1.33%
Expenses, excluding distribution fees..................... .98%(c) .92% .96% .99% 1.08%
Net investment income (loss).............................. .08%(c) -- .15% .33% .30%
For Class A, B, C and Z shares:
Portfolio turnover........................................ 20% 36% 58% 53% 64%
<CAPTION>
1994
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 13.06
--------
Income from investment operations
Net investment income (loss)................................. --(a)
Net realized and unrealized gain (loss) on investment
transactions.............................................. .13
--------
Total from investment operations.......................... .13
--------
Less distributions
Distributions from net realized gains........................ (.79)
--------
Net asset value, end of period............................... $ 12.40
--------
--------
TOTAL RETURN(b):............................................. 1.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $103,078
Average net assets (000)..................................... $ 97,877
Ratios to average net assets:
Expenses, including distribution fees..................... 1.33%
Expenses, excluding distribution fees..................... 1.09%
Net investment income (loss).............................. .00%
For Class A, B, C and Z shares:
Portfolio turnover........................................ 82%
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) 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.
(c) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-68
<PAGE>
Financial Highlights PRUDENTIAL SMALL COMPANY
(Unaudited) VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------
Six Months
Ended Year Ended September 30,
March 31, -----------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 12.63 $ 17.64 $ 14.49 $ 13.56 $ 11.99
---------- -------- -------- -------- --------
Income from investment operations
Net investment income (loss)................................. (.04) (.12)(a) (.09)(a) (.06)(a) (.06)(a)
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.10) (3.04) 5.67 1.66 2.47
---------- -------- -------- -------- --------
Total from investment operations.......................... (.14) (3.16) 5.58 1.60 2.41
---------- -------- -------- -------- --------
Less distributions
Distributions from net realized gains........................ (1.53) (1.85) (2.43) (.67) (.84)
---------- -------- -------- -------- --------
Net asset value, end of period............................... $ 10.96 $ 12.63 $ 17.64 $ 14.49 $ 13.56
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
TOTAL RETURN(b):............................................. (27.68)% (19.52)% 44.91% 12.56% 22.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $399,235 $514,159 $645,579 $378,861 $361,873
Average net assets (000)..................................... $492,799 $678,462 $443,761 $355,636 $349,929
Ratios to average net assets:
Expenses, including distribution fees..................... 1.98%(c) 1.92% 1.96% 1.99% 2.08%
Expenses, excluding distribution fees..................... .98%(c) .92% .96% .99% 1.08%
Net investment income (loss).............................. (.67)%(c) (.75)% (.60)% (.42)% (.51)%
<CAPTION>
1994
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 12.74
--------
Income from investment operations
Net investment income (loss)................................. (.09)(a)
Net realized and unrealized gain (loss) on investment
transactions.............................................. .13
--------
Total from investment operations.......................... .04
--------
Less distributions
Distributions from net realized gains........................ (.79)
--------
Net asset value, end of period............................... $ 11.99
--------
--------
TOTAL RETURN(b):............................................. .34%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $425,502
Average net assets (000)..................................... $399,920
Ratios to average net assets:
Expenses, including distribution fees..................... 2.09%
Expenses, excluding distribution fees..................... 1.09%
Net investment income (loss).............................. (.76)%
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) 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.
(c) Annualized
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-69
<PAGE>
Financial Highlights PRUDENTIAL SMALL COMPANY
(Unaudited) VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
---------------------------------------------------------
Six Months
Ended Year Ended September 30,
March 31, ------------------------------------------
1999 1998 1997 1996 1995
---------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 12.63 $ 17.64 $ 14.49 $13.56 $11.99
---------- -------- ------- ------ ------
Income from investment operations
Net investment income (loss)................................. (.04) (.12)(a) (.09)(a) (.06)(a) (.06)(a)
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.10) (3.04) 5.67 1.66 2.47
---------- -------- ------- ------ ------
Total from investment operations.......................... (.14) (3.16) 5.58 1.60 2.41
---------- -------- ------- ------ ------
Less distributions
Distributions from net realized gains........................ (1.53) (1.85) (2.43) (.67) (.84)
---------- -------- ------- ------ ------
Net asset value, end of period............................... $ 10.96 $ 12.63 $ 17.64 $14.49 $13.56
---------- -------- ------- ------ ------
---------- -------- ------- ------ ------
TOTAL RETURN(b):............................................. (27.68)% (19.52)% 44.91% 12.56% 22.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 24,912 $ 26,804 $22,049 $4,323 $1,545
Average net assets (000)..................................... $ 28,032 $ 29,259 $ 8,762 $2,786 $ 784
Ratios to average net assets:
Expenses, including distribution fees..................... 1.98%(c) 1.92% 1.96% 1.99% 2.08%
Expenses, excluding distribution fees..................... .98%(c) .92% .96% .99% 1.08%
Net investment income (loss).............................. (.67)%(c) (.75)% (.60)% (.42)% (.46)%
<CAPTION>
August 1,
1994(d)
Through
September 30,
1994
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 11.61
-----
Income from investment operations
Net investment income (loss)................................. (.01)(a)
Net realized and unrealized gain (loss) on investment
transactions.............................................. .39
-----
Total from investment operations.......................... .38
-----
Less distributions
Distributions from net realized gains........................ --
-----
Net asset value, end of period............................... $ 11.99
-----
-----
TOTAL RETURN(b):............................................. 3.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 269
Average net assets (000)..................................... $ 179
Ratios to average net assets:
Expenses, including distribution fees..................... 2.22%(c)
Expenses, excluding distribution fees..................... 1.22%(c)
Net investment income (loss).............................. (.31)%(c)
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the period.
(b) 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.
(c) Annualized.
(d) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-70
<PAGE>
Financial Highlights PRUDENTIAL SMALL COMPANY
(Unaudited) VALUE FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
------------------------------------------------------
March 1,
Six Months Year Ended September 1996(d)
Ended 30, Through
March 31, --------------------- September 30,
1999 1998 1997 1996
---------- -------- -------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 13.92 $ 19.04 $ 15.32 $ 13.69
---------- -------- -------- ------
Income from investment operations
Net investment income (loss)................................. .02 .04(a) .06(a) .05(a)
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.13) (3.31) 6.09 1.58
---------- -------- -------- ------
Total from investment operations.......................... (.11) (3.27) 6.15 1.63
---------- -------- -------- ------
Less distributions
Distributions from net realized gains........................ (1.53) (1.85) (2.43) --
---------- -------- -------- ------
Net asset value, end of period............................... $ 12.28 $ 13.92 $ 19.04 $ 15.32
---------- -------- -------- ------
---------- -------- -------- ------
TOTAL RETURN(b):............................................. (26.93)% (18.58)% 46.38% 11.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $118,572 $125,770 $151,215 $68,516
Average net assets (000)..................................... $130,112 $154,623 $ 97,310 $66,228
Ratios to average net assets:
Expenses, including distribution fees..................... .98%(c) .92% .96% .99%(c)
Expenses, excluding distribution fees..................... .98%(c) .92% .96% .99%(c)
Net investment income (loss).............................. .33%(c) .25% .40% .58%(c)
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the period.
(b) 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.
(c) Annualized.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-71
<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, that is, 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.
VALUE OF $1.00 INVESTED ON 1/1/26 THROUGH 12/31/96
<TABLE>
<CAPTION>
<S> <C>
Small Stocks $5,116.95
Common Stocks $2,350.89
Long-Term Bonds $ 44.18
Treasury Bills $ 14.95
Inflation $ 9.16
</TABLE>
Source: Ibbotson Associates. Used with permission. This chart is for
illustrative purposes only and is not indicative of the past, present, or future
performance of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "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>
<CAPTION>
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT TREASURY BONDS(1) 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT MORTGAGE SECURITIES(2) 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE CORPORATE
BONDS(3) 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD CORPORATE BONDS(4) 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- --------------------------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT BONDS(5) 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.12 8.4
</TABLE>
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one
year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of
the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign
governments, municipalities, governmental agencies or international
agencies. All bonds in the index have maturities of at least one year.
Source: Lipper Inc.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at least
one year.
(5) SALOMON SMITH BARNEY BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes
over 800 bonds issued by various foreign governments or agencies, excluding
those in the U.S., but including those in Japan, Germany, France, the U.K.,
Canada, Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden,
and Austria. All bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major
world stock markets for the period from 1985
through December 31, 1998. It does not represent the
performance of any Prudential Mutual Fund.
TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS 12/31/85 - 12/31/98 (IN U.S. DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS
(12/31/85 - 12/31/98) (IN U.S. DOLLARS)
Belgium 22.7%
Spain 22.5%
The Netherlands 20.8%
Sweden 19.9%
Switzerland 18.3%
USA 18.1%
Hong Kong 17.8%
France 17.4%
UK 16.7%
Germany 13.4%
Austria 8.9%
Japan 6.5%
</TABLE>
Source: Morgan Stanley Capital International (MSCI) and
Lipper, Inc. as of 12/31/98. Used with permission.
Morgan Stanley Country indices are unmanaged indices which
include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the
reinvestment of all distributions. This chart is for illustrative
purposes only and is not indicative of the past, present or
future performance of any specific investment. Investors
cannot invest directly in stock indices.
This chart shows the growth of a hypothetical
$10,000 investment made in the stocks representing
the S&P 500 stock index with and without reinvested
dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Appreciation and Reinvesting
Dividends $391,707
Capital Appreciation only $133,525
</TABLE>
[CHART]
Capital Appreciation and Reinvesting Dividends $228,266
Capital Appreciation Only $80,535
$10,000 Investment in 1969 through 1996
Source: Lipper Inc. Used with permission. All rights reserved.
This chart is used for illustrative purposes only and is not intended to
represent the past, present or future performance of any Prudential
Mutual Fund. Common stock total return is based on the Standard
& Poor's 500 Stock Index, a market-value-weighted index made up
of 500 of the largest stocks in the U.S. based upon their stock
market value. Investors cannot invest directly in indexes.
II-3
<PAGE>
---------------------------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $15.8 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 1.8%
U.S. 51.0%
Europe 34.7%
Pacific
Basin 12.5%
</TABLE>
Source: Morgan Stanley Capital International, December 31, 1998.
Used with permission. This chart represents the capitalization of
major world stock markets as measured by the Morgan Stanley
Capital International (MSCI) World Index. The total market
capitalization is based on the value of approximately 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.
LONG U.S. TREASURY BOND YIELD IN PERCENT
(1926-1998)
[CHART]
YEAR-END
Source: Ibbotson Associates. Used with permission. All rights reserved.
This chart illustrates the historical yield of the long-term U.S. Treasury
Bond from 1926-1998. Yields represent that of an annually renewed one-bond
portfolio with a remaining maturity of approximately 20 years. This chart
is for illustrative purposes only and should not be construed to represent
the yields of any Prudential Mutual Fund.
II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and nearly
6,500 domestic and international financial advisors. Prudential is a major
issuer of annuities, including variable annuities. Prudential seeks to develop
innovative products and services to meet consumer needs in each of its business
areas. Prudential uses the rock of Gibraltar as its symbol. The Prudential rock
is a recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 40 million people worldwide.
Long one of the largest issuers of life insurance, Prudential has 25 million
life insurance policies in force today with a face value of almost $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. Prudential provides auto insurance for more than
1.5 million cars and insures approximately 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part) manages over $211 billion in assets of
institutions and individuals. In INSTITUTIONAL INVESTOR, July 1998, Prudential
was ranked eighth in terms of total assets under management as of December 31,
1997.
REAL ESTATE. The Prudential Real Estate Affiliates is one of the leading
real estate, residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers with over 1,400 offices around the
United States.(2)
FINANCIAL SERVICES. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of Prudential, has over $1 billion in assets and serves nearly 1.5
million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of November 30, 1998, Prudential Investments Fund Management is the 18th
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- --------------
(1) PIC serves as the subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to Prudential Diversified Funds, Prudential 20/20 Focus Fund,
Prudential Sector Funds, Inc. and The Prudential Investment Portfolios, Inc.
and Mercator Asset Management LP as the subadviser to International Stock
Series, a portfolio of Prudential World Fund, Inc. There are multiple
subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1996
III-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
EQUITY FUNDS. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth Fund, a growth-style equity fund managed by Jennison Associates LLC, a
premier institutional equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Investment grade bond analysts monitor the financial
viability of different bond issuers in the investment grade corporate and
municipal bond markets-- from IBM to small municipalities, such as Rockaway
Township, New Jersey. These analysts consider among other things sinking fund
provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP and PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers have met with several senior U.S. and foreign
government officials, on issues ranging from economic conditions in foreign
countries to the viability of index-linked securities in the United States.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(4)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment and financial planning
areas.
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- --------------
(3) As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
(4) As of December 31, 1998.
III-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) Amended and Restated Articles of Incorporation. Incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 17 to the
Registration Statement filed on Form N-1A via EDGAR on November 29,
1993 (File No. 2-68723).
(2) Articles of Amendment. Incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 20 to the Registration Statement filed on
Form N-1A via EDGAR on November 29, 1994 (File No. 2-68723).
(3) Articles of Amendment. Incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 24 to the Registration Statement filed on
Form N-1A via EDGAR on December 13, 1996 (File No. 2-68723).
(4) Articles of Amendment. Incorporated by reference to Exhibit 1(d) to
Post-Effective Amendment No. 25 to the Registration Statement filed on
Form N-1A via EDGAR on December 2, 1997 (File No. 2-68723).
(5) Articles Supplementary. Incorporated by reference to Exhibit 1(e) to
Post-Effective Amendment No. 26 to the Registration Statement filed on
Form N-1A via EDGAR on November 27, 1998 (File No. 2-68723).
(b) Amended and Restated By-Laws. Incorporated by reference to Exhibit 2(d) to
Post-Effective Amendment No. 17 to the Registration Statement filed on Form
N-1A via EDGAR on November 29, 1993 (File No. 2-68723).
(c) Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibit 4(c) to Post-Effective Amendment No. 17
to the Registration Statement filed on Form N-1A via EDGAR filed on November
29, 1993 (File No. 2-68723).
(d) (1) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc.*
(2) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation.*
(e) (1) Distribution Agreement. Incorporated by reference to Exhibit 6(a) to
Post-Effective Amendment No. 26 to the Registration Statement filed on
Form N-1A via EDGAR on November 27, 1998 (File No. 2-68723).
(2) Form of Selected Dealer Agreement. Incorporated by reference to Exhibit
6(b) to Post-Effective Amendment No. 26 to the Registration Statement
filed on Form N-1A via EDGAR on November 27, 1998 (File No. 2-68723).
(g) (1) Custodian Agreement between the Registrant and State Street Bank and
Trust Company.*
(2) Amended Custodian Agreement between the Registrant and State Street Bank
and Trust Company.**
(3) Amendment to Custodian Agreement.*
(h) (1) Transfer Agency Agreement between the Registrant and Prudential Mutual
Fund Services, Inc., dated January 1, 1988.*
(2) Amendment to Transfer Agency Agreement.*
(i) Opinion and Consent of Counsel.*
(m) (1) Amended and Restated Distribution and Service Plan for Class A shares.
Incorporated by reference to Exhibit 15(a) to Post-Effective Amendment
No. 26 to the Registration Statement filed on Form N-1A via EDGAR on
November 27, 1998 (File No. 2-68723).
C-1
<PAGE>
(2) Amended and Restated Distribution and Service Plan for Class B shares.
Incorporated by reference to Exhibit 15(b) to Post-Effective Amendment
No. 26 to the Registration Statement filed on Form N-1A via EDGAR on
November 27, 1998 (File No. 2-68723).
(3) Amended and Restated Distribution and Service Plan for Class C shares.
Incorporated by reference to Exhibit 15(c) to Post-Effective Amendment
No. 26 to the Registration Statement filed on Form N-1A via EDGAR on
November 27, 1998 (File No. 2-68723).
(o) Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to Post-Effective
Amendment No. 26 to the Registration Statement filed on Form N-1A via EDGAR
on November 27, 1998 (File No. 2-68723).
- ------------------------
*Filed herewith.
**To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None.
ITEM 25. INDEMNIFICATION
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit (b) to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any stockholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit (e) to
the Registration Statement), Prudential Investment Management Services LLC or
the Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC
C-2
<PAGE>
(PIFM) and The Prudential Investment Corporation (PIC), respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC (PIFM)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this Registration
Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. The address of each person is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- --------------------------------- ------------------------------ --------------------------------------------------
<S> <C> <C>
David R. Odenath, Jr. Officer in Charge, President, Officer in Charge, President, Chief Executive
Chief Executive Officer and Officer and Chief Operating Officer, PIMS;
Chief Operating Officer Senior Vice President, The Prudential Insurance
Company of America (Prudential)
Robert F. Gunia Executive Vice President and Executive Vice President and Chief Administrative
Chief Administrative Officer Officer, PIMS; Vice President, Prudential;
President, Prudential Investment Management
Services LLC (PIMS)
William V. Healey Executive Vice President, Executive Vice President, Chief Legal Officer and
Chief Legal Officer and Secretary, PIMS; Vice President and Associate
Secretary General Counsel, Prudential; Senior Vice
President, Chief Legal Officer and Secretary,
PIMS
Brian W. Henderson Executive Vice President Executive Vice President, PIMS; Senior Vice
President and Chief Operating Officer, PIMS
Stephen Pelletier Executive Vice President Executive Vice President, PIMS
Judy A. Rice Executive Vice President Executive Vice President, PIMS
Lynn M. Waldvogel Executive Vice President Executive Vice President, PIMS
</TABLE>
(b) The Prudential Investment Corporation (PIC)
C-3
<PAGE>
See "How the Fund is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory and
Other Services" in the Statement of Additional Information constituting Part B
of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza, Newark,
NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- --------------------------------- ------------------------------ --------------------------------------------------
<S> <C> <C>
Jeffrey Hiller Chief Compliance Officer Chief Compliance Officer, Prudential Private Asset
Management
John R. Strangfeld, Jr. Chairman of the Board, President of Private Asset Management Group of
President, Chief Executive Prudential; Senior Vice President, Prudential;
Officer and Director Chairman of the Board, President, Chief
Executive Officer and Director, PIC
Bernard Winograd Senior Vice President and Chief Executive Officer, Prudential Real Estate
Director Investors; Senior Vice President and Director,
PIC
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Money Fund, Command
Government Fund, Command Tax-Free Fund, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc., (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Distressed Securities Fund, Inc., Prudential Diversified Bond Fund, Inc.,
Prudential Diversified Funds, Prudential Emerging Growth Fund, Inc., Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund,
Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity
Fund, Inc., Prudential Global Total Return Fund, Inc., Prudential Government
Income Fund, Inc., Prudential Government Securities Trust, Prudential High Yield
Fund, Inc., Prudential High Yield Total Return Fund, Inc., Prudential Index
Series Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential International Bond Fund, Inc.,
Prudential Mid-Cap Value Fund, Prudential MoneyMart Assets, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National
Municipals Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund, Prudential
Sector Funds, Inc., Prudential Small-Cap Quantum Fund, Inc., Prudential Small
Company Value Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential
Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential
Tax-Managed Equity Fund, Prudential 20/20 Focus Fund, Prudential World Fund,
Inc., The Prudential Investment Portfolios, Inc. and The Target Portfolio Trust.
(b) Information concerning the officers and directors of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- --------------------------------- ----------------------------------------------------- -----------------------------
<S> <C> <C>
Margaret Deverell................ Vice President and Chief Financial Officer None
Robert F. Gunia.................. President Vice President and Director
Kevin Frawley.................... Senior Vice President and Compliance Officer None
213 Washington Street
Newark, NJ 07102
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- --------------------------------- ----------------------------------------------------- -----------------------------
<S> <C> <C>
William V. Healey................ Senior Vice President, Secretary and Chief Legal None
Officer
Brian Henderson.................. Senior Vice President and Officer None
Mark Smith....................... Chief Operating Officer None
John R. Strangfeld, Jr........... Advisory Board Member President and Director
<FN>
- ------------------------
(1) The address of each person named is Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077 unless otherwise noted.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and Prudential Mutual
Fund Services, LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents
required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) and
Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center Three,
100 Mulberry Street, Newark, New Jersey 07102-4077 and the remaining accounts,
books and other documents required by such other pertinent provisions of Section
31(a) and the Rules promulgated thereunder will be kept by State Street Bank and
Trust Company and Prudential Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is
Managed--Manager", "How the Fund is Managed-- Investment Adviser" and "How the
Fund is Managed--Distributor" in the Prospectus and the caption "Investment
Advisory and Other Services" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Post-Effective Amendment to
the Registration Statement, Registrant is not a party to any management-related
service contract.
ITEM 30. UNDERTAKINGS
Not applicable.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Fund has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, duly authorized, in the
City of Newark, and the State of New Jersey, on the 28th day of September, 1999.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
/s/ John R. Strangfeld, Jr.
------------------------------------------
JOHN R. STRANGFELD, JR., PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ ------- ------------------
<S> <C> <C>
/s/ Edward D.
Beach
- ------------------------------------ Director September 28, 1999
EDWARD D. BEACH
/s/ Delayne D.
Gold
- ------------------------------------ Director September 28, 1999
DELAYNE D. GOLD
/s/ Robert F.
Gunia
- ------------------------------------ Director September 28, 1999
ROBERT F. GUNIA
/s/ Douglas H.
McCorkindale
- ------------------------------------ Director September 28, 1999
DOUGLAS H. MCCORKINDALE
/s/ Thomas T.
Mooney
- ------------------------------------ Director September 28, 1999
THOMAS T. MOONEY
/s/ Stephen P.
Munn
- ------------------------------------ Director September 28, 1999
STEPHEN P. MUNN
/s/ David R. Odenath,
Jr.
- ------------------------------------ Director September 28, 1999
DAVID R. ODENATH, JR.
/s/ Richard A.
Redeker
- ------------------------------------ Director September 28, 1999
RICHARD A. REDEKER
/s/ Robin B.
Smith
- ------------------------------------ Director September 28, 1999
ROBIN B. SMITH
/s/ John R. Strangfeld,
Jr.
- ------------------------------------ President and Director September 28, 1999
JOHN R. STRANGFELD, JR.
/s/ Louis A. Weil,
III
- ------------------------------------ Director September 28, 1999
LOUIS A. WEIL, III
/s/ Clay T.
Whitehead
- ------------------------------------ Director September 28, 1999
CLAY T. WHITEHEAD
/s/ Grace C.
Torres Treasurer and Principal September 28, 1999
- ------------------------------------ Financial and Accounting
GRACE C. TORRES Officer
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBITS
(a) (1) Amended and Restated Articles of Incorporation. Incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 17 to the
Registration Statement filed on Form N-1A via EDGAR on November 29,
1993 (File No. 2-68723).
(2)Articles of Amendment. Incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 20 to the Registration Statement filed on
Form N-1A via EDGAR on November 29, 1994 (File No. 2-68723).
(3)Articles of Amendment. Incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 24 to the Registration Statement filed on
Form N-1A via EDGAR on December 13, 1996 (File No. 2-68723).
(4)Articles of Amendment. Incorporated by reference to Exhibit 1(d) to
Post-Effective Amendment No. 25 to the Registration Statement filed on
Form N-1A via EDGAR on December 2, 1997 (File No. 2-68723).
(5)Articles Supplementary. Incorporated by reference to Exhibit 1(e) to
Post-Effective Amendment No. 26 to the Registration Statement filed on
Form N-1A via EDGAR on November 27, 1998 (File No. 2-68723).
(b) Amended and Restated By-Laws. Incorporated by reference to Exhibit 2(d) to
Post-Effective Amendment No. 17 to the Registration Statement filed on Form
N-1A via EDGAR on November 29, 1993 (File No. 2-68723).
(c) Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibit 4(c) to Post-Effective Amendment No. 17
to the Registration Statement filed on Form N-1A via EDGAR filed on November
29, 1993 (File No. 2-68723).
(d) (1) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc.*
(2)Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
The Prudential Investment Corporation.*
(e) (1) Distribution Agreement. Incorporated by reference to Exhibit 6(a) to
Post-Effective Amendment No. 26 to the Registration Statement filed on
Form N-1A via EDGAR on November 27, 1998 (File No. 2-68723).
(2)Form of Selected Dealer Agreement. Incorporated by reference to Exhibit
6(b) to Post-Effective Amendment No. 26 to the Registration Statement
filed on Form N-1A via EDGAR on November 27, 1998 (File No. 2-68723).
(g) (1) Custodian Agreement between the Registrant and State Street Bank and
Trust Company.*
(2)Amended Custodian Agreement between the Registrant and State Street Bank
and Trust Company.**
(3)Amendment to Custodian Agreement.*
(h) (1) Transfer Agency Agreement between the Registrant and Prudential Mutual
Fund Services, Inc., dated January 1, 1988.*
(2)Amendment to Transfer Agency Agreement.*
(i) Opinion and Consent of Counsel.*
(m) (1) Amended and Restated Distribution and Service Plan for Class A shares.
Incorporated by reference to Exhibit 15(a) to Post-Effective Amendment
No. 26 to the Registration Statement filed on Form N-1A via EDGAR on
November 27, 1998 (File No. 2-68723).
(2)Amended and Restated Distribution and Service Plan for Class B shares.
Incorporated by reference to Exhibit 15(b) to Post-Effective Amendment
No. 26 to the Registration Statement filed on Form N-1A via EDGAR on
November 27, 1998 (File No. 2-68723).
(3)Amended and Restated Distribution and Service Plan for Class C shares.
Incorporated by reference to Exhibit 15(c) to Post-Effective Amendment
No. 26 to the Registration Statement filed on Form N-1A via EDGAR on
November 27, 1998 (File No. 2-68723).
(o) Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to Post-Effective
Amendment No. 26 to the Registration Statement filed on Form N-1A via EDGAR
on November 27, 1998 (File No. 2-68723).
- ------------
*Filed herewith.
**To be filed by amendment.
<PAGE>
PRUDENTIAL-BACHE GROWTH OPPORTUNITY FUND, INC.
MANAGEMENT AGREEMENT
Agreement, made this 31st day of January, 1989 between
Prudential-Bache Growth Opportunity Fund, Inc., a Maryland corporation (the
"Fund"), and Prudential Mutual Fund Management, Inc., a Delaware corporation
(the "Manager").
WITNESSETH
WHEREAS, the Fund is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund desires to retain the Manager to render or contract
to obtain as hereinafter provided investment advisory services to the Fund and
the Fund also desires to avail itself of the facilities available to the Manager
with respect to the administration of its day to day corporate affairs, and the
Manager is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the
Fund and administrator of its corporate affairs for the period and on the terms
set forth in this Agreement. The Manager accepts such appointment and agrees to
render the services herein described, for the compensation herein provided. The
Manager will enter into an agreement, dated the date hereof, with The Prudential
Investment Corporation ("PIC") pursuant to which PIC shall furnish to the Fund
the investment advisory services specified therein in connection with the
management of the Fund. Such agreement in the form attached as Exhibit A is
hereinafter referred to as the "Subadvisory Agreement." The Manager will
continue to
<PAGE>
have responsibility for all investment advisory services furnished pursuant to
the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund,
the Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or loaned by the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus (hereinafter defined) of the Fund and
with the instructions and directions of the Board of Directors of the Fund
and will conform to and comply with the requirements of the 1940 Act and
all other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts
to be purchased or sold by the Fund and will place orders
-2-
<PAGE>
pursuant to its determinations with or through such persons, brokers,
dealers or futures commission merchants (including but not limited to
Prudential-Bache Securities Inc.) in conformity with the policy with
respect to brokerage as set forth in the Fund's Registration Statement and
Prospectus (hereinafter defined) or as the Board of Directors may direct
from time to time. In providing the Fund with investment supervision, it
is recognized that the Manager will give primary consideration to securing
the most favorable price and efficient execution. Consistent with this
policy, the Manager may consider the financial responsibility, research and
investment information and other services provided by brokers, dealers or
futures commission merchants who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may
be a party. It is understood that Prudential-Bache Securities Inc. may be
used as principal broker for securities transactions but that no formula
has been adopted for allocation of the Fund's investment transaction
business. It is also understood that it is desirable for the Fund that the
Manager have access to supplemental investment and market research and
security and economic analysis provided by brokers or futures commission
merchants and that such brokers may execute brokerage transactions at a
higher cost to the Fund than may result when allocating brokerage to other
brokers or futures commission merchants on the basis of seeking the most
favorable price and efficient execution. Therefore, the Manager is
authorized to pay higher brokerage commissions for the purchase and sale of
-3-
<PAGE>
securities and futures contracts for the Fund to brokers or futures
commission merchants who provide such research and analysis, subject to
review by the Fund's Board of Directors from time to time with respect to
the extent and continuation of this practice. It is understood that the
services provided by such broker or futures commission merchant may be
useful to the Manager in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a security
or a futures contract to be in the best interest of the Fund as well as
other clients of the Manager or the Subadviser, the Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities or futures contracts to be so sold
or purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities or futures contracts so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to
the Fund's portfolio transactions and shall render to the Fund's Board of
Directors such periodic and special reports as the Board may reasonably
request.
(e) The Manager shall be responsible for the financial and accounting
records to be maintained by the Fund (including those
-4-
<PAGE>
being maintained by the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets.
(g) The investment management services of the Manager to the Fund
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the
Secretary of State of Maryland (such Articles of Incorporation, as in
effect on the date hereof and as amended from time to time, are herein
called the "Articles of Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund
authorizing the appointment of the Manager and approving the form of this
agreement;
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-1A (the "Registration Statement"), as filed
with the Securities and Exchange Commission (the "Commission") relating to
the Fund and shares of the Fund's Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the 1940
-5-
<PAGE>
Act on Form N-8A as filed with the Commission and all amendments thereto;
and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of the Fund
to serve in the capacities in which they are elected. All services to be
furnished by the Manager under this Agreement may be furnished through the
medium of any such directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to
be maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request,
provided however that the Manager may retain a copy of such records. The
Manager further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any such records as are required to be maintained by the
Manager pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) 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 the Manager or the Fund's investment
-6-
<PAGE>
adviser,
(ii) all expenses incurred by the Manager or by the Fund in
connection with managing the ordinary course of the Fund's business other
than those assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to the
Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with the
management of the investment and reinvestment of the Fund's assets,
(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 expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Fund and
the providing of any such records to the Manager useful to the Manager in
connection with the Manager's responsibility for the accounting records of
the Fund pursuant to Section 31 of the 1940 Act and the rules promulgated
thereunder, (iii) the pricing of the shares of the Fund, including the cost
of any pricing service or services which may be retained pursuant to the
authorization of the Board of Directors of the Fund, and (iv) for both mail
and wire orders, the cashiering function in connection with the issuance
and redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and
-7-
<PAGE>
Dividend Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable
to the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal,
state or other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a
member,
(i) the cost of stock certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Securities and Exchange
Commission, registering the Fund as a broker or dealer and qualifying its
shares under state securities laws, including the preparation and printing
of the Fund's registration statements, prospectuses and statements of
additional information for filing under federal and state securities laws
for such purposes,
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and directors'
-8-
<PAGE>
meetings and of preparing, printing and mailing reports to shareholders in
the amount necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year
(including the fees payable to the Manager but excluding interest, taxes,
brokerage commissions, distribution fees and litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course of
the Fund's business) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of any
jurisdictions in which shares of the Fund are then qualified for offer and sale,
the compensation due the Manager will be reduced by the amount of such excess,
or, if such reduction exceeds the compensation payable to the Manager, the
Manager will pay to the Fund the amount of such reduction which exceeds the
amount of such compensation.
8. For the services provided and the expenses assumed pursuant to
this Agreement, the Fund will pay to the Manager as full compensation therefor a
fee at an annual rate of .70 of 1% of the Fund's average daily net assets. This
fee will be computed daily and will be paid to the Manager monthly. Any
reduction in the fee payable and any payment by the Manager to the Fund pursuant
to paragraph 7 shall be made monthly.
-9-
<PAGE>
Any such reductions or payments are subject to readjustment during the year.
9. The Manager shall not be liable for any error of judgment or for
any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section
36(b)(3) of the 1940 Act) or loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the Fund
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, or by the Manager at any time, without the payment of any
penalty, on not more than 60 days' nor less than 30 days' written notice to the
other party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act.)
11. Nothing in this Agreement shall limit or restrict the right of
any director, officer or employee of the Manager who may also be a director,
officer or employee of the Fund to engage in any other business or to devote
his or her time and attention in part to the management or
-10-
<PAGE>
other aspects of any business, whether of a similar or dissimilar nature, nor
limit or restrict the right of the Manager to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association.
12. Except as otherwise provided herein or authorized by the Board
of Directors of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
13. During the term of this Agreement, the Fund agrees to furnish
the Manager at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature, or other material prepared for distribution
to shareholders of the Fund or the public, which refer in any way to the
Manager, prior to use thereof and not to use such material if the Manager
reasonably objects in writing within five business days (or such other time as
may be mutually agreed) after receipt thereof. In the event of termination of
this Agreement, the Fund will continue to furnish to the Manager copies of any
of the above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery. The Fund shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Fund as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent
of the Fund must be obtained in conformity with the requirements of
-11-
<PAGE>
the 1940 Act.
15. Any notice or other communication required to be given pursuant
to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Manager at One Seaport Plaza, New
York, N.Y. 10292, Attention: Secretary; or (2) to the Fund at One Seaport
Plaza, New York, N.Y. 10292, Attention: President.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
17. The Fund may use the name "Prudential-Bache Growth Opportunity
Fund, Inc." or any name including the words "Prudential" or "Bache" only for so
long as this Agreement or any extension, renewal or amendment hereof remains in
effect, including any similar agreement with any organization which shall have
succeeded to the Manager's business as Manager or any extension, renewal or
amendment thereof remain in effect. At such time as such an agreement shall no
longer be in effect, the Fund will (to the extent that it lawfully can) cease to
use such a name or any other name indicating that it is advised by, managed by
or otherwise connected with the Manager, or any organization which shall have so
succeeded to such businesses. In no event shall the Fund use the name
"Prudential-Bache Growth Opportunity Fund, Inc." or any name including the word
"Prudential" or "Bache" if the Manager's function is transferred or assigned to
a company of which The Prudential Insurance Company of America does not have
control.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL-BACHE GROWTH OPPORTUNITY
FUND, INC.
By /s/ Lawrence C. McQuade
------------------------------------------
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Michael J. Downey
------------------------------------------
-13-
<PAGE>
PRUDENTIAL-BACHE GROWTH OPPORTUNITY FUND, INC.
SUBADVISORY AGREEMENT
Agreement made as of this 31st day of January, 1989 between Prudential
Mutual Fund Management Inc., a Delaware Corporation ("PMF" or the "Manager"),
and The Prudential Investment Corporation, a New Jersey Corporation (the
"Subadviser").
WHEREAS, the Manager has entered into a Management Agreement, dated
January 31, 1989 (the "Management Agreement"), with Prudential-Bache Growth
Opportunity Fund, Inc. (the "Fund"), a Maryland corporation and a diversified
open-end management investment company registered under the Investment Company
Act of 1940 (the "1940 Act"), pursuant to which PMF will act as Manager of
the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund
and the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Fund, the Subadviser shall manage the investment
operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance
with the Fund's investment objectives, policies and restrictions as
stated in the Prospectus, (such Prospectus and Statement of Additional
Information as currently in effect and as amended or supplemented from
time to time, being herein called the "Prospectus"), and subject to the
following understandings:
(i) The Subadviser shall provide supervision of the
Fund's investments and determine from time to time what
investments and securities will be purchased, retained, sold or
loaned by the Fund, and what portion of the assets will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations
under this Agreement, the Subadviser shall act in conformity with
the Articles of Incorporation, By-Laws and Prospectus of the Fund
and with the instructions and directions of the Manager and of
the Board of Directors of the Fund and will conform to and
comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state
laws and regulations.
<PAGE>
(iii) The Subadviser shall determine the securities and
futures contracts to be purchased or sold by the Fund and will
place orders with or through such persons, brokers, dealers or
futures commission merchants (including but not limited to
Prudential-Bache Securities Inc.) to carry out the policy
with respect to brokerage as set forth in the Fund's
Registration Statement and Prospectus or as the Board of
Directors may direct from time to time. In providing the Fund
with investment supervision, it is recognized that the
Subadviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework
of this policy, the Subadviser may consider the financial
responsibility, research and investment information and other
services provided by brokers, dealers or futures commission
merchants who may effect or be a party to any such transaction
or other transactions to which the Subadviser's other clients
may be a party. It is understood that Prudential-Bache
Securities Inc. may be used as principal broker for securities
transactions but that no formula has been adopted for
allocation of the Fund's investment transaction business. It
is also understood that it is desirable for the Fund that the
Subadviser have access to supplemental investment and market
research and security and economic analysis provided by brokers
or futures commission merchants who may execute brokerage
transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers on the basis of seeking
the most favorable price and efficient execution. Therefore,
the Subadviser is authorized to place orders for the purchase
and sale of securities and futures contracts for the Fund with
such brokers or futures commission merchants, subject to review
by the Fund's Board of Directors from time to time with respect
to the extent and continuation of this practice. It is
understood that the services provided by such brokers or
futures commission merchants may be useful to the Subadviser in
connection with the Subadviser's services to other clients.
On occasions when the Subadviser deems the purchase or
sale of a security or futures contract to be in the best
interest of the Fund as well as other clients of the
Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities or futures contracts to
be sold or purchased in order to obtain the most favorable
price or lower brokerage commissions and efficient
-2-
<PAGE>
execution. In such event, allocation of the securities or
futures contracts so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Subadviser in
the manner the Subadviser considers to be the most equitable
and consistent with its fiduciary obligations to the Fund and
to such other clients.
(iv) The Subadviser shall maintain all books and records
with respect to the Fund's portfolio transactions required by
subparagraphs (b)(5), (6), (7), (9), (10) and (11) and
paragraph (f) of rule 31a-1 under the 1940 Act and shall render
to the Fund's Trustees such periodic and special reports as the
Trustees may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian on
each business day with information relating to all transactions
concerning the Fund's assets and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Subadviser hereunder are not to be deemed exclusive, and the
Subadviser shall be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers
of the Fund to serve in the capacities in which they are elected.
Services to be furnished by the Subadviser under this Agreement may
be furnished through the medium of any of such directors, officers
or employees.
(c) The Subadviser shall keep the Fund's books and records required
to be maintained by the Subadviser pursuant to paragraph 1(a) hereof
and shall timely furnish to the Manager all information relating to
the Subadviser's services hereunder needed by the Manager to keep
the other books and records of the Fund required by Rule 31a-1 under
the 1940 Act. The Subadviser agrees that all records which it
maintains for the Fund are the property of the Fund and the
Subadviser will surrender promptly to the Fund any of such records
upon the Fund's request, provided however that the Subadviser may
retain a copy of such records. The Subadviser further agrees to
preserve for the periods prescribed by Rule 31a-2 of the Commission
under the 1940 Act any such records as are required to be maintained
by it pursuant to paragraph 1(a) hereof.
-3-
<PAGE>
2. The Manager shall continue to have responsibility for all services to
be provided to the Fund pursuant to the Management Agreement and shall
oversee and review the Subadviser's performance of its duties under this
Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs and
expenses incurred by the Subadviser determined in a manner acceptable to
the Manager in furnishing the services described in paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or for
any loss suffered by the Fund or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the Subadviser's
part in the performance of its duties or from its reckless disregard of
its obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the
requirements of the 1940 Act; provided, however, that this Agreement may
be terminated by the Fund at any time, without the payment of any
penalty, by the Board of Directors of the Fund or by vote of a majority
of the outstanding voting securities (as defined in the 1940 Act) of the
Fund, or by the Manager or the Subadviser at any time, without the
payment of any penalty, on not more than 60 days' nor less than 30 days'
written notice to the other party. This Agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act)
or upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Subadviser's directors, officers, or employees who may also be a
director, officer or employee of the Fund to engage in any other business
or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar
nature, nor limit or restrict the Subadviser's right to engage in any
other business or to render services of any kind to any other corporation,
firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements,
reports to stockholders,
-4-
<PAGE>
sales literature or other material prepared for distribution to
stockholders of the Fund or the public, which refer to the Subadviser in
any way, prior to use therof and not to use material if the Subadviser
reasonably objects in writing five business days (or such other time as
may be mutually agreed) after receipt thereof. Sales literature may be
furnished to the Subadviser hereunder by first-class or overnight mail,
facsimile transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Fund must be obtained in conformity with the requirements of the 1940
Act.
9. This Agreement shall be governed by the laws of the State of New York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL MUTUAL FUND
MANAGEMENT, INC.
BY /s/ Michael J. Downey
---------------------------
THE PRUDENTIAL INVESTMENT
CORPORATION
BY /s/ James Gregoire
---------------------------
-5-
<PAGE>
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held by It . . . . . . . . . . . . . . . . .-1-
2. Duties to the Custodian with Respect to Property of The Fund Held By the
Custodian in the United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . .-2-
2.1 Holding Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-2-
2.2 Delivery of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-2-
2.3 Registration of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . .-6-
2.4 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-7-
2.5 Availability of Federal Funds . . . . . . . . . . . . . . . . . . . . . . . . . .-7-
2.6 Collection of Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-8-
2.7 Payment of Fund Monies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-8-
2.8 Liability for Payment in Advance of Receipt of Securities Purchased . . . . . . -11-
2.9 Appointment of Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
2.10 Deposit of Securities in Securities Systems . . . . . . . . . . . . . . . . . . -11-
2.10A Fund Assets Held in the Custodian's Direct Paper System . . . . . . . . . . . . -13-
2.11 Segregated Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
2.12 Ownership Certificates for Tax Purposes . . . . . . . . . . . . . . . . . . . . -15-
2.13 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
2.14 Communications Relating to Fund Portfolio Securities. . . . . . . . . . . . . . -16-
2.15 Reports to Fund by Independent Public Accountants . . . . . . . . . . . . . . . -16-
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
3.1 Appointment of Foreign Sub-Custodians . . . . . . . . . . . . . . . . . . . . . -17-
3.2 Assets to be Held . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
3.3 Foreign Securities Depositories . . . . . . . . . . . . . . . . . . . . . . . . -18-
3.4 Segregation of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
3.5 Agreements with Foreign Banking Institutions. . . . . . . . . . . . . . . . . . -18-
3.6 Access of Independent Accountants of the Fund . . . . . . . . . . . . . . . . . -19-
3.7 Reports by Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
3.9 Liability of Foreign Sub-Custodians . . . . . . . . . . . . . . . . . . . . . . -20-
3.10 Liability of Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
3.11 Reimbursements for Advances . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
3.12 Monitoring Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
3.13 Branches of U.S. Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund . . . . . . . -23-
-i-
<PAGE>
5. Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
6. Actions Permitted without Express Authority . . . . . . . . . . . . . . . . . . . . . -24-
7. Evidence of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
8. Duties of Custodian with Respect to the Books of Account and Calculation of Net
Asset Value and Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
9. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
10. Opinion of Fund's Independent Accountant. . . . . . . . . . . . . . . . . . . . . . . -27-
11. Compensation of Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
12. Responsibility of Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
13. Effective Period, Termination and Amendment . . . . . . . . . . . . . . . . . . . . . -29-
14. Successor Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
15. Interpretative and Additional Provisions. . . . . . . . . . . . . . . . . . . . . . . -32-
16. Massachusetts Law to Apply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
17. Prior Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
18. The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
19. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
</TABLE>
-ii-
<PAGE>
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian", and each Fund
listed on Appendix A which evidences its agreement to be bound hereby by
executing a copy of this Contract (each such Fund individually hereinafter
referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/ Declaration of Trust. The Fund agrees to deliver to the
Custodian all securities and cash owned by it, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock, ("Shares") of
the Fund as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held or received by the Fund and not
delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors/ Trustees of the Fund, and provided that the Custodian shall
have the same responsibility or liability to the Fund on account
<PAGE>
of any actions or omissions of any sub-custodian so employed as any such
sub-custodian has to the Custodian, provided that the Custodian agreement with
any such domestic sub-custodian shall impose on such sub-custodian
responsibilities and liabilities similar in nature and scope to those imposed by
this Agreement with respect to the functions to be performed by such
sub-custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the provisions of Article 3.
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE
CUSTODIAN IN THE UNITED STATES.
2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other than
(a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of Treasury, collectively referred to herein
as "Securities System" and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.10A.
2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book-entry
system account ("Direct Paper System") only upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the parties, and
only in the following cases:
-2-
<PAGE>
(1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
(2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
(3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
(4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
(5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be
delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer into the name
of the Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for exchange
for a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units;
PROVIDED that, in any such case, the new securities are to be
delivered to the Custodian;
(7) Upon the sale of such securities for the account of the Fund, to
the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom; provided
that in any such case, the Custodian
-3-
<PAGE>
shall have no responsibility or liability for any loss arising
from the delivery of such securities prior to receiving payment
for such securities except as may arise from the Custodian's own
negligence or willful misconduct;
(8) For exchange or conversation pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
(9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that, in
any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
(10) For delivery in connection with any loans of securities made by
the Fund, BUT ONLY against receipt of adequate collateral as
agreed upon from time to time by the Custodian and the Fund,
which may be in the form of cash or obligations issued by the
United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is
to be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the delivery
of securities owned by
-4-
<PAGE>
the Fund prior to the receipt of such collateral;
(11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, BUT ONLY against
receipt of amounts borrowed;
(12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered
under the Securities Exchange Act of 1934 (the "Exchange Act")
and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
(13) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar
organization or organizations, regarding account deposits in
connection with transactions by the Fund;
(14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to
the holders of shares in connection with distributions in kind,
as may be described from time to time in the Fund's currently
effective prospectus and statement of additional
-5-
<PAGE>
information ("prospectus"), in satisfaction of requests by
holders of Shares for repurchase or redemption; and
(15) For any other proper business purpose, BUT ONLY upon receipt of,
in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors/Trustees or of the Executive
Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, specifying the securities to
be delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper business
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
2.3 REGISTRATION OF SECURITIES. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund or in
the name of any nominees of the Fund or of any nominee of the Custodian which
nominee shall be assigned exclusively to the Fund, UNLESS the Fund has
authorized in writing the appointment of a nominee to be used in common with
other registered investment companies having the same investment adviser as the
Fund, or in the name or nominee name of any agent appointed pursuant to Section
2.9 or in the name or nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on behalf of the Fund under
the terms of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain securities in
"street name", the Custodian shall utilize its best efforts to timely collect
income due the Fund on such securities and to notify the Fund on a best efforts
basis of relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange
-6-
<PAGE>
offers.
2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject only
to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund, other than cash maintained by the Fund in a bank
account established and used in accordance with Rule 17f-3 under the Investment
Company Act of 1940. Funds held by the Custodian for the Fund may be deposited
by it to its credit as Custodian in the Banking Department of the Custodian or
in such other banks or trust companies as it may in its discretion deem
necessary or desirable; PROVIDED, however, that every such bank or trust company
shall be qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be approved by
vote of a majority of the Board of Directors/Trustees of the Fund. Such funds
shall be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Fund
and the Custodian, the Custodian shall, upon the receipt of Proper Instructions,
make federal funds available to the Fund as of specified times agreed upon from
time to time by the Fund and the Custodian in the amount of checks received in
payment for Shares of the Fund which are deposited into the Fund's account.
2.6 COLLECTION OF INCOME. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the securities
-7-
<PAGE>
business, and shall collect on a timely basis all income and other payments with
respect to bearer securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof and shall credit such
income, as collected, to the Fund's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for payment
all coupons and other income items requiring presentation as and when they
become due and shall collect interest when due on securities held hereunder.
Income due the Fund on securities loaned pursuant to the provisions of Section
2.2 (10) shall be the responsibility of the Fund. The Custodian will have no
duty or responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to which the
Fund is properly entitled.
2.7 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
(1) Upon the purchase of securities held domestically, options,
futures contracts or options on futures contracts for the account
of the Fund but only (a) against the delivery of such securities,
or evidence of title to such options, futures contracts or
options on futures contracts, to the Custodian (or any bank,
banking firm or trust company doing business in the United States
or abroad which is qualified under the Investment Company Act of
1940, as amended, to act as a custodian and has been designated
by the Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3
-8-
<PAGE>
hereof or in proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.10A; (d) in the case
of repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a member
of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by the Fund
of securities owned by the Custodian along with written evidence
of the agreement by the Custodian to repurchase such securities
from the Fund or (e) for transfer to a time deposit account of
the Fund in any bank, whether domestic or foreign; such transfer
may be effected prior to receipt of a confirmation from a broker
and/or the applicable bank pursuant to Proper Instructions from
the Fund as defined in Article 5;
(2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued by the Fund as
set forth in Article 4 hereof;
(4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the
account of the Fund:
-9-
<PAGE>
interest, taxes, management, accounting, transfer agent and legal
fees, and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as
deferred expenses;
(5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
(6) For payment of the amount of dividends received in respect of
securities sold short;
(7) For any other proper purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution
of Board of Directors/Trustees or of the Executive Committee of
the Fund signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which such payment is
to be made, declaring such purpose to be a proper purpose, and
naming the person or persons to whom such payment is to be made.
2.8 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED.
Except as specifically stated otherwise in this Contract, in any and every case
where payment for purchase of securities for the account of the Fund is made by
the Custodian in advance of receipt of the securities purchased in the absence
of specific written instructions from the Fund to so pay in advance, the
Custodian shall be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its
discretion
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appoint (and may at any time remove) any other bank or trust company which is
itself qualified under the Investment Company Act of 1940, as amended, to act as
a custodian, as its agent to carry out such of the provisions of this Article 2
as the Custodian may from time to time direct; PROVIDED, however, that the
appointment of any agent shall not relieve the Custodian of its responsibilities
or liabilities hereunder.
2.10 DEPOSIT OF SECURITIES IN SECURITIES SYSTEMS. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are represented
in an account ("Account") of the Custodian in the Securities
System which shall not include any assets of the Custodian other
than assets held as a fiduciary, custodian or otherwise for
customers;
(2) The records of the Custodian with respect to domestic securities
of the Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;
(3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the
Securities System that such
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securities have been transferred to the Account, and (i.) the
making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Fund. The
Custodian shall transfer domestic securities sold for the account
of the Fund upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of
the Fund. Copies of all advices from the Securities System of
transfers of domestic securities for the account of the Fund
shall identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in the form of a
written advice or notice and shall furnish promptly to the Fund
copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the
Fund.
(4) The Custodian shall provide the Fund with any report obtained by
the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
(5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13 hereof;
(6) Anything to the contrary in this Contract notwithstanding, the
Custodian
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shall be liable to the Fund for any loss or damage to the Fund
resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or from failure of
the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against the
Securities System or any other person which the Custodian may
have as a consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any such loss or
damage.
2.10A FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The
Custodian may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
(2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which
shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
(3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry
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those securities belonging to the Fund;
(4) The Custodian shall pay for securities purchased for the account
of the Fund upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to
the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt
of payment for the account of the Fund;
(5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund copies
of daily transaction sheets reflecting each day's transaction in
the Direct Paper System for the account of the Fund;
(6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may reasonably
request from time to time;
2.11 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions
of any agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options
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Clearing Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract market), or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for purposes of
segregating cash, government securities or liquid, high-grade debt obligations
in connection with options purchased, sold or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund, (iii) for
the purposes of compliance by the Fund with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other proper
corporate purposes, BUT ONLY, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of the Board
of Directors/Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary, setting forth the
purpose or purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.12 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state tax
purposes in connection with receipt of income or other payments with respect to
domestic securities of the Fund held by it and in connection with transfers of
such securities.
2.13 PROXIES. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of the
Fund or a nominee of the Fund, all proxies, without indication of the manner in
which such proxies are to be voted, and shall
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promptly deliver to the Fund such proxies, all proxy soliciting materials and
all notices relating to such securities.
2.14 COMMUNICATIONS RELATING TO FUND PORTFOLIO SECURITIES. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency of calls and
maturities of securities held domestically and expirations of rights in
connection therewith and notices of exercise of call and put options written by
the Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities being held for the
Fund. With respect to tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the Custodian from
issuers of the securities whose tender or exchange is sought and from the party
(or his agents) making the tender or exchange offer. If the Fund desires to
take action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three business
days prior to the date of which the Custodian is to take such action.
2.15 REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS. The Custodian
shall provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system, internal
accounting control and procedures for safeguarding securities, futures contracts
and options on futures contracts, including securities deposited and/or
maintained in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the
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reports shall so state.
3. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD OUTSIDE
OF THE UNITED STATES
3.1 APPOINTMENT OF FOREIGN SUB-CUSTODIANS. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's securities
and other assets maintained outside the United States the foreign banking
institutions and foreign securities depositories designated on Schedule A hereto
("foreign sub-custodians"). Upon receipt of "Proper Instructions", as defined
in Section 5 of this Contract, together with a certified resolution of the
Fund's Board of Directors/Trustees, the Custodian and the Fund may agree to
amend Schedule A hereto from time to time to designate additional foreign
banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct the
Custodian to cease the employment of any one or more such sub-custodians for
maintaining custody of the Fund's assets.
3.2 ASSETS TO BE HELD. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to effect the
Fund's foreign securities transactions.
3.3 FOREIGN SECURITIES DEPOSITORIES. Except as may otherwise be agreed
upon in writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall include
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entry into agreements containing the provisions set forth in Section 3.5 hereof.
3.4 SEGREGATION OF SECURITIES. The Custodian shall identify on its books
as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian. Each agreement pursuant to which the Custodian employs a
foreign banking institution shall require that such institution establish a
custody account for the Custodian on behalf of the Fund and physically segregate
in that account, securities and other assets of the Fund, and, in the event that
such institution deposits the Fund's securities in a foreign securities
depository, that it shall identify on its books as belonging to the Custodian,
as agent for the Fund, the securities so deposited.
3.5 AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS. Each agreement with a
foreign banking institution shall be substantially in the form set forth in
Exhibit I hereto and shall provide that (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b) beneficial
ownership of the Fund's assets will be freely transferable without the payment
of money or value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Fund; (d) officers
of or auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
3.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND. Upon request of the
Fund, the
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Custodian will use its best efforts to arrange for the independent accountants
of the Fund to be afforded access to the books and records of any foreign
banking institution employed as a foreign sub-custodian insofar as such books
and records relate to the performance of such foreign banking institution under
its agreement with the Custodian.
3.7 REPORTS BY CUSTODIAN. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers of
securities to or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of the Fund indicating, as to securities
acquired for the Fund, the identity of the entity having physical possession of
such securities.
3.8 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT
(a) Except as otherwise provided in paragraph (b) of this Section
3.8, the provision of Sections 2.2 and 2.7 of this Contract shall apply, in
their entirety to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund and
delivery of securities maintained for the account of the Fund may be effected in
accordance with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefore (or an agent for such purchaser or
dealer) against a
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receipt with the expectation of receiving later payment for such securities from
such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian
may be maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such securities.
3.9 LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the performance of
its duties and to indemnify, and hold harmless, the Custodian and each Fund from
and against any loss, damage, cost, expense, liability or claim arising out of
or in connection with the institution's performance of such obligations. At the
election of the Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking institution as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that the Fund has not been made whole for any such loss, damage,
cost, expense, liability or claim.
3.10 LIABILITY OF CUSTODIAN. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth with
respect to sub-custodians generally in this Contract and, regardless of whether
assets are maintained in the custody of a foreign banking institution, a foreign
securities depository or a branch of a U.S. bank as contemplated by paragraph
3.13 hereof, the Custodian shall not be liable for any loss, damage, cost,
expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the
sub-custodian has otherwise exercised reasonable care.
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Notwithstanding the foregoing provisions of this paragraph 3.10, in delegating
custody duties to State Street London Ltd., the Custodian shall not be relieved
of any responsibility to the Fund for any loss due to such delegation, except
such loss as may result from (a) political risk (including, but not limited to,
exchange control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses (excluding
a bankruptcy or insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other losses under circumstances
where the Custodian and State Street London Ltd. have exercised reasonable care.
3.11 REIMBURSEMENT FOR ADVANCES. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that the
Custodian or its nominees shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or wilful misconduct, any property at
any time held for the account of the Fund shall be security therefor and should
the Fund fail to repay the Custodian promptly, the Custodian shall be entitled
to utilize available cash and to dispose of the Fund assets to the extent
necessary to obtain reimbursement.
3.12 MONITORING RESPONSIBILITIES. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will promptly inform the
Fund in the event that the Custodian learns of a material adverse change in the
financial
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condition of a foreign sub-custodian or any material loss of the assets of the
Fund or in the case of any foreign sub-custodian not the subject of an exemptive
order from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
3.13 BRANCHES OF U.S. BANKS
(a) Except as otherwise set forth in this Contract, the provisions of
Article 3 shall not apply where the custody of the Fund assets are maintained in
a foreign branch of a banking institution which is a "bank" as defined by
Section 2(a)(5) of the Investment Company Act of 1940 meeting the qualification
set forth in Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained
in an interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the Custodian,
State Street London Ltd. or both.
4. PAYMENTS FOR REPURCHASES OR REDEMPTIONS AND SALES OF SHARES OF THE FUND.
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and any
applicable votes of the Board of Directors/Trustees of the Fund pursuant
thereto, the Custodian shall, upon receipt of instructions from the Transfer
Agent, make funds available for payment to holders of Shares who have delivered
to the Transfer Agent a request for redemption or repurchase of their Shares.
In connection with the redemption or repurchase of Shares of the Fund, the
Custodian is authorized
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upon receipt of instructions from the Transfer Agent to wire funds to or through
a commercial bank designated by the redeeming shareholders. In connection with
the redemption or repurchase of Shares of the Fund, the Custodian shall honor
checks drawn on the Custodian by a holder of Shares, which checks have been
furnished by the Fund to the holder of Shares, when presented to the Custodian
in accordance with such procedures and controls as are mutually agreed upon from
time to time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. PROPER INSTRUCTIONS.
Proper Instructions as used herein means a writing signed or initialled by
one or more person or persons as the officers of the Fund shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of transaction involved, including a specific statement of the purpose
for which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. It is understood and agreed that the Board of
Directors/Directors/Trustees has authorized (i) Prudential Mutual Fund
Management, Inc., as
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Manager of the Fund, and (ii) The Prudential Investment Corporation (or
Prudential-Bache Securities Inc.), as Subadviser to the Fund, to deliver proper
instructions with respect to all matters for which proper instructions are
required by this Article 5. The Custodian may rely upon the certificate of an
officer of the Manager or Subadviser, as the case may be, with respect to the
person or persons authorized on behalf of the Manager and Subadviser,
respectively, to sign, initial or give proper instructions for the purpose of
this Article 5. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the Fund
and the Custodian are satisfied that such procedures afford adequate safeguards
for the Fund's assets. For purposes of this Section, Proper Instructions shall
include instructions received by the Custodian pursuant to any three-party
agreement which requires a segregated asset account in accordance with Section
2.11.
6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY.
The Custodian may in its discretion, without express authority from the
Fund:
(1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
PROVIDED that all such payments shall be accounted for to the Fund;
(2) surrender securities in temporary form for securities in
definitive form;
(3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments; and
(4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other dealings
with the securities and property of the Fund except as otherwise directed by the
Board of Directors/Trustees of the Fund.
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7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors/ Trustees pursuant to the Articles of
Incorporation/Declaration of Trust as described in such vote, and such vote may
be considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
8. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF
NET ASSET VALUE AND NET INCOME.
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors/Trustees of the Fund to
keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an office of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time
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to time in the Fund's currently effective prospectus.
9. RECORDS
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
10. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case
of a closed end Fund) and Form N-SAR or other periodic reports to the Securities
and Exchange Commission and with respect to any other requirements of such
Commission.
11. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
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12. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled
to rely on and may act upon advice of counsel (who may be counsel for the Fund)
on all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice. Notwithstanding the foregoing, the
responsibility of the Custodian with respect to redemptions effected by check
shall be in accordance with a separate Agreement entered into between the
Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from, or caused by, the direction of or authorization by the Fund to
maintain custody or any securities or cash of the Fund in a foreign country
including, but not limited to, losses resulting from nationalization,
expropriation, currency
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restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or wilful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall give the Fund
notice of its intention to dispose of assets identifying such assets and the
Fund shall have one business day from receipt of such notice to notify the
Custodian if the Fund wishes the Custodian to dispose of Fund assets of equal
value other than those identified in such notice.
13. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered
-28-
<PAGE>
or mailed, postage prepaid to the other party, such termination to take effect
not sooner than sixty (60) days after the date of such delivery or mailing;
PROVIDED, however that the Custodian shall not act under Section 2.10 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees of the Fund has
approved the initial use of a particular Securities System and the receipt of an
annual certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not act under Section 2.10A hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the use by the Fund of the Direct Paper System; PROVIDED FURTHER,
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Articles of Incorporation/Declaration of Trust, and further, provided,
that the Fund may at any time by action of its Board of Directors/Trustees (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its
-29-
<PAGE>
costs, expenses and disbursements.
14. SUCCESSOR CUSTODIAN
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver at the office of the Custodian and
transfer such securities, funds and other properties in accordance with such
vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
-30-
<PAGE>
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
15. INTERPRETATIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, PROVIDED that no such interpretative or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/ Declaration of Trust of the Fund. No
interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
16. MASSACHUSETTS LAW TO APPLY
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. PRIOR CONTRACTS
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
-31-
<PAGE>
18. THE PARTIES
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a Massachusetts Business Trust, references to Board of Directors
and Articles of Incorporation shall be deemed a reference to Board of
Directors/Trustees and Articles of Incorporation/Declaration of Trust
respectively and reference to shares of capital stock shall be deemed a
reference to shares of beneficial interest.
19. LIMITATION OF LIABILITY
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
-32-
<PAGE>
ATTEST STATE STREET BANK AND TRUST COMPANY
[ILLEGIBLE] By [ILLEGIBLE]
- ------------------------------- ---------------------------------
Assistant Secretary Vice President
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S. Jane Rose By /s/ Robert F. Gunia
- ------------------------------- ---------------------------------
Secretary Vice President
-33-
<PAGE>
Appendix A
----------
<TABLE>
<CAPTION>
Execution Date of
Fund Name Date Declaration of Trust
- --------- ------------ --------------------
(if applicable)
<S> <C> <C>
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Fund July 1, 1990 June 5, 1981
The BlackRock Government Income Trust August 30, 1991 June 13, 1991
The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield Fund, Inc.)
Prudential Adjustable Rate Securities Fund, Inc. June 1, 1992
Prudential California Municipal Fund August 1, 1990 May 18, 1984
Prudential Diversified Bond Fund, Inc. January 3, 1995
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Fund, Inc. June 7, 1990
Prudential GNMA Fund, Inc. August 1, 1990
Prudential Government Income Fund, Inc. July 31, 1990
(formerly Prudential Government Plus Fund)
Prudential Government Securities Trust July 26, 1990 September 22, 1981
Prudential Growth Opportunity Fund, Inc. July 26, 1990
Prudential High Yield Fund, Inc. July 26, 1990
Prudential Jennison Fund, Inc. , 1995
Prudential IncomeVertible Fund, Inc. June 6, 1990
Prudential MoneyMart Assets July 25, 1990
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990 May 18, 1984
Prudential National Municipals Fund, Inc. July 26, 1990
Prudential Pacific Growth Fund, Inc. July 16, 1992
Prudential Short-Term Global Income Fund, Inc. October 25, 1990
Prudential Special Money Market Fund January 12, 1990
Prudential Structured Maturity Fund, Inc. July 25, 1989
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Execution Date of
Fund Name Date Declaration of Trust
- --------- ------------ --------------------
(if applicable)
<S> <C> <C>
Prudential Tax-Free Money Fund July 26, 1990
Prudential U.S. Government Fund June 7,1990 September 22, 1986
Prudential Utility Fund, Inc. June 6, 1990
The Target Portfolio Trust November 9, 1992 July 29, 1992
</TABLE>
<PAGE>
AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT
This Amendment to the respective Custodian Contract/Agreement is made as of
February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.
WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and
WHEREAS, each Fund and the Custodian desire to amend certain provisions of
the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, each Fund and the Custodian desire to amend and restate certain
other provisions of the Contract relating to the custody of assets of each of
the Funds held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereby agree to amend the
Contract, to add the following new provisions which supersede the provisions in
the existing contracts relating to the custody of assets of the Funds outside
the United States.
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.1. DEFINITIONS.
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section
<PAGE>
2(a)(5) of the 1940 Act) meeting the requirements of a custodian under Section
17(f) of the 1940 Act, except that the term does not include Mandatory
Securities Depositories.
"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of
Rule 17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule
17f-5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.
3.3. COUNTRIES COVERED.
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list
on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody
Manager to maintain the assets of the Funds which list of Eligible Foreign
Custodians may be amended from time to time in the sole discretion of the
Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's
2
<PAGE>
Board responsibility as Foreign Custody Manager with respect to that country and
to have accepted such delegation. Execution of this Amendment by the Fund shall
be deemed to be a Proper Instruction to open an account, or to place or maintain
Foreign Assets, in each country listed on Schedule A in which the Custodian has
previously placed or currently maintains Foreign Assets pursuant to the terms of
the Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of a Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by that Fund's Board to the Custodian as Foreign Custody Manager for
that country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3
<PAGE>
3.4.3. MONITORING.
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign Custody Manager which is a foreign securities
depository or clearing agency that is not a Mandatory Securities Depository).
The Foreign Custody Manager shall provide the Board at least annually with
information as to the factors used in such monitoring system. If the Foreign
Custody Manager determines that the custody arrangements with an Eligible
Foreign Custodian it has selected are no longer appropriate, the Foreign Custody
Manager shall notify the Board in accordance with Section 3.7 hereunder and
withdraw the Foreign Assets from such Eligible Foreign Custodian as soon as
reasonably practicable.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO.
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.
4
<PAGE>
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17f-5.
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY
MANAGER.
The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty (60)
days after receipt by the non-terminating party of such notice. The provisions
of Section 3.3 hereof shall govern the delegation to and termination of the
Custodian as Foreign Custody Manager of the Funds with respect to designated
countries.
3.10. MOST FAVORED CLIENT.
If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUNDS HELD
OUTSIDE THE UNITED STATES.
4.1 DEFINITIONS.
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign
5
<PAGE>
Sub-Custodian in an account that is identified as belonging to the Custodian for
the benefit of its customers, PROVIDED HOWEVER, that (i) the records of the
Custodian with respect to foreign securities of the Funds which are maintained
in such account shall identify those securities as belonging to the Funds and
(ii), to the extent permitted and customary in the market in which the account
is maintained, the Custodian shall require that securities so held by the
Foreign Sub-Custodian be held separately from any assets of such Foreign
Sub-Custodian or of other customers of such Foreign Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
4.4.1. DELIVERY OF FOREIGN ASSETS.
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Fund in
accordance with customary market practice in the country where
such foreign securities are held or traded, including, without
limitation: (A) delivery against expectation of receiving later
payment; or (B) in the case of a sale effected through a Foreign
Securities System, in accordance with the rules governing the
operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign securities
are called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the name
of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such Foreign
Sub-Custodian) or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units;
6
<PAGE>
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with reasonable
market custom; PROVIDED that in any such case the Foreign
Sub-Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from
the Foreign Sub-Custodian's own negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
(ix) for delivery as security in connection with any borrowing by the
Funds requiring a pledge of assets by the Funds;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the foreign securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper trust\corporate purpose,
and naming the person or persons to whom delivery of such
securities shall be made.
4.4.2. PAYMENT OF FUND MONIES.
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, in accordance with
reasonable market settlement practice in the country where such
foreign securities are held or traded, including, without
limitation, (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer) against
expectation of receiving later delivery of such foreign
securities; or (B) in
7
<PAGE>
the case of a purchase effected through a Foreign Securities
System, in accordance with the rules governing the operation of
such Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Fund;
(iii) for the payment of any expense or liability of the Fund,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees under
this Contract, legal fees, accounting fees, and other operating
expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Fund, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(vi) for payment of part or all of the dividends received in respect
of securities sold short;
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, BUT ONLY upon receipt of Proper
Instructions specifying the amount of such payment, setting forth
the purpose for which such payment is to be made, declaring such
purpose to be a proper trust\corporate purpose, and naming the
person or persons to whom such payment is to be made.
4.4.3. MARKET CONDITIONS; MARKET INFORMATION.
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension
8
<PAGE>
funds or substantially similar institutions which, as a part of their ordinary
business operations, purchase or sell securities and make use of global custody
services.
The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:
(i) legal opinions relating to whether local law restricts with
respect to U.S. registered mutual funds (a) access of a fund's
independent public accountants to books and records of a Foreign
Sub-Custodian or Foreign Securities System, (b) a fund's ability
to recover in the event of bankruptcy or insolvency of a Foreign
Sub-Custodian or Foreign Securities System, (c) a fund's ability
to recover in the event of a loss by a Foreign Sub-Custodian or
Foreign Securities System, and (d) the ability of a foreign
investor to convert cash and cash equivalents to U.S. dollars;
(ii) summary of information regarding Foreign Securities Systems; and
(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership limits,
and (f) unique market arrangements.
4.5. REGISTRATION OF FOREIGN SECURITIES.
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign
Sub-Custodian or in the name of any nominee of the foregoing, and the Fund
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities, except to the extent that the Fund incurs
loss or damage due to failure of such nominee to meet its standard of care set
forth in the Contract. The Custodian or a Foreign Sub-Custodian shall not be
obligated to accept securities on behalf of a Fund under the terms of this
Contract unless the form of such securities and the manner in which they are
delivered are in accordance with reasonable market practice.
9
<PAGE>
4.6. BANK ACCOUNTS.
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.
4.7. COLLECTION OF INCOME.
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
4.8. SHAREHOLDER RIGHTS.
With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use reasonable commercial efforts to facilitate the exercise of
voting and other shareholder rights, subject always to the laws, regulations and
practical constraints that may exist in the country where such securities are
issued. The Fund acknowledges that local conditions, including lack of
regulation, onerous procedural obligations, lack of notice and other factors may
have the effect of severely limiting the ability of the Fund to exercise
shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such
10
<PAGE>
right or power, and both (i) and (ii) occur at least three business days prior
to the date on which the Custodian is to take action to exercise such right or
power.
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.
4.11. TAX LAW.
Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section 4.11
or from the failure of any Foreign Sub-Custodian to perform in accordance with
the terms of the applicable subcustody agreement, the Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on a
Fund, a series thereof or the Custodian as custodian of the Fund by the tax law
of the United States or of any state or political subdivision thereof. It shall
be the responsibility of each Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of the Fund by the tax law of
countries other than those mentioned in the above sentence, including
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
4.12. LIABILITY OF CUSTODIAN.
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.
11
<PAGE>
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in the
event of any conflict between the provisions of Articles 3 and 4 hereof,
the provisions of Article 3 shall prevail.
12
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Oesterreichischen --
Sparkassen AG
Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale de Banque --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano S.A. --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. Deposito Central de Valores S.A.
People's Republic The Hongkong and Shanghai --
of China Banking Corporation Limited,
Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
2/10/99 1
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Costa Rica Banco BCT S.A. --
Croatia Privredna Banka Zagreb d.d --
Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. The Bank of Greece,
System for Monitoring Transactions
in Securities in Book-Entry Form
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
2/10/99 2
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Iceland Icebank Ltd.
India Deutsche Bank AG --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.
Japan The Daiwa Bank, Limited Japan Securities Depository
Center
The Fuji Bank, Limited
Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic of Korea The Hongkong and Shanghai Banking
Corporation Limited
Latvia JSC Hansabank-Latvija --
2/10/99 3
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Lebanon British Bank of the Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa --
The Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
2/10/99 4
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
Portugal Banco Comercial Portugues --
Romania ING Bank N.V. --
Russia Credit Suisse First Boston AO, Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)
Singapore The Development Bank --
of Singapore Limited
Slovak Republic Ceskoslovenska Obchodni Banka, A.S. --
Slovenia Bank Austria d.d. Ljubljana --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland UBS AG --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
2/10/99 5
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Trinidad & Tobago Republic Bank Limited --
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
Ottoman Bank
Ukraine ING Bank, Ukraine --
United Kingdom State Street Bank and Trust Company, --
London Branch
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities)
</TABLE>
* The global custody network approved by each fund is set forth below on
Schedules A-1 and A-2.
2/10/99 6
<PAGE>
SCHEDULE A-1
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
COUNTRY FUNDS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina Mexico Global Utility Fund, Inc.
Australia Morocco Prudential 20/20 Focus Fund
Austria Netherlands Prudential Balanced Fund
Bangladesh+ New Zealand Prudential Equity Fund, Inc.
Belgium Norway Prudential Equity Income Fund
Brazil Pakistan Prudential Developing Markets Fund
Canada Peru Prudential Diversified Bond Fund, Inc.
Chile Philippines Prudential Distressed Securities Fund, Inc.
China Poland Prudential Diversified Funds
Columbia Portugal Prudential Emerging Growth Fund, Inc.
Cyprus Russia Prudential Global Genesis Fund, Inc.
Czech Republic Singapore Prudential Global Limited Maturity Fund, Inc.
Denmark Slovak Republic Prudential Index Series Fund
Ecuador South Africa Prudential Intermediate Global Income Fund, Inc.
Egypt Spain Prudential International Bond Fund, Inc.,
Finland Sri Lanka Prudential Mid-Cap Value Fund
France Sweden Prudential Natural Resources Fund, Inc.
Germany Switzerland Prudential Pacific Growth Fund, Inc.
Ghana Taiwan Prudential Real Estate Securities Fund
Greece Thailand Prudential Small-Cap Quantum Fund, Inc.
Hong Kong Turkey Prudential Small Company Value Fund, Inc.
Hungary Transnational Prudential Tax-Managed Equity Fund
India United Kingdom Prudential Utility Fund, Inc.
Indonesia Uruguay Prudential World Fund, Inc.
Ireland Venezuela The Prudential Investment Portfolios Fund, Inc.
Israel The Target Portfolio Trust
Italy The Global Total Return Fund, Inc.
Ivory Coast
Japan
Jordan
Kenya
Korea
Lebanon
Malaysia
</TABLE>
- --------------------------------------------------------------------------------
+ Countries marked by a dagger have been approved only for The Target Portfolio
Trust.
<PAGE>
SCHEDULE A-2
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
COUNTRY FUNDS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom Cash Accumulation Trust
Command Government Fund
Command Money Fund
Prudential Government Income Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential High Yield Income Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
</TABLE>
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)
Bolsa de Valores de Rio de Janeiro
All SSB CLIENTS PRESENTLY USE CBLC
Central de Custodia e de Liquidacao Financeira
de Titulos
Canada The Canadian Depository
for Securities Limited
People's Republic Shanghai Securities Central Clearing and
of China Registration Corporation
Shenzhen Securities Central Clearing
Co., Ltd.
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Croatia
Czech Republic Stredisko cennych papiru
Czech National Bank
Denmark Vaerdipapircentralen (the Danish
Securities Center)
Egypt Misr Company for Clearing, Settlement,
and Central Depository
Finland The Finnish Central Securities
Depository
France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository
(Apothetirion Titlon AE)
Hong Kong The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
[MANDATORY FOR GOV'T BONDS ONLY;
SSB DOES NOT USE FOR OTHER SECURITIES]
India The National Securities Depository Limited
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Indonesia Bank Indonesia
Ireland Central Bank of Ireland
Securities Settlement Office
Israel The Tel Aviv Stock Exchange Clearing
House Ltd.
Bank of Israel
Italy Monte Titoli S.p.A.
Banca d'Italia
Japan Bank of Japan Net System
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository Corporation
Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.
The Central Bank of Lebanon
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Malaysia The Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System
Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores)
Morocco Maroclear
The Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand New Zealand Central Securities
Depository Limited
Norway Verdipapirsentralen (the Norwegian
Registry of Securities)
Pakistan Central Depository Company of Pakistan Limited
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Philippines The Philippines Central Depository, Inc.
The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury
Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych)
Central Treasury Bills Registrar
Portugal Central de Valores Mobiliarios (Central)
Romania National Securities Clearing, Settlement and
Depository Co.
Bucharest Stock Exchange Registry Division
Singapore The Central Depository (Pte)
Limited
Monetary Authority of Singapore
Slovak Republic Stredisko Cennych Papierov
National Bank of Slovakia
South Africa The Central Depository Limited
Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana,
Central de Anotaciones en Cuenta
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Sri Lanka Central Depository System
(Pvt) Limited
Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.
Thailand Thailand Securities Depository
Company Limited
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Venezuela Central Bank of Venezuela
Lusaka Central Depository Limited
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
SCHEDULE C
MARKET INFORMATION
<TABLE>
<CAPTION>
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
- ------------------------------- -----------------
(FREQUENCY)
<S> <C>
THE GUIDE TO CUSTODY IN WORLD MARKETS An overview of safekeeping and settlement practices and
(annually) procedures in each market in which State Street Bank and
Trust Company offers custodial services.
GLOBAL CUSTODY NETWORK REVIEW Information relating to the operating history and structure of
(annually) depositories and subcustodians located in the markets in
which State Street Bank and Trust Company offers custodial
services, including transnational depositories.
GLOBAL LEGAL SURVEY With respect to each market in which State Street Bank and
(annually) Trust Company offers custodial services, opinions relating to
whether local law restricts (i) access of a fund's independent
public accountants to books and records of a Foreign Sub-
Custodian or Foreign Securities System, (ii) the Fund's ability
to recover in the event of bankruptcy or insolvency of a
Foreign Sub-Custodian or Foreign Securities System, (iii) the
Fund's ability to recover in the event of a loss by a Foreign
Sub-Custodian or Foreign Securities System, and (iv) the
ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars.
SUBCUSTODIAN AGREEMENTS Copies of the subcustodian contracts State Street Bank and
(annually) Trust Company has entered into with each subcustodian in the
markets in which State Street Bank and Trust Company offers
subcustody services to its US mutual fund clients.
Network Bulletins (weekly): Developments of interest to investors in the markets in which
State Street Bank and Trust Company offers custodial
services.
Foreign Custody Advisories
(as necessary): With respect to markets in which State Street Bank and Trust
Company offers custodial services which exhibit special
custody risks, developments which may impact State Street's
ability to deliver expected levels of service.
</TABLE>
<PAGE>
SCHEDULE D
LIST OF FUNDS, CONTRACTS AND AGREEMENTS
Fund Name Execution Date
- --------- --------------
Cash Accumulation Trust December 12, 1997
Command Government Fund July 1, 1990
Command Money Fund July 1, 1990
Command Tax-Free Fund July 1, 1990
The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield Fund, Inc.)
Prudential 20/20 Focus Fund April 14, 1998
Prudential California Municipal Fund August 1, 1990
Prudential Developing Markets Fund June 1, 1998
Prudential Distressed Securities Fund, Inc. February 8, 1996
Prudential Diversified Bond Fund, Inc. January 3, 1995
Prudential Diversified Funds September 2, 1998
Prudential Emerging Growth Fund, Inc. October 21, 1996
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Limited Maturity Fund, Inc. October 25, 1990
(formerly Prudential Short-Term Global
Income Fund, Inc.)
Prudential Government Income Fund, Inc. July 31, 1990
(formerly Prudential Government Plus Fund)
Prudential Government Securities Trust July 26, 1990
Prudential High Yield Fund, Inc. July 26, 1990
<PAGE>
Prudential High Yield Total Return Fund, Inc. May 30, 1997
Prudential International Bond Fund, Inc. January 16, 1996
(formerly The Global Government Plus Fund, Inc.)
The Prudential Investment Portfolios Fund, Inc. October 27, 1995
(formerly Prudential Jennison Series Fund, Inc.)
Prudential Mid-Cap Value Fund April 14, 1998
Prudential MoneyMart Assets, Inc. July 25, 1990
Prudential Mortgage Income Fund, Inc. August 1, 1990
(formerly Prudential GNMA Fund, Inc.)
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990
Prudential National Municipals Fund, Inc. July 26, 1990
Prudential Pacific Growth Fund, Inc. July 16, 1992
Prudential Real Estate Securities Fund February 18, 1998
Prudential Small Cap Quantum Fund, Inc. August 1, 1997
Prudential Small Company Value Fund, Inc. July 26, 1990
(formerly Prudential Growth Opportunity Fund, Inc.)
Prudential Special Money Market Fund, Inc. January 12, 1990
Prudential Structured Maturity Fund, Inc. July 25, 1989
Prudential Tax-Free Money Fund, Inc. July 26, 1990
Prudential Utility Fund, Inc. June 6, 1990
Prudential World Fund, Inc. June 7, 1990
(formerly Prudential Global Fund, Inc.)
The Target Portfolio Trust November 9, 1992
Global Utility Fund, Inc. December 21, 1989
Nicholas-Applegate Fund, Inc. April 10, 1987
<PAGE>
Prudential Balanced Fund September 4, 1987
Prudential Equity Income Fund January 6, 1987
Prudential Global Genesis Fund, Inc. October 21, 1987
Prudential Institutional Liquidity Portfolio, Inc. November 20, 1987
Prudential Intermediate Global Income Fund, Inc. May 19, 1988
Prudential Municipal Bond Fund August 25, 1987
Prudential Natural Resources Fund, Inc. September 18, 1987
Prudential Tax-Managed Equity Fund December 8, 1998
The Asia Pacific Fund April 24, 1987
Duff & Phelps Utilities Tax-Free Income Fund, Inc. November 21, 1991
First Financial Fund, Inc. May 1, 1986
The High Yield Income Fund, Inc. November 6, 1987
The High Yield Plus Fund, Inc. March 15, 1988
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY
/s/Marc L. Parsons By: /s/Ronald E. Logue
- ------------------------------ ------------------------------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
<TABLE>
<S> <C>
Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
<PAGE>
The Prudential Investment Portfolios, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Prudential Tax-Free Money Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.
</TABLE>
WITNESSED BY:
By: /s/S. Jane Rose By: /s/Grace Torres
--------------------------- -------------------------------------
Grace Torres
Treasurer
First Financial Fund, Inc.
The High Yield Plus Fund, Inc.
WITNESSED BY:
By: /s/Stephanie L. Bourque By: /s/Arthur J. Brown
--------------------------- -------------------------------------
Arthur J. Brown
Secretary
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
BETWEEN
PRUDENTIAL-BACHE GROWTH OPPORTUNITY FUND, INC.
AND
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent......................1
Article 2 Fees and Expenses..............................................4
Article 3 Representations and Warranties of the Agent....................5
Article 4 Representations of Warranties of the Fund......................5
Article 5 Duty of Care and Indemnification...............................6
Article 6 Documents and Covenants of the Fund and the Agent..............9
Article 7 Termination of Agreement.......................................10
Article 8 Assignment.....................................................11
Article 9 Affiliations...................................................11
Article 10 Amendment......................................................12
Article 11 Applicable Law.................................................12
Article 12 Miscellaneous..................................................12
Article 13 Merger of Agreement............................................13
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st day of January, 1988 by and between
PRUDENTIAL-BACHE GROWTH OPPORTUNITY FUND, INC., a Maryland corporation,
having its principal office and place of business at One Seaport Plaza, New
York, New York 10292 (the "Fund"), and PRUDENTIAL MUTUAL FUND SERVICES, INC.,
a New Jersey corporation, having its principal office and place of business
at Raritan Plaza I, Edison, New Jersey 08818 (the "Agent" or "PMFS").
WHEREAS, the Fund desires to appoint PMFS as its transfer agent, dividend
disbursing agent and shareholder servicing agent in connection with certain
other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 TERMS OF APPOINTMENT; DUTIES OF PMFS
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS
agrees to act as, the transfer agent for the authorized and issued shares of
the common stock of each series of the Fund, $.01 par value ("Shares"),
dividend disbursing agent and shareholder servicing agent in connection with
any accumulation, open-account or similar plans provided to the shareholders
of the Fund or any series thereof ("Shareholders") and set out in the
currently effective prospectus and statement of additional information
("prospectus") of the Fund, including without limitation any periodic
investment plan or periodic withdrawal program.
-1-
<PAGE>
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the Custodian
of the Fund authorized pursuant to the Articles of Incorporation of the Fund
(the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it
by the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Fund as such charges may be reflected in the
prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
-2-
<PAGE>
(ix) Record the issuance of Shares of the Fund and maintain pursuant to
Rule 17Ad-10(e) under the Securities Exchange Act of 1934 ("1934 Act") a record
of the total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. PMFS shall also provide
to the Fund on a regular basis the total number of Shares which are authorized,
issued and outstanding and shall notify the Fund in case any proposed issue of
Shares by the Fund would result in an overissue. In case any issue of Shares
would result in an overissue, PMFS shall refuse to issue such Shares and shall
not countersign and issue any certificates requested for such Shares. When
recording the issuance of Shares, PMFS shall have no obligation to take
cognizance of any Blue Sky laws relating to the issue or sale of such Shares,
which functions shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the
above paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions
by federal tax authorities for all Shareholders, preparing and mailing
confirmation forms and statements of account to Shareholders for all purchases
and redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders and
providing Shareholder account information and (ii) provide a system which will
-3-
<PAGE>
enable the Fund to monitor the total number of Shares sold in each State or
other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of PMFS for the Fund's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is solely limited
to the initial establishment of transactions subject to Blue Sky compliance by
the Fund and the reporting of such transactions to the Fund as provided above
and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established from
time to time by agreement between the Fund and PMFS.
Article 2 FEES AND EXPENSES
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the
Fund agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by
PMFS for the items set out in Schedule A attached hereto. In addition, any other
expenses incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.
-4-
<PAGE>
2.03 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of time following the mailing of the respective
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to PMFS by the
Fund upon request prior to the mailing date of such materials.
Article 3 REPRESENTATIONS AND WARRANTIES OF PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry on its
business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities
and Exchange Commission ("SEC") as a Transfer Agent pursuant to the requirements
of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
-5-
<PAGE>
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is an investment company registered with the SEC under
the Investment Company Act of 1940, as amended (the "1940 Act").
4.05 A registration statement under the Securities Act of 1933
(the "1933 Act") is currently effective and will remain effective, and
appropriate state securities law filings have been made and will continue to be
made, with respect to all Shares of the Fund being offered for sale.
Article 5 DUTY OF CARE AND INDEMNIFICATION
5.01 PMFS shall not be responsible for, and the Fund shall
indemnify and hold PMFS harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability arising out of
or attributable to:
(a) All actions of PMFS or its agents or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
-6-
<PAGE>
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities or Blue Sky laws of
any State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by PMFS as a result of PMFS' lack of good faith, negligence
or willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS,
its agents and subcontractors shall be protected and indemnified in acting
upon any paper or document furnished by or on behalf of the Fund, reasonably
believed to be genuine and to have been signed by the proper person or
persons, or upon any instruction, information, data, records or documents
provided to PMFS or its agents or subcontractors by machine readable input,
telex, CRT data entry or other similar means authorized by the Fund, and
shall not be held to have notice of any change of authority of any person,
until receipt of written notice thereof from the Fund. PMFS, its agents and
subcontractors shall also
-7-
<PAGE>
be protected and indemnified in recognizing stock certificates which are
reasonably believed to bear the proper manual or facsimile signature of the
officers of the Fund, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God,
strikes, equipment or transmission failure or damage reasonably beyond its
control, or other causes reasonably beyond its control, such party shall not
be liable for damages to the other for any damages resulting from such
failure to perform or otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in
this Article 5 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in
any case in which the other party may be required to indemnify it except with
the other party's prior written consent.
-8-
<PAGE>
Article 6 DOCUMENTS AND COVENANTS OF THE FUND AND PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Directors of the
Fund authorizing the appointment of PMFS and the execution and delivery of this
Agreement;
(b) A certified copy of the Articles of Incorporation and By-Laws of
the Fund and all amendments thereto;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Directors, with a certificate of the Secretary of the
Fund as to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems
to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
-9-
<PAGE>
6.03 PMFS shall prepare and keep records relating to the services
to be performed hereunder, in the form and manner as it may deem advisable. To
the extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PFMS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person.
Article 7 TERMINATION OF AGREEMENT
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
-10-
<PAGE>
Article 8 ASSIGNMENT
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent
by the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential-Bache Securities Inc. ("Prudential-Bache"), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
("Prudential"), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential-Bache or Prudential subsidiary or affiliate duly registered
as a broker-dealer and/or a transfer agent pursuant to the 1934 Act or (vi) any
other Prudential-Bache or Prudential affiliate or subsidiary; provided, however,
that PMFS shall be as fully responsible to the Fund for the acts and omissions
of any agent or subcontractor as it is for its own acts and omissions.
Article 9 AFFILIATIONS
9.01 PMFS may now or hereafter, without the consent of or notice
to the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for
any other investment company registered with the SEC under the 1940 Act,
including without limitation any investment company whose adviser,
administrator, sponsor or principal underwriter is or may become affiliated with
Prudential-Bache and/or Prudential or any of its or their direct or indirect
subsidiaries or affiliates.
-11-
<PAGE>
9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
directors, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
Article 10 AMENDMENT
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 11 APPLICABLE LAW
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 MISCELLANEOUS
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate,
in cases where the alleged loss is in the amount of $1000 or less.
-12-
<PAGE>
12.02 In the event that any check or other order for payment of
money on the account of any Shareholder or new investor is returned unpaid for
any reason, PMFS will (a) give prompt notification to the Fund's distributor
("Distributor") of such non-payment; and (b) take such other action, including
imposition of a reasonable processing or handling fee, as PMFS may, in its sole
discretion, deem appropriate or as the Fund and the Distributor may instruct
PMFS.
12.03 Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Fund or to PMFS shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
Prudential-Bache Growth Opportunity Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza I
Edison, NJ 08818
Attention: President
Article 13 MERGER OF AGREEMENT
13.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in their names and on their behalf under their seals by and
through their duly authorized officers, as of the day and year first above
written.
PRUDENTIAL-BACHE GROWTH OPPORTUNITY
FUND, INC.
BY: /s/ Robert F. Gunia
----------------------------
ATTEST:
/s/ S. Jane Rose
- --------------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Fred A. Fiandaca
----------------------------
ATTEST:
/s/ Lynda M. Puglisi
- --------------------------
-14-
<PAGE>
AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AMENDMENT to the Transfer Agency and Service Agreement by and between
Prudential Small Company Value Fund, Inc. (the "Fund") and Prudential Mutual
Fund Services LLC (successor to Prudential Mutual Fund Services,
Inc.)("PMFS") is entered into as of August 24, 1999.
WHEREAS, the Fund and PMFS have entered into a Transfer Agency and Service
Agreement (the "Agreement") pursuant to which PMFS serves as transfer agent,
dividend disbursing agent and shareholder servicing agent for the Fund; and
WHEREAS, the Fund and PMFS desire to amend the Agreement to confirm the
Fund's agreement to pay transfer agency account fees and expenses for beneficial
owners holding shares through omnibus accounts maintained by The Prudential
Insurance Company of America, its subsidiaries or affiliates.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement, and other good and valuable consideration, Article 8 of the Agreement
is amended by adding the following Section:
8.04 PMFS may enter into agreements with Prudential or any subsidiary
or affiliate of Prudential whereby PMFS will maintain an omnibus account
and the Fund will reimburse PMFS for amounts paid by PMFS to Prudential, or
such subsidiary or affiliate, in an amount not in excess of the annual
maintenance fee for each beneficial shareholder account and transactional
fees and expenses with respect to such beneficial shareholder account as if
each beneficial shareholder account were maintained by PMFS on the Fund's
records, subject to the fee schedule attached hereto as Schedule A.
Prudential, its subsidiary or affiliate, as the case may be, shall maintain
records relating to each beneficial shareholder account that underlies the
omnibus account maintained by PMFS.
<PAGE>
IN WITNESS WHEROF, the parties hereto have caused this Amendment to be
executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
ATTEST:
By: /s/ Robert F. Gunia By: /s/ Marguerite E.H. Morrison
-------------------------------- -------------------------------------
Vice President Secretary
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTEST:
By: /s/ Brian W. Henderson By: /s/ William V. Healey
-------------------------------- -------------------------------------
President Secretary
<PAGE>
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH
36 SOUTH CHARLES STREET WASHINGTON
BALTIMORE, MARYLAND 21201-3018 NEW YORK
410-539-2530 PHILADELPHIA
FAX: 410-539-0489 EASTON
RESTON
September 27, 1999
Prudential Small Company Value Fund, Inc.
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
Re: Registration Statement on Form N-1A
-----------------------------------
Ladies and Gentlemen:
We have acted as special Maryland counsel to Prudential Small Company Value
Fund, Inc. (the "Fund") in connection with the registration by the Fund of up to
1,000,000,000 shares of its Common Stock divided into four classes, designated
Class A, Class B, Class C and Class Z shares, par value $.01 per share (the
"Shares"), pursuant to a registration statement on Form N-1A, as amended (the
"Registration Statement") under the Securities Act of 1933, as amended.
In this capacity, we have examined the Fund's charter and by-laws, the
proceedings of the Board of Directors of the Fund authorizing the issuance of
the Shares in accordance with the Registration Statement, and such other
statutes, certificates, instruments and documents relating to the Fund and
matters of law as we have deemed necessary to the issuance of this opinion. In
such examination, we have assumed, without independent investigation, the
genuineness of all signatures, the conformity of final documents in all material
respects to the versions thereof submitted to us in draft form, the authenticity
of all documents submitted to us as originals, and the conformity with originals
of all documents submitted to us as copies. As to factual matters, we have
relied on an officer's certificate and have not independently verified the
matters stated therein.
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
<PAGE>
Piper & Marbury
L.L.P.
Prudential Small Company Value Fund, Inc.
September 27, 1999
Page 2
1. The Fund has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. The Shares to be issued by the Fund pursuant to the Registration
Statement have been duly authorized and, when issued as contemplated in the
Registration Statement in an amount not to exceed the number of Shares
authorized by the charter but unissued, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not thereby admit that
we are within the category of persons whose consent is required under Section
7 of the 1933 Act or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
/s/ Piper & Marbury L.L.P.
