<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 2000
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. 29 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 30 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL SMALL COMPANY FUND, INC.
(formerly 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, 2000 pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
<TABLE>
<S> <C>
Title of Securities Being Registered............... Shares of Common Stock, par value $.01 per share
</TABLE>
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--------------------------------------------------------------------------------
<PAGE>
PROSPECTUS NOVEMBER 29, 2000
PRUDENTIAL
SMALL COMPANY FUND, INC.
FUND TYPE Stock
OBJECTIVE Capital growth
BUILD ON THE ROCK
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Fund's shares, nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to state otherwise.
[PRUDENTIAL LOGO]
<PAGE>
TABLE OF CONTENTS
-------------------------------------
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 HOW THE FUND INVESTS
6 Investment Objective and Policies
7 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
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 Telephone Redemptions or Exchanges
34 FINANCIAL HIGHLIGHTS
34 Class A Shares
35 Class B Shares
36 Class C Shares
37 Class Z Shares
38 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
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PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
-------------------------------------
This section highlights key information about the PRUDENTIAL SMALL COMPANY FUND,
INC. (formerly, 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 invest-
ments whose price will increase over time. We normally invest at least 65% of
our total assets in common stocks of small, less well-known U.S. companies that
the investment adviser believes are relatively undervalued.
We currently consider small companies to be those with a market
capitalization less than the largest market capitalization found in the Standard
& Poor's 600 SmallCap Index ($ . billion as of , 2000). The
portfolio is well-diversified and typically includes stocks representing all of
the sectors in the Index. 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 and convertible securities.
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. The Fund's holdings can vary
significantly from broad market indexes and the
-------------------------------------------------------------------
WE'RE BLEND INVESTORS
In deciding which stocks to buy, we use a blend of both value and growth styles.
We look for stocks of smaller, less well-known companies that we believe have
above average growth prospects but can be purchased at lower prices relative to
the company's earnings or whose growth prospects are underappreciated by the
market. This approach is often referred to as GARP, or "growth at a reasonable
price."
-------------------------------------------------------------------
--------------------------------------------------------------------------------
1
<PAGE>
RISK/RETURN SUMMARY
------------------------------------------------
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.
Generally, the stock prices of small companies vary more than the prices of
large company stocks. Small company stocks present above-average risks. This
means that when stock prices decline overall, the Fund may decline more than a
broad-based securities market index. Small companies usually offer a smaller
range of products and services than larger companies. They also may have limited
financial resources and may lack management depth.
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.
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 FUND, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for the last 10 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. Past performance does not mean that the Fund
will achieve similar results in the future. The Fund followed a "value" style of
investing until May 2000, when it adopted its current "blend" style.
ANNUAL RETURNS* (CLASS B SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 -12.51%
1991 38.69%
1992 20.22%
1993 18.75%
1994 -3.86%
1995 23.31%
1996 22.97%
1997 32.64%
1998 -11.56%
1999
</TABLE>
BEST QUARTER: _% ( _ quarter of 199_) WORST QUARTER: _% (_ quarter of 199_)
* 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 1-1-00 TO 9-30-00 WAS %.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<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 N/A % (since 8-1-94)
Class Z shares % N/A N/A % (since 3-1-96)
Russell 2000(2) % % % N/A(2)
S&P 600 SmallCap Index(3)
Lipper Average(4) % % % 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 RUSSELL 2000 VALUE INDEX (RUSSELL 2000) IS AN UNMANAGED
CAPITAL-WEIGHTED INDEX OF THE SMALLEST 2,000 STOCKS AMONG THE LARGEST 3,000
EQUITY-CAPITALIZED U.S. CORPORATIONS AND REPRESENTS APPROXIMATELY % OF
THEIR AGGREGATE MARKET VALUE. THESE RETURNS DO NOT INCLUDE THE EFFECT OF
ANY SALES CHARGES OR OPERATING EXPENSES OF A MUTUAL FUND. THESE RETURNS
WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES. RUSSELL 2000
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 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.
THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF ANY SALES
CHARGES. THE SECURITIES IN S&P SMALLCAP MAY BE VERY DIFFERENT FROM THOSE IN
THE FUND. SOURCE: LIPPER INC.
4 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN
THE LIPPER SMALL CAP VALUE FUNDS CATEGORY AND DOES NOT INCLUDE THE EFFECT
OF ANY SALES CHARGES. AGAIN, THESE RETURNS WOULD BE LOWER IF THEY INCLUDED
THE EFFECT OF SALES CHARGES. 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 show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of the Fund--Class A, B, C and Z. Each
share class has different sales charges--known as loads--and expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Fund."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering
price) 5% None 1% None
Maximum deferred sales charge (load) (as a
percentage of the lower of original
purchase price or sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load) imposed on
reinvested dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .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, 2001, 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 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
relatively undervalued. We currently consider small companies to be those with
market capitalizations of less than the largest market capitalization found in
the Standard & Poor's 600 SmallCap Index ($ . billion at , 2000).
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 the kind of companies we consider small to reflect
industry norms. 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
to the company's common stock or some other equity security.
-------------------------------------------------------------------
OUR BLEND STRATEGY
We look for smaller, less well-known companies that we believe have above
average growth prospects and whose stocks appear undervalued relative to those
growth prospects or relative to the company's earnings. We build our portfolios
on a company by company basis using in-depth fundamental analysis, while
considering industry and sector weightings of the benschmark. Generally, we
consider selling a security for any of the following reasons: (1) if the
underlying trends in the company's industry or business change; (2) if the
company experiences a deterioration of fundamentals and its earnings prospects;
or (3) if the company's valuation, in our opinion, is too high relative to its
risks.
-------------------------------------------------------------------
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6 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover
page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board can change investment policies
that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we may use the following investment
strategies to try to increase the Fund's returns or protect its assets if market
conditions warrant.
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.
MONEY MARKET INSTRUMENTS
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; short-term obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities; 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.
--------------------------------------------------------------------------------
7
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------
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.
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 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
-------------------------------------------------------------------
8 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------
given currency on a future date and at a set price.
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. Repurchase agreements are used for cash management purposes.
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. The investment types are listed in the order in which they
normally will be used by the portfolio manager. 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>
-------------------------------------------------------------------------------------------------------
COMMON STOCKS OF SMALL -- Individual stocks could lose -- Historically, stocks have
U.S. 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
-- Changes in interest rates may
affect the securities of small
companies more than the
securities of larger companies
-- Changes in economic or political
conditions, both domestic and
international, may result in a
decline in value of the Fund's
investments
-------------------------------------------------------------------------------------------------------
COMMON STOCKS OF LARGER -- Similar risks to small U.S. -- Not as likely to lose value as
U.S. 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 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>
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 -- Limits potential for capital -- May preserve the Fund's assets
INSTRUMENTS appreciation
-- Credit risk--the risk that the
UP TO 100% ON A default of an issuer would
TEMPORARY BASIS leave the Fund with unpaid
interest or principal
-- 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
-------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
11
<PAGE>
HOW THE FUND INVESTS
------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
---------------------------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as 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 -- One way to manage the Fund's
to the Fund that would not have risk/return balance is by
otherwise occurred locking in the value of an
-- Derivatives used for risk investment ahead of time
management may not have the -- Hedges that correlate well with
intended effects and may result an underlying position can
in losses or missed reduce or eliminate investment
opportunities income or capital gains at low
-- The other party to a derivatives cost
contract could default
-- Derivatives that involve
leverage could magnify losses
-- Certain types of derivatives
involve costs to the Fund that
can reduce returns
---------------------------------------------------------------------------------------------------------
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>
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12 PRUDENTIAL SMALL COMPANY 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 also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended September 30, 2000, 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 , 2000, PIFM served as the
manager to all of the Prudential mutual funds, and as manager or administrator
to 22 closed-end investment companies, with aggregate assets of approximately
$ billion.
INVESTMENT ADVISER
Jennison Associates LLC (Jennison) is the Fund's investment adviser and has
served as such since August 2000. Its address is 466 Lexington Avenue, New York,
NY 10017. PIFM has responsibility for all investment advisory services,
supervises Jennison and pays Jennison for its services. As of September 30,
2000, Jennison managed approximately $ billion in assets. Jennison has served
as an investment adviser to investment companies since 1990. The Prudential
Investment Corporation (PI) served as investment adviser from the Fund's
inception through August 2000. For the period January 1, 2000 through August
2000, PI was paid at the same rate at which Jennison currently is being paid by
PIFM.
PORTFOLIO MANAGER
The Fund has been managed by John Mullman, CFA, since May 2000. Mr. Mullman is a
Senior Vice President of Jennison. Mr. Mullman has been
--------------------------------------------------------------------------------
13
<PAGE>
HOW THE FUND IS MANAGED
------------------------------------------------
employed with Prudential since 1987, most recently managing institutional
portfolios. He earned a B.A. from the College of The Holy Cross and an M.B.A.
from Yale University. He 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.
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14 PRUDENTIAL SMALL COMPANY 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 or tax-deferred plan or account.
Dividends and distributions from the Fund also may be subject to state and local
income taxes in the state where you live.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified or 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. Capital gains are generated when the Fund sells its
assets for a profit. For example, if the Fund bought 100 shares of ACME Corp.
stock for a total of $1,000 and more than one year later sold the shares for a
total of $1,500, the Fund has net long-term capital gains of $500, which it will
pass on to shareholders (assuming the Fund's total gains are greater than any
losses it may have). Capital gains are taxed differently depending on how long
the Fund holds the security--if a security is held more than one year before it
is sold, LONG-TERM capital gains are taxed at the rate of 20%, but if the
security is held one year or less, SHORT-TERM 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
--------------------------------------------------------------------------------
15
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
------------------------------------------------
may be subject to taxes, unless your shares are held in a qualified or
tax-deferred plan or account. For more information about automatic reinvestment
and other shareholder services, see "Step 4: Additional Shareholder Services" in
the next section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Fund as part of a qualified or 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 or tax-deferred
plan or account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions and sale proceeds.
Dividends of net investment income and short-term capital gains paid to a
nonresident foreign shareholder generally will be subject to a U.S. withholding
tax of 30%. This rate may be lower, depending on any tax treaty the U.S. may
have with the shareholder's country.
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
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16 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
------------------------------------------------
by the amount of the dividend to reflect the payout, although this may not be
apparent because the value of each share of the Fund also will be affected by
the market changes, if any. The distribution you receive makes up for the
decrease in share value. However, the timing of your purchase does mean that
part of your investment came back to you as taxable income.
QUALIFIED AND TAX-DEFERRED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before the
sale of the shares). If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.
-------------------------------------------------------------------
RECEIPTS FROM SALE --> +$ CAPITAL GAIN
(taxes owed)
$ OR
--> -$ CAPITAL LOSS
(offset against gain)
-------------------------------------------------------------------
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
--------------------------------------------------------------------------------
17
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
------------------------------------------------
increased in value since you purchased them, you have capital gains, which are
subject to the taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on Form 1099; however, proceeds from the sale or exchange will
be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified or tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
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18 PRUDENTIAL SMALL COMPANY 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
You may purchase shares by check or wire. We do not accept cash or money
orders. To purchase by wire, call the number above to obtain an application.
After PMFS receives your completed application, you will receive an account
number. For additional information about purchasing shares of the Fund, see the
back cover page of this prospectus. We have the right to reject any purchase
order (including an exchange into the Fund) or suspend or modify the Fund's sale
of its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge or CDSC), but the operating expenses each year are higher
than Class A share expenses. With Class C shares, you pay a 1% front-end sales
charge and a 1% CDSC if you sell within 18 months of purchase, but the operating
expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
the varying distribution fees
-- The different sales charges that apply to each share class--
Class A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front-end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges
--------------------------------------------------------------------------------
19
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial sales 5% of the None 1% of the None
charge public offering public offering
price price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge (CDSC)(2) Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase(2)
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 AND SERVICE 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, 2001, 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.
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20 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales
charge by increasing the amount of your investment. This table shows how
the sales charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
SALES CHARGE AS % 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 Class A shares of two or more Prudential mutual funds at the same
time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the
current value of Prudential mutual fund shares you already own with
the value of the shares you are purchasing for purposes of
determining the applicable sales charge (note: you must notify the
Transfer Agent if you qualify for Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares
in the Fund and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required
--------------------------------------------------------------------------------
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 registered
representatives and employees of brokers that have entered into a dealer
agreement with the Distributor. To qualify for a reduction or waiver of the
sales charge, you must notify the Transfer Agent or your broker at the time of
purchase. For more information, see the SAI, "Purchase, Redemption and Pricing
of Fund Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
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22 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated (Prudential Securities) or one 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, or
-- 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, who may require any supporting documents they
consider 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."
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24 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is determined
by a simple calculation: it's the total value of the Fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of Fund XYZ owned by shareholders, the price of one
share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Fund's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to check the price of mutual funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York time on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on most national holidays and Good Friday. Because the Fund
may invest in foreign securities, its NAV may change on days when you cannot buy
or sell shares. We do not determine the NAV on days when we have not received
any orders to purchase, sell or exchange Fund shares, or when changes in the
value of the Fund's portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
-------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. stock in
its portfolio and the price of ACME stock goes up while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of Fund XYZ
will increase.
-------------------------------------------------------------------
--------------------------------------------------------------------------------
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 8159
PHILADELPHIA, PA 19101
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.
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26 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. Eligible investors who apply for PruTector coverage after the
initial 6-month enrollment period will need to provide satisfactory evidence of
insurability. This insurance is subject to other restrictions and is not
available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class B and Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, your broker must receive your order to sell by 4:15 p.m. New York
time to process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 8149
PHILADELPHIA, PA 19101
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
--------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
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.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. As permitted by the
Securities and Exchange Commission, this may happen during unusual market
conditions or emergencies when the Fund can't determine the value of its assets
or sell its holdings. For more information, see the SAI, "Purchase, Redemption
and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, you want the redemption
proceeds payable to or sent to someone or some place that is not in our records,
or you are a business or a trust and you hold your shares directly with the
Transfer Agent, you will need to have the signature on your sell order signature
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker-dealer or credit union. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale
of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
-------------------------------------------------------------------
28 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
-- 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.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in
the fourth and 1% in the fifth and sixth years. The rate decreases on the first
day of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase (one year for Class C shares purchased
before November 2, 1998). For both Class B and Class C shares, the CDSC is
calculated based on the lesser of the original purchase price or the redemption
proceeds. For purposes of determining how long you've held your shares, all
purchases during the month are grouped together and considered to have been made
on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares held in joint
tenancy, provided the shares were purchased before the death or
disability
-- To provide for certain distributions--made without IRS penalty--from
a tax-deferred retirement plan, IRA or Section 403(b) custodial
account
-- On certain sales effected through a Systematic Withdrawal Plan.
--------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
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 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
qualified or 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 and account
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
-------------------------------------------------------------------
30 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
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 8157
PHILADELPHIA, PA 19101
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
--------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
Class B or Class C shares into a money market fund, the time you hold the shares
in the money market account will not be counted in calculating the required
holding period for CDSC liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The decision
may be based upon dollar amount, volume and frequency of trading. The Fund may
notify a market timer of rejection of an exchange or purchase order after the
day the order is placed. If the Fund allows a market timer to trade Fund shares,
it may require the market timer to enter into a written agreement to follow
certain procedures and limitations.
-------------------------------------------------------------------
32 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
TELEPHONE REDEMPTIONS OR EXCHANGES
You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852. In order to redeem or exchange your shares by telephone, you
must call the Fund before 4:15 p.m. New York time. You will receive a redemption
or exchange amount based on that day's NAV.
The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming or exchanging shares. The
Fund will not be liable if it follows instructions that it reasonably believes
are made by the shareholder. If the Fund does not follow reasonable procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail or through your broker.
The telephone redemption or exchange privilege may be modified or terminated
at any time. If this occurs, you will receive a written notice from the Fund.
--------------------------------------------------------------------------------
33
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------
The financial highlights will help you evaluate the Fund's financial performance
for the past five years. 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 YEARS ENDED 9-30)
<TABLE>
<CAPTION>
PER SHARE OPERATING
PERFORMANCE 2000 1999(1) 1998(1) 1997(1) 1996(1)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.79 $18.95 $15.30 $14.18
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.01) -- .02 .04
Net realized and unrealized gain
(loss) on investment transactions .29 (3.31) 6.06 1.75
TOTAL FROM INVESTMENT OPERATIONS .28 (3.31) 6.08 1.79
-----------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized
gains (1.53) (1.85) (2.43) (.67)
NET ASSET VALUE, END OF YEAR $12.54 $13.79 $18.95 $15.30
TOTAL RETURN(2) 1.48% (18.90)% 45.92% 13.38%
-----------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999(1) 1998(1) 1997(1) 1996(1)
-----------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $319,779 $365,431 $412,980 $237,306
Average net assets (000) $360,707 $443,189 $287,894 $223,091
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees(3) 1.27% 1.17% 1.21% 1.24%
Expenses, excluding distribution
fees 1.02% .92% .96% .99%
Net investment income (loss) (.09)% -- .15% .33%
Portfolio turnover 39% 36% 58% 53%
</TABLE>
1 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
2 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.
3 THE DISTRIBUTOR OF THE FUND VOLUNTARILY AGREED TO LIMIT ITS DISTRIBUTION
FEES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
-------------------------------------------------------------------
34 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------
CLASS B SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 9-30)
<TABLE>
<CAPTION>
PER SHARE OPERATING
PERFORMANCE 2000 1999(1) 1998(1) 1997(1) 1996(1)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.63 $17.64 $14.49 $13.56
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.10) (.12) (.09) (.06)
Net realized and unrealized gain
(loss) on investment transactions .28 (3.04) 5.67 1.66
TOTAL FROM INVESTMENT OPERATIONS .18 (3.16) 5.58 1.60
-------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized
gains (1.53) (1.85) (2.43) (.67)
NET ASSET VALUE, END OF YEAR $11.28 $12.63 $17.64 $14.49
TOTAL RETURN(2) .74% (19.52)% 44.91% 12.56%
-------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999(1) 1998(1) 1997(1) 1996(1)
-------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $335,013 $514,159 $645,579 $378,861
Average net assets (000) $444,747 $678,462 $443,761 $355,636
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 2.02% 1.92% 1.96% 1.99%
Expenses, excluding distribution
fees 1.02% .92% .96% .99%
Net investment loss (.82)% (.75)% (.60)% (.42)%
Portfolio turnover 39% 36% 58% 53%
</TABLE>
1 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
2 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.
--------------------------------------------------------------------------------
35
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------
CLASS C SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 9-30)
<TABLE>
<CAPTION>
PER SHARE OPERATING
PERFORMANCE 2000 1999(1) 1998(1) 1997(1) 1996(1)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.63 $17.64 $14.49 $13.56
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.10) (.12) (.09) (.06)
Net realized and unrealized gain
(loss) on investment transactions .28 (3.04) 5.67 1.66
TOTAL FROM INVESTMENT OPERATIONS .18 (3.16) 5.58 1.60
------------------------------------------------------------------
LESS DISTRIBUTIONS:
Distributions from net realized
gains (1.53) (1.85) (2.43) (.67)
NET ASSET VALUE, END OF YEAR $11.28 $12.63 $17.64 $14.49
TOTAL RETURN(2) .74% (19.52)% 44.91% 12.56%
------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999(1) 1998(1) 1997(1) 1996(1)
------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $25,207 $26,804 $22,049 $4,323
Average net assets (000) $27,813 $29,259 $8,762 $2,786
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 2.02% 1.92% 1.96% 1.99%
Expenses, excluding distribution
fees 1.02% .92% .96% .99%
Net investment loss (.83)% (.75)% (.60)% (.42)%
Portfolio turnover 39% 36% 58% 53%
</TABLE>
1 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
2 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.
-------------------------------------------------------------------
36 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by , independent
accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL PERIODS ENDED 9-30)
<TABLE>
<CAPTION>
PER SHARE OPERATING
PERFORMANCE 2000 1999(2) 1998(2) 1997(2) 1996(1),(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $13.92 $19.04 $15.32 $13.69
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .02 .04 .06 .05
Net realized and unrealized gain
(loss) on investment transactions .29 (3.31) 6.09 1.58
TOTAL FROM INVESTMENT OPERATIONS .31 (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 $12.70 $13.92 $19.04 $15.32
TOTAL RETURN(3) 1.70% (18.58)% 46.38% 11.91%
-----------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999(2) 1998(2) 1997(2) 1996(1),(2)
-----------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $105,355 $125,770 $151,215 $68,516
Average net assets (000) $131,013 $154,623 $97,310 $66,228
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.02% .92% .96% .99%(4)
Net investment income .16% .25% .40% .58%(4)
Portfolio turnover 39% 36% 58% 53%
</TABLE>
1 INFORMATION SHOWN IS FOR THE PERIOD 3-1-96 (WHEN CLASS Z SHARES WERE FIRST
OFFERED) THROUGH 9-30-96.
2 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
3 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.
4 ANNUALIZED.
--------------------------------------------------------------------------------
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 EQUITY FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
PRUDENTIAL JENNISON EQUITY OPPORTUNITY FUND
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL COMPANY FUND, INC.
PRUDENTIAL TAX-MANAGED FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC.
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL U.S. EMERGING GROWTH FUND, INC.
PRUDENTIAL VALUE 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 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 NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
PRUDENTIAL GLOBAL GROWTH FUND
PRUDENTIAL INTERNATIONAL VALUE FUND
PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
GLOBAL BOND FUND
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
-------------------------------------------------------------------
38 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, INC.
PRUDENTIAL TOTAL RETURN BOND FUND, INC.
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
NEW JERSEY SERIES
NEW YORK 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
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>
Notes
-------------------------------------------------------------------
40 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
Notes
--------------------------------------------------------------------------------
41
<PAGE>
Notes
-------------------------------------------------------------------
42 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
Notes
--------------------------------------------------------------------------------
43
<PAGE>
Notes
-------------------------------------------------------------------
44 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852
<PAGE>
Notes
--------------------------------------------------------------------------------
45
<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 8098
PHILADELPHIA, PA 19101
(800) 225-1852
(732) 482-7555 (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
1-202-942-8090.)
Via the Internet:
on the EDGAR Database at
http://www.sec.gov
CUSIP Nos.: Quotron Symbols:
Class A: 743968-10-9 PGOAX
Class B: 743968-20-8 CHNDX
Class C: 743968-30-7 PSCCX
Class Z: 743968-40-6 PSCZX
Investment Company Act File No. 811-3084
MF109A
[RECYCLED LOGO]
Printed on Recycled Paper
<PAGE>
PRUDENTIAL SMALL COMPANY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 29, 2000
Prudential Small Company Fund, Inc., formerly known as 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 above average
growth prospects and valuations which, in the investment adviser's view, are
temporarily low relative to the companies' earnings, assets, cash flow,
price/book value and 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, 2000. A copy
of the Prospectus may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<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-19
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-26
Shareholder Investment Account........................ B-35
Net Asset Value....................................... B-39
Performance Information............................... B-40
Taxes, Dividends and Distributions.................... B-43
Financial Statements.................................. B-46
Report of Independent Accountants..................... B-
Appendix I -- General Investment Information.......... I-1
Appendix II -- Historical Performance Data............ II-1
</TABLE>
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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.
Effective May 30, 1997, the Fund's name was changed from Prudential Small
Companies Fund, Inc. to Prudential Small Company Value Fund, Inc. The Fund's
name was changed from Prudential Small Company Value Fund, Inc. to Prudential
Small Company Fund, Inc. effective May 30, 2000.
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 above average
growth prospects and 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.
The Fund generally invests in common stocks of small companies, that is,
those with a market capitalization less than the largest market capitalization
found in the Standard & Poor's 600 SmallCap Index ($ . billion as of ,
2000). 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 generally are senior to common stocks
in a corporation's capital structure but usually are 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.
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
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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 also is 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
usually are subject to auditing, accounting, and financial reporting standards
comparable to those of domestic issuers.
WARRANTS AND RIGHTS. A warrant gives its holder 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
that 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 possibly
a corresponding increase in the amount of securities required to be liquidated
to meet distribution requirements).
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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 member state's national
currency. By July 1, 2002, the euro is expected to become the sole legal tender
of the member states. During the transition period, the Fund will treat the euro
as a separate currency from the national currency of any member state.
The adoption by the member states of the euro will eliminate the substantial
currency risk among member states and will likely affect the investment process
and considerations of the Fund's investment adviser. To the extent the Fund
holds non-U.S. dollar-denominated securities, including those denominated in the
euro, the Fund will still be subject to currency risk due to fluctuations in
those currencies as compared to the U.S. dollar.
The medium- to long-term impact of the introduction of the euro in member
states cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general long-term ramifications
can be expected, such as changes in economic environment and changes in behavior
of investors, all of which will impact the Fund's investments.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund 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 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
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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.
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.
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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.
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,
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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 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
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"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 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.
B-8
<PAGE>
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 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."
B-9
<PAGE>
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.
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
B-10
<PAGE>
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 transactions. These include forward contracts, when-issued
and delayed delivery securities, futures contracts, written options and options
on futures contracts (unless otherwise covered). If collateralized or otherwise
covered, in accordance with Commission guidelines, these will not be deemed to
be senior securities. The assets segregated will be marked-to-market daily.
B-11
<PAGE>
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. If the Fund were to exceed this limit, the investment adviser would
take prompt action to reduce the Fund's holdings in illiquid securities to no
more than 15% of its net assets, as required by applicable law. Illiquid
securities include repurchase agreements 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 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.
B-12
<PAGE>
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.
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.
(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, 2000 and 1999,
the Fund's portfolio turnover rate was % and 39%, 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
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<PAGE>
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 foreign currency forward
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.
(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.)
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(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>
Saul K. Fenster (67) Director President (since December 1978) of New Jersey
Institute of Technology; Commissioner (since
1998) of the Middle States Association,
Commission on Higher Education; member (since
1985) of the New Jersey Commission on Science
and Technology; formerly a director or trustee
(1987-1999) of the New Jersey State Chamber of
Commerce, Society of Manufacturing Engineering
Education Foundation, the Research and
Development Council of New Jersey, Prosperity
New Jersey, Inc., the Edison Partnership,
National Action Council for Minorities in
Engineering and IDT Corporation.
Delayne Dedrick Gold (63) Director Marketing and Management Consultant.
*Robert F. Gunia (53) Vice President and Executive Vice President and Chief
Director Administrative Officer (since June 1999) of
Prudential Investments; Executive Vice
President and Treasurer (since December 1996)
of Prudential Investments Fund Management LLC
(PIFM); President (since April 1999) of
Prudential Investment Management Services LLC
(PIMS); formerly Senior Vice President (March
1987-May 1999) of Prudential Securities
Incorporated (Prudential Securities), Corporate
Vice President (September 1997-March 1999) of
The Prudential Insurance Company of America
(Prudential) and Chief Administrative Officer
(July 1990-September 1996), Director (January
1989-September 1996) and Executive Vice
President, Treasurer and Chief Financial
Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.
Douglas H. McCorkindale (61) Director Chairman (since June 2000) and President (since
September 1997) of Gannett Co. Inc. (publishing
and media); formerly Vice Chairman (March
1984-May 2000) of Gannett Co. Inc.; Director of
Gannett Co. Inc., Global Crossing Ltd. and
Continental Airlines, Inc.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
------------------------ --------- ----------------------
<S> <C> <C>
W. Scott McDonald, Jr. (63) Director Vice President (since 1997) of Kaludis
Consulting Group, Inc., a Sallie Mae company
serving higher education; formerly Principal
(1995-1997) of Scott McDonald & Associates,
Chief Operating Officer (1991-1995) of
Fairleigh Dickinson University, Executive Vice
President and Chief Operating Officer
(1975-1991) of Drew University, Interim
President (1988-1990) of Drew University, and a
founding director of School, College and
University Underwriters Ltd.
Thomas T. Mooney (58) Director President of the Greater Rochester Metro Chamber
of Commerce; former Rochester City Manager;
former Deputy Monroe County Executive; Trustee
of Center for Governmental Research, Inc.;
Director of Blue Cross of Rochester, Monroe
County Water Authority and Executive Service
Corps of Rochester.
Stephen P. Munn (58) Director Chairman (since January 1994), Director and
President (since 1988) and Chief Executive
Officer (1988-December 1993) of Carlisle
Companies Incorporated.
*David R. Odenath, Jr. (43) Vice President and Officer in Charge, President, Chief Executive
Director Officer and Chief Operating Officer (since June
1999), PIFM; Senior Vice President (since June
1999), Prudential; formerly Senior Vice
President (August 1993-May 1999), PaineWebber
Group Inc.
Richard A. Redeker (57) Director Formerly President, Chief Executive Officer and
Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc.,
Executive Vice President, Director and Member
of the Operating Committee (October
1993-September 1996) of Prudential Securities,
Director (October 1993-September 1996) of
Prudential Securities Group, Inc., Executive
Vice President (January 1994-September 1996) of
The Prudential Investment Corporation, Director
(January 1994-September 1996) of Prudential
Mutual Fund Distributors, Inc. and Prudential
Mutual Fund Services, Inc. and Senior Executive
Vice President and Director (September
1978-September 1993) of Kemper Financial
Services, Inc.
Robin B. Smith (60) Director Chairman and Chief Executive Officer (since
August 1996); formerly President and Chief
Executive Officer (January 1989-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.
</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. (47) President and Director Chief Executive Officer, Chairman, President and
Director (since January 1990) of The Prudential
Investment Corporation, Executive Vice
President (since February 1998), Prudential
Global Asset Management Group of Prudential,
and Chairman (since August 1989), Pricoa
Capital Group; formerly various positions to
Chief Executive Officer (November 1994-December
1998), Private Asset Management Group of
Prudential and Senior Vice President (January
1986-August 1989), Prudential Capital Group, a
unit of Prudential.
Louis A. Weil, III (59) Director Formerly, Chairman (January 1999-July 2000),
President and Chief Executive Officer (January
1996-July 2000) and Director (September
1991-July 2000) of Central Newspapers, Inc.,
Chairman of the Board (January 1996-July 2000),
Publisher and Chief Executive Officer (August
1991-December 1995) of Phoenix Newspapers,
Inc., Publisher (May 1989-March 1991) of Time
Magazine, President, Publisher & Chief
Executive Officer (February 1986-August 1989)
of The Detroit News and member of the Advisory
Board, Chase Manhattan Bank-Westchester.
Clay T. Whitehead (62) Director President of National Exchange Inc. (new
business development firm) (since May 1983).
Grace C. Torres (41) Treasurer and Principal First Vice President (since December 1996) of
Financial and PIFM; First Vice President (March
Accounting Officer 1994-September 1996) of Prudential Securities;
formerly First Vice President (March
1994-September 1996) of Prudential Mutual Fund
Management, Inc.
Marguerite E. H. Morrison (44) Secretary Department Vice President and Chief Legal
Officer (since August 2000) of the Mutual Funds
Law Division of Prudential; Vice President and
Associate General Counsel (since December 1996)
of PIFM; formerly Vice President and Associate
General Counsel (September 1987-September 1996)
of Prudential Securities; Vice President and
Associate General Counsel (June 1991-September
1996) of Prudential Mutual Fund Management,
Inc.
William V. Healey (47) Assistant Secretrary Vice President and Associate General Counsel
(since August 1998) of Prudential and Chief
Legal Officer of Prudential Investments;
Director (since June 1999), ICI Mutual
Insurance Company; formerly Associate General
Counsel of The Dreyfus Corporation (Dreyfus), a
subsidiary of Mellon Bank, N.A. (Mellon Bank),
and an officer and/or director of various
affiliates of Mellon Bank and Dreyfus.
</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.
B-17
<PAGE>
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.
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 $ , 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 any Prudential mutual fund. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Director. The Fund's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Fund.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended September 30, 2000 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's board and that of all other funds managed by
the Manager (Fund Complex) for the calendar year ended December 31, 1999.
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@ $ $142,500(43/70)
Saul K. Fenster@@ -- $ 35,000(5/21)
Delayne Dedrick Gold $ $144,500(43/70)*
Robert F. Gunia+ -- None
Douglas H. McCorkindale** $ $ 80,000(24/49)*
W. Scott McDonald, Jr.@@ -- $ 35,000(5/21)
Thomas T. Mooney** $ $129,500(35/75)*
Stephen P. Munn $ $ 62,250(29/53)*
David R. Odenath, Jr.+ -- None
Richard A. Redeker $ $ 95,000(29/53)*
Robin B. Smith** $ $ 96,000(32/44)*
John R. Strangfeld+ -- None
Louis A. Weil, III $ $ 96,000(29/53)*
Clay T. Whitehead $ $ 77,000(38/66)*
</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, 1999, includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $ , $
and $ 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.
@ Mr. Beach retired on December 31, 1999.
@@ Messrs. Fenster and McDonald joined the Board in August 2000.
B-18
<PAGE>
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 3, 2000, 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 3, 2000, there were no beneficial owners, directly or
indirectly, of more than 5% of the outstanding shares of any class of shares of
the Fund.
As of November 3, 2000, 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), 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, 2000, the Manager managed
and/or administered open-end and closed-end management investment companies with
assets of approximately $72 billion. According to the Investment Company
Institute, as of June 30, 2000, the Prudential mutual funds were the 22nd
largest family of mutual funds in the United States.
Prudential Mutual Fund Services LLC (the Transfer Agent), an affiliate of
the Manager, serves as the transfer agent and dividend distribution agent for
the Prudential mutual funds and, in addition, provides customer service,
recordkeeping and management and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), 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 Jennison Associates LLC (Jennison,
the investment adviser or the Subadviser), 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-19
<PAGE>
(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 Subadviser, 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 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 (as defined in the Investment Company Act), 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, 2000, 1999 and 1998, the Fund
incurred management fees of $ , $6,749,959 and $9,138,728, respectively.
PIFM has entered into an interim Subadvisory Agreement with Jennison, a
wholly-owned subsidiary of the Prudential Investment Corporation (PI). Jennison
will furnish investment advisory services in connection with the management of
the Fund. In connection therewith, Jennison 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. PI was the Fund's subadviser
until , 2000, and was reimbursed by the Manager for the reasonable
costs and expenses it incurred in furnishing investment advisory services.
Effective January 1, 2000, PI was paid by PIFM at the annual rate of .455 of 1%
of the Fund's average daily net assets. Jennison will be paid at this rate only
upon shareholder approval of a new Subadvisory Agreement.
If a new Subadvisory Agreement is approved by shareholders as described
below, it will provide 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 interim Subadvisory Agreement will continue in effect for a
period of up to 150 days from its effectiveness on August 24, 2000 until a new
Subadvisory Agreement is approved by a majority of the Fund's outstanding voting
securities.
(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. See "How the Fund is Managed--Distributor" in
the Prospectus.
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.
B-20
<PAGE>
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related 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, 2001 and contractually limited its
distribution-related fees for the fiscal year ended September 30, 2000 to .25 of
1% of the average daily net assets of the Class A shares.
For the fiscal year ended September 30, 2000, 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, 2000, 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, 2000, 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, 2000, the Distributor received approximately
$ in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended September 30, 2000, 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
B-21
<PAGE>
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 $ ).
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, 2000, the Distributor
received approximately $ in contingent deferred sales charges attributable
to Class C shares. For the fiscal year ended September 30, 2000, the Distributor
also received approximately $ in initial sales charges attributable to
Class C shares.
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
B-22
<PAGE>
the Fund may not exceed .75 of 1% per class. The 6.25% limitation applies to
each class of the Fund rather than on a per shareholder basis. If aggregate
sales charges were to exceed 6.25% of total gross sales of any class, all sales
charges on shares of that class would be suspended.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Fund and cash and in that capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians provide
custodial services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin,
New Jersey 08830, 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.
, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants, and in that capacity audits
the annual financial statements of the Fund.
CODES OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics. In
addition, the Manager, Subadviser and Distributor have each adopted a Code of
Ethics (the Codes). The Codes permit personnel subject to the Codes to invest in
securities, including securities that may be purchased or held by the Fund.
However, the protective provisions of the Codes prohibit certain investments and
limit such personnel from making investments during periods when the Fund is
making such investments. The Codes are on public file with, and are available
from, the Commission.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, 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.
B-23
<PAGE>
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 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
B-24
<PAGE>
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, 2000.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund................ $ $2,516,963 $1,812,871
Total brokerage commissions paid to Prudential Securities... $ $ 5,118 $ 2,049
Percentage of total brokerage commissions paid to Prudential
Securities................................................. % .20% .11%
</TABLE>
Of the total brokerage commissions paid by the Fund for the fiscal year
ended September 30, 2000, $ ( % 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, 2000. As of September 30, 2000, the Fund held
securities of Warburg Dillon Read LLC, Bear, Stearns & Co. Inc., Morgan (J.P.)
Securities, Inc. and Goldman, Sachs & Co. in the amount of $ , $ ,
$ and $ , respectively.
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
B-25
<PAGE>
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.
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, fund and class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company (State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Small Company Fund, Inc., specifying on the wire
the account number assigned by PMFS and your name and identifying the class in
which you are investing (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
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.
B-26
<PAGE>
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, 2000, the maximum offering price
of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share...... $
Maximum sales charge (5% of offering price).................
------
Maximum offering price to public............................ $
======
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 to public.................................... $
======
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.
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.
B-27
<PAGE>
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, without
the initial sales charge, 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,
- Members of the Board of Directors of Prudential,
- Real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent,
- Registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases at
NAV are permitted by such person's employer,
- Investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one year
in the case of Benefit Plans, (2) the purchase is made with proceeds of a
redemption of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (3) the financial
adviser served as the client's broker on the previous purchase,
- Investors in Individual Retirement Accounts, provided the purchase is made
in a directed rollover to such Individual Retirement Account or with the
proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential provides administrative or recordkeeping services and further
provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution,
- Orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services (for example, mutual
fund "wrap" or asset allocation programs), 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).
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.
B-28
<PAGE>
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential mutual funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "How to Buy, Sell and
Exchange Shares of the Fund--How to Buy Shares--Reducing or Waiving Class A's
Initial Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- An individual
- The individual's spouse, their children and their parents
- The individual's and spouse's Individual Retirement Account (IRA)
- Any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a 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.
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 investor. 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 investor'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 satisfied within the thirteen-month period, the investor is required
to pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charge actually paid. Such payment
may be made directly to the Distributor or, if not paid, the Distributor will
liquidate sufficient escrowed shares to obtain such difference. If the goal is
exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the investor the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase Class A shares of the Fund pursuant to a letter of intent should
carefully read such letter of intent.
B-29
<PAGE>
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.
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.
B-30
<PAGE>
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 option,
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund), or
- 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.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates must be received by the Transfer Agent, the
Distributor or your broker in order for the redemption request to be processed.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
8149, Philadelphia, Pennsylvania 19101, 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
B-31
<PAGE>
Services offices. In the case of redemptions from a PruArray Plan, if the
proceeds of the redemption are invested in another investment option of the plan
in the name of the record holder and at the same address as reflected in the
Transfer Agent's records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (4) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the same Fund at the NAV
next determined after the order is received, which must be within 90 days after
the date of the redemption. Any CDSC paid in connection with such redemption
will be credited (in shares) to your account. (If less than a full repurchase is
made, the credit will be on a PRO RATA basis.) You must notify the Transfer
Agent, either directly or through the Distributor or your broker, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales Charge"
below. Exercise of the repurchase privilege will generally not affect federal
tax treatment of any gain realized upon redemption. However, if the redemption
was made within a 30 day period of the repurchase and if the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, may not
be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase (one year in the case of shares 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.
B-32
<PAGE>
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 (five years
for Class B shares purchased prior to January 22, 1990) 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, at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability.
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.
B-33
<PAGE>
You must notify the Fund's Transfer Agent either directly or through your
broker at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or,
in the case of a trust, a copy of the grantor's
death certificate, plus a copy of the trust
agreement identifying the grantor.
Disability--An individual will be A copy of the Social Security Administration award
considered disabled if he or she is letter or a letter from a physician on the
unable to engage in any substantial physician's letterhead stating that the shareholder
gainful activity by reason of any (or, in the case of a trust, the grantor (a copy of
medically determinable physical or the trust agreement identifying the grantor will be
mental impairment which can be expected required as well)) is permanently disabled. The
to result in death or to be of letter must also indicate the date of disability.
long-continued and indefinite duration.
Distribution from an IRA or A copy of the distribution form from the custodial
403(b) Custodial Account firm indicating (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 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
B-34
<PAGE>
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.
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 at net asset
value per share. An investor may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends 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 dividends or distributions in cash may subsequently
reinvest any such dividend or distribution at NAV by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. The
reinvestment will be made at the NAV per share next determined after receipt of
the check by the Transfer Agent. Shares purchased with reinvested dividends
and/or distributions will not be subject to any CDSC upon redemption.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential mutual funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
mutual funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. 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.
B-35
<PAGE>
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates must be returned in order for the
shares to be exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 8157, Philadelphia, PA
19101.
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 and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the exchange privilege only to acquire
Class A shares of the Prudential mutual funds participating in the exchange
privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(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
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money market
fund. In order to minimize the period of time in which shares are subject to a
CDSC, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held in
a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of the month), the entire month will
be included in the CDSC holding period. Conversely, if shares are exchanged into
a money market fund prior to the last
B-36
<PAGE>
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the NAV above the total
amount of payments for the purchase of Class B or Class C shares and
(3) amounts representing Class B or Class C shares held beyond the applicable
CDSC period. Class B and Class C shareholders must notify the Transfer Agent
either directly or through Prudential Securities, Prusec or another broker that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares are 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)
B-37
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................................. $ 105 $ 158 $ 210 $ 263
20 Years............................................. 170 255 340 424
15 Years............................................. 289 433 578 722
10 Years............................................. 547 820 1,093 1,366
5 Years............................................. 1,361 2,041 2,721 3,402
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.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Distributor, the Transfer Agent or your broker. The withdrawal plan provides for
monthly, quarterly, semi-annual or annual redemption checks in any amount,
except as provided below, up to the value of the shares in the shareholder's
account. Withdrawals of Class B or Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and
(3) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan.
The 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 systematic 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 systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must 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
B-38
<PAGE>
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
</TABLE>
------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential mutual funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as, to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial 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
B-39
<PAGE>
securities exchange and NASDAQ National Market System securities (other than
options on stock and stock indexes) 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 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.
B-40
<PAGE>
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, 2000.
<TABLE>
<CAPTION>
1 YEAR 5 YRS 10 YRS SINCE INCEPTION
-------------- -------- -------- ------------------
<S> <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.
Below are the aggregate total returns for the Fund's share classes for the
periods ended September 30, 2000.
<TABLE>
<CAPTION>
1 YEAR 5 YRS 10 YRS SINCE INCEPTION
-------------- -------- -------- ------------------
<S> <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>
B-41
<PAGE>
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)
ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Fund shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indexes. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
Set forth below is a chart which compares the performance of different types
of investments over the long term and the rate of inflation.(1)
PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS
OVER THE LONG TERM (12/31/25 - 12/31/99)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
Common Stocks Long-Term Gov't. Bonds Inflation
11.4% 5.1% 3.1%
</TABLE>
------------
(1)Source: Ibbotson Associates. All rights reserved. Common stock returns are
based on the Standard & Poor's 500 Composite Stock Price Index, a
market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only and is
not intended to represent the performance of any particular
investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
B-42
<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, intends to remain qualified, and has elected to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code. This relieves the Fund (but not its shareholders) from paying
federal income tax on income and capital gains which are distributed to
shareholders, and permits net capital gains of the Fund (that is, the excess of
net long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long shareholders
have held their shares in the Fund.
Qualification of the Fund as a regulated investment company under the
Internal Revenue Code requires, among other things, that (a) the Fund derive at
least 90% of 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 distribute to its shareholders at least 90% of its net investment
income and net short-term capital gains (that is, the excess of net short-term
capital gains over net long-term capital losses) in each year. 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 generally will be treated
as long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Fund lapses or is terminated
through a closing transaction, such as a repurchase by the Fund of the option
from its holder, the Fund generally 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. Except with respect to
certain foreign currency forward contracts, 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
B-43
<PAGE>
losses on securities and options and futures contracts to 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
the 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. 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.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder. Foreign shareholders are advised to consult their own
tax advisors with respect to particular tax consequences to them of an
investment in the Fund.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent a Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts (described above), and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are not eligible for the dividends-received deduction.
The 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.
B-44
<PAGE>
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 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. The Fund does not
expect to meet the requirements of the Internal Revenue Code for
"passing-through" to its shareholders any foreign income taxes paid.
Shareholders are advised to consult their own tax advisors with respect to
particular tax consequences to them of an investment in the Fund.
B-45
<PAGE>
PORTFOLIO OF INVESTMENTS AS PRUDENTIAL SMALL COMPANY
OF SEPTEMBER 30, 1999 VALUE FUND, INC.
------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
---------------------------------------------------------------
LONG-TERM INVESTMENTS--92.6%
COMMON STOCKS--92.3%
AEROSPACE/DEFENSE--0.7%
443,600 Doncasters PLC (ADR)
(United Kingdom)(a) $ 5,323,200
------------------------------------------------------------
APPAREL--3.6%
294,500 Cole National Corp., Class A(a) 2,263,969
278,700 Kellwood Co. 6,131,400
390,500 Nautica Enterprises, Inc.(a) 6,296,813
1,050,700 Phillips-Van Heusen Corp. 9,324,962
423,600 Reebok International, Ltd.(a) 4,527,225
------------
28,544,369
------------------------------------------------------------
AUTOMOTIVE--2.7%
98,800 Borg-Warner Automotive, Inc. 4,248,400
199,200 Dura Automotive Systems, Inc.(a) 4,793,250
116,600 Midas, Inc. 2,404,875
234,000 Simpson Industries, Inc. 2,588,625
203,800 Strattec Security Corp.(a) 7,133,000
------------
21,168,150
------------------------------------------------------------
BANKS--0.8%
306,200 Commercial Federal Corp. 6,009,175
------------------------------------------------------------
BUILDING & CONSTRUCTION--3.3%
361,300 Crossmann Communities, Inc.(a) 5,893,706
161,300 Giant Cement Holding Inc.(a) 3,699,819
235,400 Nortek Inc.(a) 8,033,025
158,400 NVR, Inc.(a) 7,999,200
------------
25,625,750
------------------------------------------------------------
BUILDING & PRODUCTS--0.8%
661,700 Cameron Ashley Building
Products, Inc.(a) 5,955,300
BUSINESS SERVICES--0.5%
422,900 World Fuel Services Corp. $ 4,123,275
------------------------------------------------------------
CHEMICALS--2.1%
949,200 Agrium, Inc. (Canada) 9,432,675
441,500 Arch Chemicals Inc. 7,146,781
------------
16,579,456
------------------------------------------------------------
CONTAINERS & PACKAGING--1.1%
261,100 ACX Technologies, Inc.(a) 2,480,450
390,500 Shorewood Packaging Corp.(a) 5,296,156
36,200 U.S. Can Corp.(a) 739,838
------------
8,516,444
------------------------------------------------------------
DIVERSIFIED RESOURCES--0.2%
112,000 Amcol International Corp. 1,652,000
------------------------------------------------------------
ELECTRICAL UTILITIES--2.3%
552,500 El Paso Electric Co.(a) 4,972,500
185,904 Sierra Pacific Resources 4,136,364
234,800 TNP Enterprises, Inc. 9,142,525
------------
18,251,389
------------------------------------------------------------
ELECTRICAL EQUIPMENT--1.0%
371,300 Belden, Inc. 7,611,650
------------------------------------------------------------
ELECTRONICS--1.1%
593,000 Pioneer-Standard Electronics, Inc. 8,561,437
------------------------------------------------------------
FINANCIAL SERVICES--1.7%
286,000 Federated Investors, Inc., Class B 4,933,500
235,400 Heller Financial, Inc., Class A 5,296,500
157,000 Waddell & Reed Financial, Inc.,
Class B 3,355,875
------------
13,585,875
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
PORTFOLIO OF INVESTMENTS AS PRUDENTIAL SMALL COMPANY
OF SEPTEMBER 30, 1999 VALUE FUND, INC.
------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
--------------------------------------------------------------
<C> <S> <C>
FOOD DISTRIBUTION--2.2%
411,600 Fleming Cos., Inc. $ 4,038,825
611,333 SUPERVALU, Inc. 13,334,701
------------
17,373,526
------------------------------------------------------------
FOODS--3.1%
25,700 Grand Union Co.(a) 350,966
446,000 International Home Foods Inc.(a) 7,805,000
440,800 Suiza Foods Corp.(a) 16,530,000
------------
24,685,966
------------------------------------------------------------
FURNITURE--1.4%
354,800 Furniture Brands International,
Inc.(a) 6,985,125
206,400 Stanley Furniture Company, Inc.(a) 4,360,200
------------
11,345,325
------------------------------------------------------------
GAS DISTRIBUTION--1.4%
234,000 Eastern Enterprises, Inc. 10,866,375
------------------------------------------------------------
HEALTH SERVICES--2.9%
852,300 Beverly Enterprises, Inc.(a) 3,622,275
835,500 Foundation Health Systems, Inc.(a) 7,885,031
1,124,250 Sierra Health Services, Inc.(a) 11,383,031
------------
22,890,337
------------------------------------------------------------
HOSPITAL MANAGEMENT--3.7%
624,600 Health Management Assoc., Inc.,
Class A(a) 4,606,425
837,200 Quorum Health Group, Inc.(a) 5,886,563
453,800 Triad Hospitals, Inc.(a) 4,594,725
528,700 Universal Health Services, Inc.
Class B(a) 13,680,112
------------
28,767,825
------------------------------------------------------------
HOTEL/MOTEL--1.3%
1,174,700 Lodgian, Inc.(a) 4,405,125
726,500 Prime Hospitality Corp.(a) 5,812,000
------------
10,217,125
INSURANCE--12.1%
559,827 Amerus Life Holdings, Inc. $ 11,861,335
578,700 Capital Re Corp. 5,787,000
626,600 CNA Surety Corp. 8,224,125
551,400 Enhance Financial Services Group,
Inc. 9,752,887
261,800 Everest Reinsurance Holdings, Inc. 6,234,113
440,600 Financial Security Assurance
Holdings, Ltd. 22,773,512
538,600 Harleysville Group, Inc. 7,574,062
207,800 Horace Mann Educators Corp. 5,363,838
229,600 Liberty Financial Co., Inc. 5,036,850
605,100 MMI Cos., Inc. 6,618,281
216,352 Reinsurance Group of America, Inc. 5,557,542
------------
94,783,545
------------------------------------------------------------
MACHINERY--1.6%
180,300 Applied Power Inc., Class A 5,476,613
829,800 CTB International Corp.(a) 5,653,012
104,200 Denison International PLC (ADR)
(United Kingdom)(a) 1,224,350
------------
12,353,975
------------------------------------------------------------
MEDIA--3.0%
236,700 A. H. Belo Corp., Class A 4,526,888
749,290 Granite Broadcasting Corp.(a) 8,335,851
205,300 Young Broadcasting, Inc., Class
A(a) 10,752,587
------------
23,615,326
------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES--0.8%
271,000 Varian Medical Systems, Inc. 5,928,125
------------------------------------------------------------
METALS PROCESSING--1.2%
259,950 Chase Industries, Inc.(a) 2,225,822
380,400 Hawk Corporation, Class A(a) 1,997,100
340,500 Wolverine Tube, Inc.(a) 5,277,750
------------
9,500,672
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
PORTFOLIO OF INVESTMENTS AS PRUDENTIAL SMALL COMPANY
OF SEPTEMBER 30, 1999 VALUE FUND, INC.
------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
--------------------------------------------------------------
<C> <S> <C>
MISCELLANEOUS INDUSTRIAL--9.1%
1,025,200 Aztar Corp.(a) $ 10,508,300
20,148 Blout International, Inc. 271,998
245,850 Clarcor, Inc. 4,133,353
790,900 Coinmach Laundry Corp.(a) 7,711,275
515,200 DT Industries, Inc.(a) 3,316,600
274,000 Graco, Inc. 9,013,594
486,500 Griffon Corp.(a) 3,892,000
182,200 Lincoln Electric Holdings, Inc. 3,803,425
180,300 Pentair, Inc. 7,234,537
346,900 Regal Beloit Corp. 7,198,175
341,035 Robbins & Myers, Inc. 5,286,043
381,900 United Dominion Industries,
Ltd. (Canada) 9,070,125
100,400 Vari-Lite International, Inc.(a) 100,400
------------
71,539,825
------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES--0.5%
402,000 Ennis Business Forms, Inc. 3,567,750
------------------------------------------------------------
OIL & GAS EXPLORATION/PRODUCTION--7.0%
844,000 Bellwether Exploration Co.(a) 5,275,000
202,700 Cabot Oil & Gas Corp., Class A 3,496,575
1,107,300 Comstock Resources, Inc.(a) 4,567,613
155,600 Devon Energy Corp. 6,447,675
382,700 Louis Dreyfus Natural Gas Corp.(a) 8,204,131
1,049,085 Santa Fe Snyder Corp.(a) 9,441,765
362,200 St. Mary Land & Exploration Co. 9,462,475
570,700 Vintage Petroleum, Inc.(a) 7,704,450
------------
54,599,684
------------------------------------------------------------
PAPER & PACKAGING--0.9%
544,300 Schweitzer-Mauduit International,
Inc. 7,041,881
------------------------------------------------------------
PRINTING & PUBLISHING--2.2%
430,100 Big Flower Holdings, Inc.(a) 12,177,206
107,600 Pulitzer Inc. 4,889,075
------------
17,066,281
REGIONAL BANKS--1.6%
225,600 Community First Bankshares, Inc. $ 3,807,000
522,200 Peoples Heritage Financial Group 8,681,575
------------
12,488,575
------------------------------------------------------------
RESTAURANTS--2.8%
426,400 Buffets, Inc.(a) 4,956,900
376,000 CKE Restaurants, Inc. 2,726,000
754,100 Ryan's Family Steak Houses, Inc.(a) 6,786,900
480,600 VICORP Restaurants, Inc.(a) 7,929,900
------------
22,399,700
------------------------------------------------------------
RETAIL--4.4%
659,800 Bon-Ton Stores, Inc.(a) 2,618,581
497,100 Dress Barn, Inc.(a) 9,118,678
98,300 Payless ShoeSource, Inc.(a) 4,964,150
724,800 Pier 1 Imports, Inc. 4,892,400
892,500 Stage Stores, Inc.(a) 5,522,344
1,047,900 Stein Mart, Inc.(a) 7,466,288
------------
34,582,441
------------------------------------------------------------
SAVINGS & LOAN--2.3%
507,600 Astoria Financial Corp. 15,608,700
305,600 Sovereign Bancorp, Inc. 2,779,050
------------
18,387,750
------------------------------------------------------------
SECURITY/INVESTIGATION SERVICES--0.4%
209,100 Burns International Services
Corp.(a) 3,371,738
------------------------------------------------------------
SPECIALTY CHEMICALS--3.1%
195,100 Cambrex Corp. 5,157,956
278,200 CK Witco Corp. 4,051,288
771,300 Ethyl Corp. 2,988,788
464,400 Lilly Industries, Inc., Class A 6,327,450
527,500 M.A. Hanna Co. 6,000,312
------------
24,525,794
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1999
------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
---------------------------------------------------------------
<C> <S> <C>
STEEL - PRODUCERS--0.1%
58,500 Northwest Pipe Co.(a) $ 914,063
------------------------------------------------------------
TECHNOLOGY--0.2%
230,500 X-Rite, Inc. 1,498,250
------------------------------------------------------------
TEXTILES--0.6%
685,100 Dan River Inc., Class A(a) 4,453,150
51,300 Guilford Mills, Inc. 442,462
------------
4,895,612
------------------------------------------------------------
WASTE MANAGEMENT--0.5%
394,600 Republic Services, Inc., Class A(a) 4,291,275
------------
Total common stocks
(cost $797,686,684) 725,006,211
------------------------------------------------------------
CONVERTIBLE BOND--0.3%
PRINCIPAL
AMOUNT
(000)
---------
$ 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) 2,250,360
------------
Total long-term investments
(cost $800,365,684) 727,256,571
SHORT-TERM INVESTMENT--8.1%
------------------------------------------------------------
63,721 Joint Repurchase Agreement Account,
5.22%, 10/1/99
(cost $63,721,000; Note 5) 63,721,000
------------------------------------------------------------
TOTAL INVESTMENTS--100.7%
(cost $864,086,684; Note 4) 790,977,571
Liabilities in excess of
other assets--(0.7%) (5,622,581)
------------
Net Assets--100% $785,354,990
------------
------------
</TABLE>
---------------
ADR--American Depository Receipt.
(a) Non-income producing security.
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
PRUDENTIAL SMALL COMPANY
STATEMENT OF ASSETS AND LIABILITIES VALUE FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS September 30, 1999
------------------
<S> <C>
Investments, at value (cost $864,086,684).............................................................. $ 790,977,571
Cash................................................................................................... 358,553
Receivable for investments sold........................................................................ 12,006,796
Receivable for Fund shares sold........................................................................ 3,572,455
Dividends and interest receivable...................................................................... 538,525
Prepaid expenses....................................................................................... 16,512
------------------
Total assets........................................................................................ 807,470,412
------------------
LIABILITIES
Payable for Fund shares reacquired..................................................................... 19,218,966
Payable for investments purchased...................................................................... 1,607,337
Management fee payable................................................................................. 489,012
Distribution fee payable............................................................................... 386,804
Accrued expenses....................................................................................... 413,303
------------------
Total liabilities................................................................................... 22,115,422
------------------
NET ASSETS............................................................................................. $ 785,354,990
------------------
------------------
Net assets were comprised of:
Common stock, at par................................................................................ $ 657,101
Paid-in capital in excess of par.................................................................... 867,907,066
------------------
868,564,167
Accumulated net realized loss on investments........................................................ (10,100,064)
Net unrealized depreciation on investments.......................................................... (73,109,113)
------------------
Net assets, September 30, 1999......................................................................... $ 785,354,990
------------------
------------------
Class A:
Net asset value and redemption price per share
($319,779,225 divided by 25,493,677 shares of common stock issued and outstanding)............... $12.54
Maximum sales charge (5% of offering price)......................................................... .66
------------------
Maximum offering price to public.................................................................... $13.20
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share
($335,013,021 divided by 29,688,163 shares of common stock issued and outstanding)............... $11.28
------------------
------------------
Class C:
Net asset value and redemption price per share
($25,207,272 divided by 2,233,796 shares of common stock issued and outstanding)................. $11.28
Sales charge (1% of offering price)................................................................. .11
------------------
Offering price to public............................................................................ $11.39
------------------
------------------
Class Z:
Net asset value, offering price and redemption price per share
($105,355,472 divided by 8,294,458 shares of common stock issued and outstanding)................ $12.70
------------------
------------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
STATEMENT OF OPERATIONS
------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME (LOSS) SEPTEMBER 30, 1999
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $51,333)..................... $ 8,490,990
Interest................................. 3,022,931
------------------
Total income.......................... 11,513,921
------------------
Expenses
Management fee........................... 6,749,959
Distribution fee--Class A................ 901,768
Distribution fee--Class B................ 4,447,467
Distribution fee--Class C................ 278,132
Transfer agent's fees and expenses....... 2,554,000
Reports to shareholders.................. 275,000
Custodian's fees and expenses............ 130,000
Registration fees........................ 85,000
Directors' fees and expenses............. 27,000
Audit fees and expenses.................. 25,000
Legal fees and expenses.................. 22,000
Miscellaneous............................ 3,034
------------------
Total expenses........................ 15,498,360
------------------
Net investment loss......................... (3,984,439)
------------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investment
transactions............................. 6,018,074
Net change in unrealized appreciation on
investments.............................. 13,126,457
------------------
Net gain on investments..................... 19,144,531
------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................... $ 15,160,092
------------------
------------------
</TABLE>
PRUDENTIAL SMALL COMPANY
VALUE FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED SEPTEMBER 30,
IN NET ASSETS 1999 1998
<S> <C> <C>
Operations
Net investment loss........ $ (3,984,439) $ (4,946,053)
Net realized gain on
investment
transactions............ 6,018,074 150,641,304
Net change in unrealized
appreciation
(depreciation) on
investments............. 13,126,457 (392,297,749)
------------------ --------------
Net increase (decrease) in
net assets resulting
from operations......... 15,160,092 (246,602,498)
------------------ --------------
Distributions from net
realized gains on
investments transactions
(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 (Note
6) (net of share
conversions)
Net proceeds from shares
sold.................... 556,701,257 864,798,421
Net asset value of shares
issued to shareholders
in reinvestment of
distributions........... 117,928,503 124,093,166
Cost of shares
reacquired.............. (814,921,695) (813,331,700)
------------------ --------------
Net increase (decrease) in
net assets from Fund
share transactions...... (140,291,935) 175,559,887
------------------ --------------
Total decrease................ (246,809,066) (199,658,471)
NET ASSETS
Beginning of year............. 1,032,164,056 1,231,822,527
------------------ --------------
End of year................... $ 785,354,990 $1,032,164,056
------------------ --------------
------------------ --------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-51
<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 capital growth. The Fund invests in
common stocks of small, less well-known companies that the investment adviser
believes are undervalued. 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 or, if there was no sale, at the mean between the last bid and asked
prices or at the bid price in the absence of an asked price. Securities traded
in the over-the-counter market (including securities listed on exchanges whose
primary market is believed to be over-the-counter) are valued by an independent
pricing agent or principal market maker and listed securities for which the
primary market is believed to be over-the-counter 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 under triparty repurchase agreements, as the case may be, 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 by
$3,984,439, decrease accumulated net realized gain on investments by $31,313,409
and increase paid-in capital by $27,328,970 due to the Fund experiencing net
operating losses and redemptions utilized as distributions for federal income
tax purposes during the fiscal year ended September 30, 1999. 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.
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ("PIMS"), which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Fund compensates
--------------------------------------------------------------------------------
B-52
<PAGE>
PRUDENTIAL SMALL COMPANY
NOTES TO FINANCIAL STATEMENTS VALUE FUND, INC.
--------------------------------------------------------------------------------
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. The distribution fees are accrued
daily and payable monthly. No distribution or service fees are paid to PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans 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, 1999.
PIMS has advised the Fund that it received approximately $343,400 and $46,700 in
front-end sales charges resulting from sales of Class A and Class C shares,
respectively, during the year ended September 30, 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 year ended September 30, 1999, it
received approximately $1,370,500 and $21,600 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIC, PIFM and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America ("Prudential").
As of March 11, 1999, the Fund along with other affiliated registered investment
companies (the "Funds"), entered into a syndicated credit agreement ("SCA") with
an unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any borrowings will be at market rates. The Funds pay a commitment
fee at an annual rate of .065 of 1% on the unused portion of the credit
facility, which is accrued and paid quarterly on a pro rata basis by the Funds.
The SCA expires on March 9, 2000. 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 year ended September
30, 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 year ended September 30, 1999,
the Fund incurred fees of approximately $2,324,100 for the services of PMFS. As
of September 30, 1999, approximately $180,400 of such fees were due to PMFS.
Transfer agent fees and expenses in Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
For the year ended September 30, 1999, PSI earned approximately $5,118 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities of the Fund, other than short-term
investments, for the fiscal year ended September 30, 1999 were $352,194,619 and
$615,421,254, respectively.
The cost basis of investments for federal income tax purposes as of September
30, 1999 was $864,583,302 and, accordingly, net unrealized depreciation of
investments for federal income tax purposes was $73,605,731 (gross unrealized
appreciation--$83,412,212; gross unrealized depreciation--$157,017,943).
The Fund will elect, for United States federal income tax purposes, to treat net
short-term capital losses of $9,603,446 incurred in the eleven months ended
September 30, 1999 as having been incurred in the following fiscal year.
------------------------------------------------------------
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. Government or federal agency obligations. As of September 30, 1999, the
Fund had a 9.7% undivided interest in the joint account. The undivided interest
of the Fund represented $63,721,000 in principal amount. As of such date, each
repurchase agreement in the joint account and value of the collateral therefor
was as follows:
Warburg Dillon Read LLC, 5.32%, in the principal amount of $190,000,000,
repurchase price $190,028,077, due 10/1/99. The value of the collateral
including accrued interest was $193,802,299.
Bear, Stearns & Co. Inc., 5.32%, in the principal amount of $190,000,000,
repurchase price $190,028,077, due 10/1/99. The value of the collateral
including accrued interest was $194,200,266.
Morgan (J.P.) Securities, Inc., 5.25%, in the principal amount of $190,000,000,
repurchase price $190,027,708, due 10/1/99. The value of the collateral
including accrued interest was $193,800,121.
Goldman, Sachs & Co., 4.75%, in the principal amount of $88,875,000, repurchase
price $88,886,726, due 10/1/99. The value of the collateral including accrued
interest was $90,653,200.
--------------------------------------------------------------------------------
B-53
<PAGE>
PRUDENTIAL SMALL COMPANY
NOTES TO FINANCIAL STATEMENTS VALUE FUND, INC.
--------------------------------------------------------------------------------
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 upon
the period of time the shares are held. Prior to November 2, 1998, Class C
shares were 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 1 billion shares of common stock authorized at $.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, Class C and Class Z shares each consist of 250
million authorized shares.
Transactions in shares of common stock for the years ended September 30, 1999
and September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
----------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1999:
Shares sold........................ 21,652,787 $ 283,748,336
Shares issued in reinvestment of
distributions.................... 2,977,458 39,600,186
Shares reacquired.................. (28,149,832) (366,651,014)
----------- -------------
Net decrease in shares outstanding
before conversion................ (3,519,587) (43,302,492)
Shares issued upon conversion from
Class B.......................... 2,514,601 32,509,648
----------- -------------
Net decrease in shares
outstanding...................... (1,004,986) $ (10,792,844)
----------- -------------
----------- -------------
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>
Year ended September 30, 1999:
Shares sold........................ 12,427,779 $ 148,785,336
Shares issued in reinvestment of
distributions.................... 5,000,512 60,256,172
Shares reacquired.................. (25,651,226) (300,425,348)
----------- -------------
Net decrease in shares outstanding
before conversion................ (8,222,935) (91,383,840)
Shares reacquired upon conversion
into Class A..................... (2,785,771) (32,509,648)
----------- -------------
Net decrease in shares
outstanding...................... (11,008,706) $(123,893,488)
----------- -------------
----------- -------------
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>
Year ended September 30, 1999:
Shares sold........................ 1,537,225 $ 18,451,563
Shares issued in reinvestment of
distributions.................... 278,300 3,353,512
Shares reacquired.................. (1,703,303) (19,969,646)
----------- -------------
Net increase in shares
outstanding...................... 112,222 $ 1,835,429
----------- -------------
----------- -------------
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>
Year ended September 30, 1999:
Shares sold........................ 7,908,673 $ 105,716,022
Shares issued in reinvestment of
distributions.................... 1,095,136 14,718,633
Shares reacquired.................. (9,747,471) (127,875,687)
----------- -------------
Net decrease in shares
outstanding...................... (743,662) $ (7,441,032)
----------- -------------
----------- -------------
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-54
<PAGE>
PRUDENTIAL SMALL COMPANY
FINANCIAL HIGHLIGHTS VALUE FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of year........................... $ 13.79 $ 18.95 $ 15.30 $ 14.18 $ 12.40
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)................................. (.01) -- .02 .04 .05
Net realized and unrealized gain (loss) on investment
transactions.............................................. .29 (3.31) 6.06 1.75 2.57
-------- -------- -------- -------- --------
Total from investment operations.......................... .28 (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 year................................. $ 12.54 $ 13.79 $ 18.95 $ 15.30 $ 14.18
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):............................................. 1.48% (18.90)% 45.92% 13.38% 23.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $319,779 $365,431 $412,980 $237,306 $242,231
Average net assets (000)..................................... $360,707 $443,189 $287,894 $223,091 $174,449
Ratios to average net assets:
Expenses, including distribution fees..................... 1.27% 1.17% 1.21% 1.24% 1.33%
Expenses, excluding distribution fees..................... 1.02% .92% .96% .99% 1.08%
Net investment income (loss).............................. (.09)% -- .15% .33% .30%
For Class A, B, C and Z shares:
Portfolio turnover........................................ 39% 36% 58% 53% 64%
</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,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of year........................... $ 12.63 $ 17.64 $ 14.49 $ 13.56 $ 11.99
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss.......................................... (.10) (.12) (.09) (.06) (.06)
Net realized and unrealized gain (loss) on investment
transactions.............................................. .28 (3.04) 5.67 1.66 2.47
-------- -------- -------- -------- --------
Total from investment operations.......................... .18 (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 year................................. $ 11.28 $ 12.63 $ 17.64 $ 14.49 $ 13.56
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):............................................. .74% (19.52)% 44.91% 12.56% 22.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $335,013 $514,159 $645,579 $378,861 $361,873
Average net assets (000)..................................... $444,747 $678,462 $443,761 $355,636 $349,929
Ratios to average net assets:
Expenses, including distribution fees..................... 2.02% 1.92% 1.96% 1.99% 2.08%
Expenses, excluding distribution fees..................... 1.02% .92% .96% .99% 1.08%
Net investment loss....................................... (.82)% (.75)% (.60)% (.42)% (.51)%
</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
-----------------------------------------------------
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of year........................... $ 12.63 $ 17.64 $ 14.49 $13.56 $11.99
------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss.......................................... (.10) (.12) (.09) (.06) (.06)
Net realized and unrealized gain (loss) on investment
transactions.............................................. .28 (3.04) 5.67 1.66 2.47
------- ------- ------- ------ ------
Total from investment operations.......................... .18 (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 year................................. $ 11.28 $ 12.63 $ 17.64 $14.49 $13.56
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(b):............................................. 0.74% (19.52)% 44.91% 12.56% 22.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $25,207 $26,804 $22,049 $4,323 $1,545
Average net assets (000)..................................... $27,813 $29,259 $ 8,762 $2,786 $ 784
Ratios to average net assets:
Expenses, including distribution fees..................... 2.02% 1.92% 1.96% 1.99% 2.08%
Expenses, excluding distribution fees..................... 1.02% .92% .96% .99% 1.08%
Net investment loss....................................... (.83)% (.75)% (.60)% (.42)% (.46)%
</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 year reported and includes reinvestment of dividends and
distributions.
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
<PAGE>
PRUDENTIAL SMALL COMPANY
FINANCIAL HIGHLIGHTS VALUE FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Z
----------------------------------------------------
MARCH 1,
1996(d)
YEAR ENDED SEPTEMBER 30, THROUGH
---------------------------------- SEPTEMBER 30,
1999 1998 1997 1996
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(a):
Net asset value, beginning of period......................... $ 13.92 $ 19.04 $ 15.32 $ 13.69
-------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................ .02 .04 .06 .05
Net realized and unrealized gain (loss) on investment
transactions.............................................. .29 (3.31) 6.09 1.58
-------- -------- -------- ------
Total from investment operations.......................... .31 (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............................... $ 12.70 $ 13.92 $ 19.04 $ 15.32
-------- -------- -------- ------
-------- -------- -------- ------
TOTAL RETURN(b):............................................. 1.70% (18.58)% 46.38% 11.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $105,355 $125,770 $151,215 $68,516
Average net assets (000)..................................... $131,013 $154,623 $ 97,310 $66,228
Ratios to average net assets:
Expenses, including distribution fees..................... 1.02% .92% .96% .99%(c)
Expenses, excluding distribution fees..................... 1.02% .92% .96% .99%(c)
Net investment income..................................... .16% .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-58
<PAGE>
PRUDENTIAL SMALL COMPANY
REPORT OF INDEPENDENT ACCOUNTANTS VALUE FUND, INC.
------------------------------------------------------------
The Shareholders and Board of Directors of
Prudential Small Company Value Fund, Inc.
------------------------------------------------------------
B-59
<PAGE>
(This page has been left blank intentionally.)
B-60
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Portfolio of Investments as of March 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 95.9%
Common Stocks 95.5%
-------------------------------------------------------------------------------------
AEROSPACE/DEFENSE 0.6%
443,600 Doncasters PLC (ADR) (United Kingdom)(a) $ 3,853,775
-------------------------------------------------------------------------------------
APPAREL 2.2%
278,700 Kellwood Co. 4,894,669
221,700 Nautica Enterprises, Inc.(a) 2,604,975
762,500 Phillips-Van Heusen Corp. 5,861,719
--------------
13,361,363
-------------------------------------------------------------------------------------
AUTO/EQUIPMENT RENTAL 0.4%
164,200 Rent-A-Center, Inc.(a) 2,463,000
-------------------------------------------------------------------------------------
AUTOMOTIVE 2.4%
113,800 Borg-Warner Automotive, Inc. 4,480,875
255,300 Dura Automotive Systems, Inc.(a) 4,387,969
147,900 Midas, Inc. 3,549,600
234,000 Simpson Industries, Inc. 2,296,125
--------------
14,714,569
-------------------------------------------------------------------------------------
BUILDING & CONSTRUCTION 2.2%
361,300 Crossmann Communities, Inc.(a) 5,724,347
62,600 Nortek Inc.(a) 1,385,025
120,100 NVR, Inc.(a) 6,485,400
--------------
13,594,772
-------------------------------------------------------------------------------------
BUILDING & PRODUCTS 1.5%
365,100 Cameron Ashley Building Products, Inc.(a) 6,297,975
246,200 Hussmann International, Inc. 3,123,662
--------------
9,421,637
-------------------------------------------------------------------------------------
CHEMICALS 2.1%
292,100 Agrium, Inc. (Canada) 2,355,056
541,800 Arch Chemicals Inc. 10,836,000
--------------
13,191,056
</TABLE>
See Notes to Financial Statements B-61
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
COMMERCIAL SERVICES 0.9%
273,800 G & K Services, Inc., Class A $ 5,351,934
-------------------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES 0.4%
163,600 Deltek Systems, Inc.(a) 2,505,125
-------------------------------------------------------------------------------------
CONTAINERS & PACKAGING 0.6%
278,300 American National Can Group, Inc. 3,652,687
-------------------------------------------------------------------------------------
DENTAL SUPPLIES 0.8%
163,900 DENTSPLY International Inc. 4,650,663
-------------------------------------------------------------------------------------
DIVERSIFIED MANUFACTURING 1.2%
149,800 ESCO Electronics Corp.(a) 2,509,150
82,600 FMC Corp.(a) 4,666,900
--------------
7,176,050
-------------------------------------------------------------------------------------
ELECTRICAL UTILITIES 1.7%
116,300 Bangor Hydro-Electric Co. 2,013,444
552,500 El Paso Electric Co.(a) 5,732,187
207,804 Sierra Pacific Resources 2,597,550
--------------
10,343,181
-------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 1.5%
339,500 Belden, Inc. 9,336,250
-------------------------------------------------------------------------------------
ELECTRONICS 1.7%
673,700 Pioneer-Standard Electronics, Inc. 10,610,775
-------------------------------------------------------------------------------------
ENTERTAINMENT 1.5%
640,600 Aztar Corp.(a) 6,085,700
163,200 Harrah's Entertainment, Inc.(a) 3,029,400
--------------
9,115,100
</TABLE>
See Notes to Financial Statements B-62
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES 2.7%
149,300 Deluxe Corp. $ 3,956,450
109,500 Federated Investors, Inc., Class B 2,990,719
272,200 Heller Financial, Inc., Class A 6,294,625
81,600 Waddell & Reed Financial, Inc., Class B 3,182,400
--------------
16,424,194
-------------------------------------------------------------------------------------
FOOD DISTRIBUTION 2.5%
187,300 Fleming Cos., Inc. 2,821,206
669,333 SUPERVALU, Inc. 12,675,494
--------------
15,496,700
-------------------------------------------------------------------------------------
FOODS 2.9%
211,900 Aurora Foods Inc.(a) 635,700
292,000 Del Monte Foods Co.(a) 3,120,750
575,400 International Home Foods Inc.(a) 9,206,400
126,900 Suiza Foods Corp.(a) 5,107,725
--------------
18,070,575
-------------------------------------------------------------------------------------
FURNITURE 1.7%
354,800 Furniture Brands International, Inc.(a) 6,674,675
204,900 Stanley Furniture Company, Inc.(a) 3,969,937
--------------
10,644,612
-------------------------------------------------------------------------------------
HEALTH SERVICES 1.1%
835,500 Foundation Health Systems, Inc.(a) 6,684,000
-------------------------------------------------------------------------------------
HOSPITAL MANAGEMENT 5.2%
265,400 Health Management Associates, Inc., Class A(a) 3,781,950
857,000 Quorum Health Group, Inc.(a) 8,623,562
438,500 Triad Hospitals, Inc.(a) 7,344,875
250,000 Universal Health Services, Inc., Class B(a) 12,250,000
--------------
32,000,387
-------------------------------------------------------------------------------------
HOTEL/MOTEL 1.5%
1,005,100 Lodgian, Inc.(a) 3,769,125
744,200 Prime Hospitality Corp.(a) 5,395,450
--------------
9,164,575
</TABLE>
See Notes to Financial Statements B-63
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
INSURANCE 13.8%
552,027 Amerus Life Holdings, Inc. $ 10,005,489
653,600 CNA Surety Corp. 9,109,550
551,400 Enhance Financial Services Group, Inc. 7,788,525
315,200 Everest Re Group, Ltd. 10,283,400
279,400 Financial Security Assurance Holdings, Ltd. 20,518,438
207,200 Harleysville Group, Inc. 3,004,400
264,400 Horace Mann Educators Corp. 4,874,875
206,500 Liberty Financial Co., Inc. 4,091,281
478,252 Reinsurance Group of America, Inc. 11,388,376
132,600 StanCorp Financial Group, Inc. 3,629,925
--------------
84,694,259
-------------------------------------------------------------------------------------
MACHINERY 2.6%
228,800 Applied Power Inc., Class A 6,520,800
418,600 Denison International PLC (ADR) (United Kingdom) (a) 5,441,800
228,700 Gardner Denver Inc.(a) 4,302,419
--------------
16,265,019
-------------------------------------------------------------------------------------
MEDIA 2.6%
393,000 A. H. Belo Corp., Class A 7,024,875
209,390 Granite Broadcasting Corp.(a) 1,491,904
396,500 Sinclair Broadcast Group, Inc., Class A(a) 3,543,719
191,000 Young Broadcasting, Inc., Class A(a) 3,629,000
--------------
15,689,498
-------------------------------------------------------------------------------------
MISCELLANEOUS INDUSTRIAL 7.0%
245,850 Clarcor, Inc. 4,363,838
816,400 Coinmach Laundry Corp.(a) 8,112,975
164,800 Graco, Inc. 4,779,200
617,100 Griffon Corp.(a) 4,821,094
232,200 Pentair, Inc. 8,605,912
238,800 Regal Beloit Corp. 4,179,000
341,035 Robbins & Myers, Inc. 8,056,952
--------------
42,918,971
</TABLE>
See Notes to Financial Statements B-64
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
OFFICE EQUIPMENT & SUPPLIES 0.5%
440,100 Ennis Business Forms, Inc. $ 3,190,725
-------------------------------------------------------------------------------------
OIL & GAS EXPLORATION/PRODUCTION 6.8%
789,400 Bellwether Exploration Co.(a) 5,476,463
134,500 Cabot Oil & Gas Corp., Class A 2,429,406
533,200 Comstock Resources, Inc.(a) 2,932,600
122,200 Devon Energy Corp. 5,934,337
236,900 Louis Dreyfus Natural Gas Corp.(a) 8,054,600
662,485 Santa Fe Snyder Corp.(a) 6,376,418
233,400 St. Mary Land & Exploration Co. 6,972,825
191,400 Vintage Petroleum, Inc.(a) 3,851,925
--------------
42,028,574
-------------------------------------------------------------------------------------
PAPER & PACKAGING 1.0%
459,400 Schweitzer-Mauduit International, Inc. 5,943,488
-------------------------------------------------------------------------------------
PRINTING & PUBLISHING 2.1%
137,900 ADVO, Inc.(a) 3,447,500
97,700 Central Newspapers, Inc., Class A 3,285,162
378,900 Mail-Well, Inc.(a) 3,291,694
75,600 Pulitzer Inc. 3,090,150
--------------
13,114,506
-------------------------------------------------------------------------------------
REGIONAL BANKS 1.9%
225,600 Community First Bankshares, Inc. 3,609,600
522,200 Peoples Heritage Financial Group 7,833,000
--------------
11,442,600
-------------------------------------------------------------------------------------
RESTAURANTS 3.9%
484,500 Buffets, Inc.(a) 4,375,641
371,900 CBRL Group, Inc. 3,719,000
172,500 Ruby Tuesday, Inc. 3,018,750
780,200 Ryan's Family Steak Houses, Inc.(a) 7,460,662
263,489 VICORP Restaurants, Inc.(a) 5,500,333
--------------
24,074,386
</TABLE>
See Notes to Financial Statements B-65
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL 7.3%
461,800 Bon-Ton Stores, Inc.(a) $ 1,399,831
357,700 Casey's General Stores, Inc. 3,889,988
171,700 Movado Group, Inc. 1,727,731
97,800 Payless ShoeSource, Inc.(a) 5,079,487
736,000 Pier 1 Imports, Inc. 7,544,000
195,100 Regis Corp. 2,889,919
270,500 Ross Stores, Inc. 6,508,906
1,344,900 Stein Mart, Inc.(a) 11,095,425
299,000 The Wet Seal, Inc.(a) 4,709,250
--------------
44,844,537
-------------------------------------------------------------------------------------
SAVINGS & LOAN 1.7%
374,100 Astoria Financial Corp. 10,615,087
-------------------------------------------------------------------------------------
SECURITY/INVESTIGATION SERVICES 0.8%
494,600 Burns International Services Corp.(a) 5,193,300
-------------------------------------------------------------------------------------
SPECIALTY CHEMICALS 1.8%
349,700 CK Witco Corp. 3,562,569
63,500 Great Lakes Chemical Corp. 2,159,000
430,600 Lilly Industries, Inc., Class A 5,328,675
--------------
11,050,244
-------------------------------------------------------------------------------------
TECHNOLOGY 0.8%
489,400 X-Rite, Inc. 4,955,175
-------------------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT 0.1%
17,000 Harris Corp. 587,563
-------------------------------------------------------------------------------------
TEXTILES 0.4%
397,500 Dan River Inc., Class A(a) 2,558,906
</TABLE>
See Notes to Financial Statements B-66
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------------------------------------------------------------------------------------------
<C> <S> <C>
WASTE MANAGEMENT 1.1%
612,700 Republic Services, Inc., Class A(a) $ 6,701,406
17,500 Waste Connections, Inc.(a) 212,188
--------------
6,913,594
--------------
Total common stocks (cost $573,506,235) 587,907,412
--------------
CONVERTIBLE BOND 0.4%
PRINCIPAL
AMOUNT
(000)
-----------------------------------------------------------------------------------
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) 2,625,420
--------------
Total long-term investments
(cost $576,185,235) 590,532,832
--------------
SHORT-TERM INVESTMENT 1.4%
REPURCHASE AGREEMENT
-------------------------------------------------------------------------------------
8,449 Joint Repurchase Agreement Account,
6.15%, 4/3/00
(cost $8,449,000; Note 5) 8,449,000
--------------
TOTAL INVESTMENTS 97.3%
(COST $584,634,235; NOTE 4) 598,981,832
Other assets in excess of liabilities 2.7% 16,885,070
--------------
NET ASSETS 100% $ 615,866,902
--------------
--------------
</TABLE>
------------------------------
ADR--American Depository Receipt.
(a) Non-income producing security.
See Notes to Financial Statements B-67
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at value (cost $584,634,235) $ 598,981,832
Cash 41,966
Receivable for investments sold 13,477,877
Receivable for Fund shares sold 7,343,289
Dividends and interest receivable 312,652
Prepaid expenses 13,908
--------------
TOTAL ASSETS 620,171,524
--------------
LIABILITIES
Payable for Fund shares reacquired 2,442,869
Payable for investments purchased 645,437
Management fee payable 345,334
Distribution fee payable 260,014
Accrued expenses 610,968
--------------
TOTAL LIABILITIES 4,304,622
--------------
NET ASSETS $ 615,866,902
--------------
--------------
Net assets were comprised of:
Common stock, at par $ 484,354
Paid-in capital in excess of par 671,059,246
--------------
671,543,600
Net investment loss (539,335)
Accumulated net realized loss on investments (69,484,960)
Net unrealized appreciation on investments 14,347,597
--------------
Net assets, March 31, 2000 $ 615,866,902
--------------
--------------
</TABLE>
See Notes to Financial Statements B-68
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Statement of Assets and Liabilities (Unaudited) Cont'd.
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------------------------------------------------------------------------------
<S> <C>
Class A:
Net asset value and redemption price per share
($271,047,212 divided by 20,402,430 shares of
common stock issued and outstanding) $13.29
Maximum sales charge (5% of offering price) .70
--------------
Maximum offering price to public $13.99
--------------
--------------
Class B:
Net asset value, offering price and redemption price per
share
($231,578,227 divided by 19,447,451 shares of common
stock issued and outstanding) $11.91
--------------
--------------
Class C:
Net asset value and redemption price per share
($18,363,271 divided by 1,542,095 shares of common
stock issued and outstanding) $11.91
Sales charge (1% of offering price) .12
--------------
Offering price to public $12.03
--------------
--------------
Class Z:
Netasset value, offering price and redemption price
per share ($94,878,192 divided by 7,043,389 shares
of common stock issued and outstanding) $13.47
--------------
--------------
</TABLE>
See Notes to Financial Statements B-69
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT LOSS
Income
Dividends (net of foreign withholding taxes of $11,096) $ 4,159,658
Interest 1,055,821
-----------------
TOTAL INCOME 5,215,479
-----------------
Expenses
Management fee 2,362,612
Distribution fee--Class A 349,804
Distribution fee--Class B 1,393,572
Distribution fee--Class C 105,732
Transfer agent's fees and expenses 1,229,000
Reports to shareholders 137,000
Custodian's fees and expenses 65,000
Registration fees 50,000
Legal fees and expenses 24,000
Audit fees and expenses 13,000
Directors' fees and expenses 10,000
Miscellaneous 15,094
-----------------
TOTAL EXPENSES 5,754,814
-----------------
NET INVESTMENT LOSS (539,335)
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investment transactions (59,384,896)
Net change in unrealized appreciation on investments 87,456,710
-----------------
NET GAIN ON INVESTMENTS 28,071,814
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 27,532,479
-----------------
-----------------
</TABLE>
See Notes to Financial Statements B-70
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, 2000 SEPTEMBER 31, 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment loss $ (539,335) $ (3,984,439)
Net realized gain (loss) on
investment transactions (59,384,896) 6,018,074
Net change in unrealized appreciation on
investments 87,456,710 13,126,457
-------------- ------------------
Net increase in net assets resulting from
operations 27,532,479 15,160,092
-------------- ------------------
DISTRIBUTIONS FROM NET REALIZED GAINS ON
INVESTMENT TRANSACTIONS (NOTE 1)
Class A -- (41,109,661)
Class B -- (62,450,536)
Class C -- (3,389,932)
Class Z -- (14,727,094)
-------------- ------------------
-- (121,677,223)
-------------- ------------------
FUND SHARE TRANSACTIONS (NOTE 6) (NET OF
SHARE CONVERSIONS)
Net proceeds from shares sold 254,796,526 556,701,257
Net asset value of shares issued to
shareholders in reinvestment of
distributions -- 117,928,503
Cost of shares reacquired (451,817,093) (814,921,695)
-------------- ------------------
Net decrease in net assets from Fund
share transactions (197,020,567) (140,291,935)
-------------- ------------------
Total decrease (169,488,088) (246,809,066)
NET ASSETS
Beginning of period 785,354,990 1,032,164,056
-------------- ------------------
End of period $ 615,866,902 $ 785,354,990
-------------- ------------------
-------------- ------------------
</TABLE>
See Notes to Financial Statements B-71
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Notes to Financial Statements (Unaudited)
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 capital growth. The Fund
invests in common stocks of small, less well-known companies that the investment
adviser believes are undervalued. 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 or, if there was no sale, at the mean between the last bid
and asked prices or at the bid price in the absence of an asked price.
Securities traded in the over-the-counter market (including securities listed on
exchanges whose primary market is believed to be over-the-counter) are valued by
an independent pricing agent or principal market maker and listed securities for
which the primary market is believed to be over-the-counter 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 under triparty repurchase agreements, as the case may be, 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
B-72
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Notes to Financial Statements (Unaudited)
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 services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund
bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .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. 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. The distribution
See Notes to Financial Statements B-73
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Notes to Financial Statements (Unaudited) Cont'd.
fees are accrued daily and payable monthly. No distribution or service fees are
paid to PIMS as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans 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, 2000.
PIMS has advised the Fund that it received approximately $47,400 and
$7,500 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the six months ended March 31, 2000. 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, 2000, it
received approximately $589,100 and $10,600 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIC, PIFM and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America ("Prudential").
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a syndicated credit agreement ("SCA") with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the six months ended March 31, 2000.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended March 31, 2000,
the Fund incurred fees of approximately $860,800 for the services of PMFS. As of
March 31, 2000, approximately $137,700 of such fees were due to PMFS. Transfer
B-74
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Notes to Financial Statements (Unaudited)
agent fees and expenses in Statement of Operations include certain out-of-pocket
expenses paid to nonaffiliates.
For the six months ended March 31, 2000, PSI earned approximately $12,515
in brokerage commissions from portfolio transactions executed on behalf of the
Fund.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities of the Fund, other than short-term
investments, for the six months ended March 31, 2000 were $152,093,154 and
$316,882,704, respectively.
The cost basis of investments for federal income tax purposes as of March
31, 2000 was $585,127,974 and, accordingly, net unrealized depreciation of
investments for federal income tax purposes was $13,853,858 (gross unrealized
appreciation--$87,654,056; gross unrealized depreciation--$73,800,198).
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. Government or federal agency obligations. As of March 31, 2000, the Fund
had a 1.3% undivided interest in the joint account. The undivided interest of
the Fund represented $8,449,000 in principal amount. As of such date, each
repurchase agreement in the joint account and value of the collateral therefor
was as follows:
Bear, Stearns & Co. Inc., 6.10%, in the principal amount of $120,000,000,
repurchase price $120,061,000, due 04/3/00. The value of the collateral
including accrued interest was $123,642,827.
Credit Suisse First Boston Corp., 6.10%, in the principal amount of
$130,000,000, repurchase price $130,066,083, due 04/3/00. The value of the
collateral including accrued interest was $134,450,258.
Greenwich Capital Markets, Inc., 6.15%, in the principal amount of $100,000,000,
repurchase price $100,051,250, due 04/3/00. The value of the collateral
including accrued interest was $102,005,200. Goldman, Sachs & Co., 6.09%, in the
principal amount of $100,000,000, repurchase price $100,050,750, due 04/3/00.
The value of the collateral including accrued interest was $102,000,425.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 6.25%, in the principal amount of
$207,289,000, repurchase price $207,396,963, due 04/3/00. The value of the
collateral including accrued interest was $211,435,308.
See Notes to Financial Statements B-75
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Notes to Financial Statements (Unaudited) Cont'd.
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 upon
the period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who 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 1 billion shares of common stock authorized at $.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, Class C and Class Z shares each consist
of 250 million authorized shares.
Transactions in shares of common stock for the six months ended March 31,
2000 and the year ended September 30, 1999 were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
---------------------------------------------------------- ----------- -------------
<S> <C> <C>
Six months ended March 31, 2000:
Shares sold 13,872,152 $ 170,494,861
Shares reacquired (20,254,048) (247,972,362)
----------- -------------
Net decrease in shares outstanding before conversion (6,381,896) (77,477,501)
Shares issued upon conversion from Class B 1,290,649 15,474,298
----------- -------------
Net decrease in shares outstanding (5,091,247) $ (62,003,203)
----------- -------------
----------- -------------
Year ended September 30, 1999:
Shares sold 21,652,787 $ 283,748,336
Shares issued in reinvestment of distributions 2,977,458 39,600,186
Shares reacquired (28,149,832) (366,651,014)
----------- -------------
Net decrease in shares outstanding before conversion (3,519,587) (43,302,492)
Shares issued upon conversion from Class B 2,514,601 32,509,648
----------- -------------
Net decrease in shares outstanding (1,004,986) $ (10,792,844)
----------- -------------
----------- -------------
<CAPTION>
CLASS B
----------------------------------------------------------
<S> <C> <C>
Six months ended March 31, 2000:
Shares sold 4,335,693 $ 47,995,485
Shares reacquired (13,138,204) (144,448,898)
----------- -------------
Net decrease in shares outstanding before conversion (8,802,511) (96,453,413)
Shares reacquired upon conversion into Class A (1,438,201) (15,474,298)
----------- -------------
Net decrease in shares outstanding (10,240,712) $(111,927,711)
----------- -------------
----------- -------------
</TABLE>
B-76
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Notes to Financial Statements (Unaudited)
<TABLE>
<CAPTION>
CLASS B SHARES AMOUNT
---------------------------------------------------------- ----------- -------------
Year ended September 30, 1999:
<S> <C> <C>
Shares sold 12,427,779 $ 148,785,336
Shares issued in reinvestment of distributions 5,000,512 60,256,172
Shares reacquired (25,651,226) (300,425,348)
----------- -------------
Net decrease in shares outstanding before conversion (8,222,935) (91,383,840)
Shares reacquired upon conversion into Class A (2,785,771) (32,509,648)
----------- -------------
Net decrease in shares outstanding (11,008,706) $(123,893,488)
----------- -------------
----------- -------------
<CAPTION>
CLASS C
----------------------------------------------------------
<S> <C> <C>
Six months ended March 31, 2000:
Shares sold 895,027 $ 9,814,904
Shares reacquired (1,586,728) (17,434,838)
----------- -------------
Net decrease in shares outstanding (691,701) $ (7,619,934)
----------- -------------
----------- -------------
Year ended September 30, 1999:
Shares sold 1,537,225 $ 18,451,563
Shares issued in reinvestment of distributions 278,300 3,353,512
Shares reacquired (1,703,303) (19,969,646)
----------- -------------
Net increase in shares outstanding 112,222 $ 1,835,429
----------- -------------
----------- -------------
<CAPTION>
CLASS Z
----------------------------------------------------------
<S> <C> <C>
Six months ended March 31, 2000:
Shares sold 2,126,138 $ 26,491,276
Shares reacquired (3,377,207) (41,960,995)
----------- -------------
Net decrease in shares outstanding (1,251,069) $ (15,469,719)
----------- -------------
----------- -------------
Year ended September 30, 1999:
Shares sold 7,908,673 $ 105,716,022
Shares issued in reinvestment of distributions 1,095,136 14,718,633
Shares reacquired (9,747,471) (127,875,687)
----------- -------------
Net decrease in shares outstanding (743,662) $ (7,441,032)
----------- -------------
----------- -------------
</TABLE>
See Notes to Financial Statements B-77
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
CLASS A
----------------
SIX MONTHS ENDED
MARCH 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE(a):
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.54
----------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.01
Net realized and unrealized gain (loss) on investment
transactions 0.74
----------------
Total from investment operations 0.75
----------------
LESS DISTRIBUTIONS
Distributions from net realized gains --
----------------
Net asset value, end of period $ 13.29
----------------
----------------
TOTAL RETURN(b): 5.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $271,047
Average net assets (000) $279,843
Ratios to average net assets:
Expenses, including distribution fees 1.41%(c)
Expenses, excluding distribution fees 1.16%(c)
Net investment income (loss) 0.14%(c)
Portfolio turnover rate 24%
</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 less than a full year are not
annualized.
(c) Annualized.
See Notes to Financial Statements B-78
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 13.79 $ 18.95 $ 15.30 $ 14.18 $ 12.40
---------------- ---------------- ---------------- ---------------- ----------------
(.01) -- .02 .04 .05
.29 (3.31) 6.06 1.75 2.57
---------------- ---------------- ---------------- ---------------- ----------------
.28 (3.31) 6.08 1.79 2.62
---------------- ---------------- ---------------- ---------------- ----------------
(1.53) (1.85) (2.43) (.67) (.84)
---------------- ---------------- ---------------- ---------------- ----------------
$ 12.54 $ 13.79 $ 18.95 $ 15.30 $ 14.18
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
1.48% (18.90)% 45.92% 13.38% 23.29%
$319,779 $365,431 $412,980 $237,306 $242,231
$360,707 $443,189 $287,894 $223,091 $174,449
1.27% 1.17% 1.21% 1.24% 1.33%
1.02% .92% .96% .99% 1.08%
(.09)% -- .15% .33% .30%
39% 36% 58% 53% 64%
</TABLE>
See Notes to Financial Statements B-79
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
CLASS B
----------------
SIX MONTHS ENDED
MARCH 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE(a):
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.28
----------------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.03)
Net realized and unrealized gain (loss) on investment
transactions 0.66
----------------
Total from investment operations 0.63
----------------
LESS DISTRIBUTIONS
Distributions from net realized gains --
----------------
Net asset value, end of period $ 11.91
----------------
----------------
TOTAL RETURN(b): 5.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $231,578
Average net assets (000) $278,715
Ratios to average net assets:
Expenses, including distribution fees 2.16%(c)
Expenses, excluding distribution fees 1.16%(c)
Net investment loss (0.61)%(c)
Portfolio turnover rate 24%
</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 less than a full year are not
annualized.
(c) Annualized.
See Notes to Financial Statements B-80
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 12.63 $ 17.64 $ 14.49 $ 13.56 $ 11.99
---------------- ---------------- ---------------- ---------------- ----------------
(.10) (.12) (.09) (.06) (.06)
.28 (3.04) 5.67 1.66 2.47
---------------- ---------------- ---------------- ---------------- ----------------
.18 (3.16) 5.58 1.60 2.41
---------------- ---------------- ---------------- ---------------- ----------------
(1.53) (1.85) (2.43) (.67) (.84)
---------------- ---------------- ---------------- ---------------- ----------------
$ 11.28 $ 12.63 $ 17.64 $ 14.49 $ 13.56
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
0.74% (19.52)% 44.91% 12.56% 22.37%
$335,013 $514,159 $645,579 $378,861 $361,873
$444,747 $678,462 $443,761 $355,636 $349,929
2.02% 1.92% 1.96% 1.99% 2.08%
1.02% .92% .96% .99% 1.08%
(.82)% (.75)% (.60)% (.42)% (.51)%
39% 36% 58% 53% 64%
</TABLE>
See Notes to Financial Statements B-81
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
CLASS C
----------------
SIX MONTHS ENDED
MARCH 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE(a):
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.28
--------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.03)
Net realized and unrealized gain (loss) on investment
transactions 0.66
--------
Total from investment operations 0.63
--------
LESS DISTRIBUTIONS
Distributions from net realized gains --
--------
Net asset value, end of period $ 11.91
--------
--------
TOTAL RETURN(b): 5.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 18,364
Average net assets (000) $ 21,146
Ratios to average net assets:
Expenses, including distribution fees 2.16%(c)
Expenses, excluding distribution fees 1.16%(c)
Net investment loss (0.62)%(c)
Portfolio turnover rate 24%
</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 less than a full year are not
annualized.
(c) Annualized.
See Notes to Financial Statements B-82
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 12.63 $ 17.64 $ 14.49 $13.56 $11.99
-------- -------- -------- ------- -------
(.10) (.12) (.09) (.06) (.06)
.28 (3.04) 5.67 1.66 2.47
-------- -------- -------- ------- -------
.18 (3.16) 5.58 1.60 2.41
-------- -------- -------- ------- -------
(1.53) (1.85) (2.43) (.67) (.84)
-------- -------- -------- ------- -------
$ 11.28 $ 12.63 $ 17.64 $14.49 $13.56
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
0.74% (19.52)% 44.91% 12.56% 22.37%
$ 25,207 $ 26,804 $ 22,049 $4,323 $1,545
$ 27,813 $ 29,259 $ 8,762 $2,786 $ 784
2.02% 1.92% 1.96% 1.99% 2.08%
1.02% .92% .96% .99% 1.08%
(.83)% (.75)% (.60)% (.42)% (.46)%
39% 36% 58% 53% 64%
</TABLE>
See Notes to Financial Statements B-83
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
CLASS Z
----------------
SIX MONTHS
ENDED
MARCH 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE(a):
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.70
--------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.02
Net realized and unrealized gain (loss) on investment
transactions 0.75
--------
Total from investment operations 0.77
--------
LESS DISTRIBUTIONS
Distributions from net realized gains --
--------
Net asset value, end of period $ 13.47
--------
--------
TOTAL RETURN(b): 6.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 94,878
Average net assets (000) $ 95,328
Ratios to average net assets:
Expenses, including distribution fees 1.16%(c)
Expenses, excluding distribution fees 1.16%(c)
Net investment income 0.38%(c)
Portfolio turnover rate 24%
</TABLE>
------------------------------
(a) Calculated based upon weighted average shares outstanding during the period.
(b) 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 less than a full
year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class Z shares.
See Notes to Financial Statements B-84
<PAGE>
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
CLASS Z
-------------------------------------------------------------------------------------
MARCH 1, 1996(d)
YEAR ENDED SEPTEMBER 30, THROUGH SEPTEMBER 30,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 13.92 $ 19.04 $ 15.32 $ 13.69
---------------- ---------------- ---------------- --------
.02 .04 .06 .05
.29 (3.31) 6.09 1.58
---------------- ---------------- ---------------- --------
.31 (3.27) 6.15 1.63
---------------- ---------------- ---------------- --------
(1.53) (1.85) (2.43) --
---------------- ---------------- ---------------- --------
$ 12.70 $ 13.92 $ 19.04 $ 15.32
---------------- ---------------- ---------------- --------
---------------- ---------------- ---------------- --------
1.70% (18.58)% 46.38% 11.91%
$105,355 $125,770 $151,215 $ 68,516
$131,013 $154,623 $ 97,310 $ 66,228
1.02% .92% .96% .99%(c)
1.02% .92% .96% .99%(c)
.16% .25% .40% .58%(c)
39% 36% 58% 53%
</TABLE>
See Notes to Financial Statements B-85
<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 1/1/1926 THROUGH 12/31/1999
<TABLE>
<CAPTION>
<S> <C>
Small Stocks $6,640.79
Common Stocks $2,845.63
Long-Term Bonds $ 40.22
Treasury Bills $ 15.64
Inflation $ 9.40
</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 500
Composite Stock Price Index, a market-weighted, unmanaged index of 500 stocks
(currently) in a variety of industries. It is often used as a broad measure of
stock market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1989
through 1999. The total returns of the indexes include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary--Fees and Expenses" in the prospectus.
The net effect of the deduction of the operating expenses of a mutual fund on
these historical total returns, including the compounded effect over time, could
be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT TREASURY BONDS(1) 14.4 % 8.5 % 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6 % 10.0% (2.56)%
--------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT MORTGAGE SECURITIES(2) 15.4 % 10.7 % 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5 % 7.0% 1.86 %
--------------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE CORPORATE
BONDS(3) 14.1 % 7.1 % 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2 % 8.6% (1.96)%
--------------------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD CORPORATE BONDS(4) 0.8 % (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8 % 1.6% 2.39 %
--------------------------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT BONDS(5) (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0 % 19.6% 4.1% (4.3)% 5.3% (5.07)%
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.12 8.4 7.46
</TABLE>
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one
year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of
the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-
denominated issues and include debt issued or guaranteed by foreign
sovereign governments, municipalities, governmental agencies or
international agencies. All bonds in the index have maturities of at least
one year. 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, 1999. It does not represent the
performance of any Prudential mutual fund.
TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS 12/31/85 - 12/31/99 (IN U.S. DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
U.K. 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
</TABLE>
Source: Morgan Stanley Capital International (MSCI) and
Lipper, Inc. as of 12/31/99. Used with permission.
Morgan Stanley Country indexes are unmanaged indexes which
include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the
reinvestment of all distributions. This chart is for illustrative
purposes only and is not indicative of the past, present or
future performance of any specific investment. Investors
cannot invest directly in stock indexes.
This chart shows the growth of a hypothetical
$10,000 investment made in the stocks representing
the S&P 500 stock index with and without reinvested
dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Appreciation and Reinvesting
Dividends $474,094
Capital Appreciation Only $159,597
</TABLE>
Source: Lipper Inc. Used with permission. All rights reserved.
This chart is used for illustrative purposes only and is not intended to
represent the past, present or future performance of any Prudential Mutual Fund.
Common stock total return is based on the Standard & Poor's 500 Composite Stock
Price Index, a market-value-weighted index made up of 500 of the largest stocks
in the U.S. based upon their stock market value. Investors cannot invest
directly in indexes.
II-3
<PAGE>
---------------------------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $20.7 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. 49.00%
Europe 32.50%
Pacific
Basin 16.40%
Canada 2.10%
</TABLE>
Source: Morgan Stanley Capital International, December 31, 1999.
Used with permission. This chart represents the capitalization of
major world stock markets as measured by the Morgan Stanley
Capital International (MSCI) World Index. The total market
capitalization is based on the value of 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
(1926-1999)
[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 1926-1999. Yields represent that of an annually renewed one-bond
portfolio with a remaining maturity of approximately 20 years. This chart
is for illustrative purposes only and should not be construed to represent
the yields of any Prudential mutual fund.
II-4
<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).
(6) Articles of Amendment.*
(b) Amended and Restated By-Laws.*
(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. Incorporated by reference to Exhibit (d)(1) to
Post-Effective Amendment No. 27 to the Registration Statement filed on
Form N-1A via EDGAR on September 28, 1999 (File No. 2-68723).
(2) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation. Incorporated by reference to
Exhibit (d)(2) to Post-Effective Amendment No. 27 to the Registration
Statement filed on Form N-1A via EDGAR on September 28, 1999 (File No.
2-68723).
(3) Amendment to Subadvisory Agreement.*
(4) Interim Subadvisory Agreement with Jennison Associates LLC.*
(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. Incorporated by reference to Exhibit (g)(1) to
Post-Effective Amendment No. 27 to the Registration Statement filed on
Form N-1A via EDGAR on September 28, 1999 (File No. 2-68723).
(2) Amended Custodian Agreement between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit 8(b) to
Post-Effective Amendment No. 14 to the Registration Statement filed on
Form N-1A (File No. 2-68723).
(3) Amendment to Custodian Agreement. Incorporated by reference to Exhibit
(g)(3) to Post-Effective Amendment No. 27 to the Registration Statement
filed on Form N-1A via EDGAR on September 28, 1999 (File No. 2-68723).
(h) (1) Transfer Agency Agreement between the Registrant and Prudential Mutual
Fund Services, Inc., dated January 1, 1988. Incorporated by reference
to Exhibit (h)(1) to Post-Effective Amendment No. 27 to the
Registration Statement filed on Form N-1A via EDGAR on September 28,
1999 (File No. 2-68723).
C-1
<PAGE>
(2) Amendment to Transfer Agency Agreement. Incorporated by reference to
Exhibit (h)(2) to Post-Effective Amendment No. 27 to the Registration
Statement filed on Form N-1A via EDGAR on September 28, 1999 (File No.
2-68723).
(i) (1) Opinion and Consent of Counsel. Incorporated by reference to
Exhibit (i) to Post-Effective Amendment No. 27 to the Registration
Statement filed on Form N-1A via EDGAR on September 28, 1999 (File
No. 2-68723).
(2) Consent of Counsel.**
(j) Consent of Independent Accountants.**
(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).
(n) 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).
(p) (1) Fund's Code of Ethics.*
(2) Manager's, Investment Adviser's and Distributor's Code of Ethics.*
(3) Jennison Associates LLC Code of Ethics.*
------------------------
*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)(1) 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
C-2
<PAGE>
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), Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) and Section 4 of the Interim Subadvisory Agreement limit
the liability of Prudential Investments Fund Management LLC (PIFM), The
Prudential Investment Corporation (PIC) and Jennison Associates LLC (Jennison),
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, Chief Officer in Charge, President, Chief
Executive Officer and Chief Executive Officer and Chief
Operating Officer Operating Officer, PIFM; Senior
Vice President, The Prudential
Insurance Company of America
(Prudential)
Robert F. Gunia Executive Vice President and Chief Executive Vice President and Chief
Administrative Officer Administrative Officer, PIFM; Vice
President, Prudential; President,
Prudential Investment Management
Services LLC (PIMS)
William V. Healey Executive Vice President, Chief Executive Vice President, Chief
Legal Officer and Secretary Legal Officer and Secretary, PIFM;
Vice President and Associate
General Counsel, Prudential;
Senior Vice President, Chief Legal
Officer and Secretary, PIMS
Stephen Pelletier Executive Vice President Executive Vice President, PIFM
Judy A. Rice Executive Vice President Executive Vice President, PIFM
Lynn M. Waldvogel Executive Vice President Executive Vice President, PIFM
</TABLE>
(b) Jennison Associates LLC (Jennison)
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 Jennison's directors and executive
officers are listed in its Form ADV as currently on file with the Securities and
Exchange Commission (File No. 801-5608), the text of which is hereby
incorporated by reference.
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
Diversified Funds, Prudential Equity Fund, Inc., Prudential Europe Growth
Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global Total Return
Fund, Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust, Prudential High Yield Fund, Inc., Prudential High Yield Total
Return Fund, Inc., Prudential Index Series Fund, Prudential International Bond
Fund, Inc., 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 Short-Term Corporate Bond Fund, Inc., Prudential Small Company
Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential Tax-Free
Money Fund, Inc., Prudential Tax-Managed Funds, Prudential Tax-Managed Small-Cap
Fund, Inc., Prudential Total Return Bond Fund, Inc., Prudential 20/20 Focus
Fund, Prudential U.S. Emerging Growth Fund, Inc., Prudential Value Fund,
Prudential World Fund, Inc., Strategic Partners Series, The Prudential
Investment Portfolios, Inc., The Target Portfolio Trust and Target Funds.
(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 None
Officer
213 Washington Street
Newark, NJ 07102
William V. Healey................. Senior Vice President, Secretary and Chief Assistant Secretary
Legal Officer
John R. Strangfeld................ Advisory Board Member President and Director
</TABLE>
------------------------
(1) The address of each person named is Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077 unless otherwise noted.
(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, 194 Wood Avenue South, Iselin, New Jersey 08830.
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.
C-4
<PAGE>
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 29th day of September, 2000.
PRUDENTIAL SMALL COMPANY FUND, INC.
/s/ John R. Strangfeld
------------------------------------------
JOHN R. STRANGFELD, 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/ Saul K. Fenster
------------------------------------ Director September 29, 2000
SAUL K. FENSTER
/s/ Delayne D. Gold
------------------------------------ Director September 29, 2000
DELAYNE D. GOLD
/s/ Robert F. Gunia
------------------------------------ Director September 29, 2000
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale
------------------------------------ Director September 29, 2000
DOUGLAS H. MCCORKINDALE
/s/ W. Scott McDonald, Jr.
------------------------------------ Director September 29, 2000
W. SCOTT MCDONALD, JR.
/s/ Thomas T. Mooney
------------------------------------ Director September 29, 2000
THOMAS T. MOONEY
/s/ Stephen P. Munn
------------------------------------ Director September 29, 2000
STEPHEN P. MUNN
/s/ David R. Odenath, Jr.
------------------------------------ Director September 29, 2000
DAVID R. ODENATH, JR.
/s/ Richard A. Redeker
------------------------------------ Director September 29, 2000
RICHARD A. REDEKER
/s/ Robin B. Smith
------------------------------------ Director September 29, 2000
ROBIN B. SMITH
/s/ John R. Strangfeld
------------------------------------ President and Director September 29, 2000
JOHN R. STRANGFELD
/s/ Louis A. Weil, III
------------------------------------ Director September 29, 2000
LOUIS A. WEIL, III
/s/ Clay T. Whitehead
------------------------------------ Director September 29, 2000
CLAY T. WHITEHEAD
/s/ Grace C. Torres Treasurer and Principal Financial September 29, 2000
------------------------------------ and Accounting Officer
GRACE C. TORRES
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBITS
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).
(6) Articles of Amendment.*
(b) Amended and Restated By-Laws.*
(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. Incorporated by reference to Exhibit (d)(1) to
Post-Effective Amendment No. 27 to the Registration Statement filed on
Form N-1A via EDGAR on September 28, 1999 (File No. 2-68723).
(2) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation. Incorporated by reference to
Exhibit (d)(2) to Post-Effective Amendment No. 27 to the Registration
Statement filed on Form N-1A via EDGAR on September 28, 1999 (File No.
2-68723).
(3) Amendment to Subadvisory Agreement.*
(4) Interim Subadvisory Agreement with Jennison Associates LLC.*
(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. Incorporated by reference to Exhibit (g)(1) to
Post-Effective Amendment No. 27 to the Registration Statement filed on
Form N-1A via EDGAR on September 28, 1999 (File No. 2-68723).
(2) Amended Custodian Agreement between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit 8(b) to
Post-Effective Amendment No. 14 to the Registration Statement filed on
Form N-1A (File No. 2-68723).
(3) Amendment to Custodian Agreement. Incorporated by reference to Exhibit
(g)(3) to Post-Effective Amendment No. 27 to the Registration Statement
filed on Form N-1A via EDGAR on September 28, 1999 (File No. 2-68723).
(h) (1) Transfer Agency Agreement between the Registrant and Prudential Mutual
Fund Services, Inc., dated January 1, 1988. Incorporated by reference
to Exhibit (h)(1) to Post-Effective Amendment No. 27 to the
Registration Statement filed on Form N-1A via EDGAR on September 28,
1999 (File No. 2-68723).
(2) Amendment to Transfer Agency Agreement. Incorporated by reference to
Exhibit (h)(2) to Post-Effective Amendment No. 27 to the Registration
Statement filed on Form N-1A via EDGAR on September 28, 1999 (File No.
2-68723).
<PAGE>
(i) (1) Opinion and Consent of Counsel. Incorporated by reference to
Exhibit (i) to Post-Effective Amendment No. 27 to the Registration
Statement filed on Form N-1A via EDGAR on September 28, 1999 (File No.
2-68723).
(2) Consent of Counsel.**
(j) Consent of Independent Accountants.**
(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).
(n) 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).
(p) (1) Fund's Code of Ethics.*
(2) Manager's, Investment Adviser's and Distributor's Code of Ethics.*
(3) Jennison Associates LLC Code of Ethics.*
------------------------
*Filed herewith.
**To be filed by amendment
