-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ct09NxXs0EHW7yvt96HNXgP7nChQANzCCP3T2P7WA1Ur/kEG+QnNVDEJ4/4y+jGW LDru4IzR9izHZxWuAwx+cQ== /in/edgar/work/0000912057-00-043220/0000912057-00-043220.txt : 20001003 0000912057-00-043220.hdr.sgml : 20001003 ACCESSION NUMBER: 0000912057-00-043220 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20000929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL SMALL CO FUND INC CENTRAL INDEX KEY: 0000318531 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] IRS NUMBER: 133040042 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 002-68723 FILM NUMBER: 732856 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 811-03084 FILM NUMBER: 732857 BUSINESS ADDRESS: STREET 1: 100 MULBERRY ST CITY: NEWARK STATE: NJ ZIP: 07102 BUSINESS PHONE: 2122141250 MAIL ADDRESS: STREET 1: ONE SEAPORT PLZ STREET 2: ONE SEAPORT PLZ CITY: NEW YORK STATE: NY ZIP: 10292 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL SMALL CO VALUE FUND INC DATE OF NAME CHANGE: 19971202 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL SMALL COMPANIES FUND INC DATE OF NAME CHANGE: 19961216 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL GROWTH OPPORTUNITY FUND INC DATE OF NAME CHANGE: 19950523 485APOS 1 a2024616z485apos.txt 485APOS 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. Title of Securities Being Registered............... Shares of Common Stock, par value $.01 per share
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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] TABLE OF CONTENTS - ------------------------------------- 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)
- ------------------------------------------------------------------- PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 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. - ------------------------------------------------------------------- 2 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 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
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)
1 YR 5 YRS 10 YRS SINCE INCEPTION 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)
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 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)
CLASS A CLASS B CLASS C CLASS Z 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
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C CLASS Z 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) % % %
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 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:
1 YR 3 YRS 5 YRS 10 YRS Class A shares $ $ $ $ Class B shares $ $ $ $ Class C shares $ $ $ $ Class Z shares $ $ $ $
You would pay the following expenses on the same investment if you did not sell your shares:
1 YR 3 YRS 5 YRS 10 YRS Class A shares $ $ $ $ Class B shares $ $ $ $ Class C shares $ $ $ $ Class Z shares $ $ $ $
- -------------------------------------------------------------------------------- 5 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. - ------------------------------------------------------------------- - ------------------------------------------------------------------- 6 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 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 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 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
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS - ------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------- 10 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 HOW THE FUND INVESTS - ------------------------------------------------ INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS 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 - -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 11 HOW THE FUND INVESTS - ------------------------------------------------ INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS - --------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------- 12 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 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. - ------------------------------------------------------------------- 14 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 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 - ------------------------------------------------------------------- 16 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 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. - ------------------------------------------------------------------- 18 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 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.
CLASS A CLASS B CLASS C CLASS Z 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)
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. - ------------------------------------------------------------------- 20 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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.
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE 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
* 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 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. - ------------------------------------------------------------------- 22 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - ------------------------------------------------ Broker-dealers, investment advisers or financial planners sponsoring these mutual fund programs may offer their clients more than one class of shares in the Fund in connection with different pricing options for their programs. Investors should consider carefully any separate transaction and other fees charged by these programs in connection with investing in each available share class before selecting a share class. OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the following: -- Certain participants in the MEDLEY Program (group variable annuity contracts) sponsored by Prudential for whom Class Z shares of the Prudential mutual funds are an available option, -- Current and former Directors/Trustees of the Prudential mutual funds (including the Fund), and -- Prudential, with an investment of $10 million or more. In connection with the sale of shares, the Manager, the Distributor or one of their affiliates may pay brokers, financial advisers and other persons a commission of up to 4% of the purchase price for Class B shares, up to 2% of the purchase price for Class C shares and a finder's fee for Class A or Class Z shares from their own resources based on a percentage of the net asset value of shares sold or otherwise. CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS If you buy Class B shares and hold them for approximately seven years, we will automatically convert them into Class A shares without charge. At that time, we will also convert any Class B shares that you received with reinvested dividends and other distributions. Since the 12b-1 fees for Class A shares are lower than for Class B shares, converting to Class A shares lowers your Fund expenses. When we do the conversion, you will get fewer Class A shares than the number of converted Class B shares if the price of the Class A shares is higher than the price of Class B shares. The total dollar value will be the same, so you will not have lost any money by getting fewer Class A shares. We do the conversions quarterly, not on the anniversary date of your purchase. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Conversion Feature--Class B Shares." - ------------------------------------------------------------------- 24 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 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. - ------------------------------------------------------------------- 26 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 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 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 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 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 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 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 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 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)
PER SHARE OPERATING PERFORMANCE 2000 1999(1) 1998(1) 1997(1) 1996(1) 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%
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 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)
PER SHARE OPERATING PERFORMANCE 2000 1999(1) 1998(1) 1997(1) 1996(1) 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%
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 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)
PER SHARE OPERATING PERFORMANCE 2000 1999(1) 1998(1) 1997(1) 1996(1) 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%
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 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)
PER SHARE OPERATING PERFORMANCE 2000 1999(2) 1998(2) 1997(2) 1996(1),(2) 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%
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 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 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 Notes - ------------------------------------------------------------------- 40 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 Notes - -------------------------------------------------------------------------------- 41 Notes - ------------------------------------------------------------------- 42 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 Notes - -------------------------------------------------------------------------------- 43 Notes - ------------------------------------------------------------------- 44 PRUDENTIAL SMALL COMPANY FUND, INC. [LOGO] (800) 225-1852 Notes - -------------------------------------------------------------------------------- 45 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: publicinfo@sec.gov (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 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
PAGE ---- 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
- -------------------------------------------------------------------------------- MF109B 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 B-2 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). B-3 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 B-4 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. B-5 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, B-6 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 B-7 "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 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 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 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 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 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 B-13 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.) B-14 (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
POSITION PRINCIPAL OCCUPATIONS NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS - ------------------------ --------- ---------------------- 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.
B-15
POSITION PRINCIPAL OCCUPATIONS NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS - ------------------------ --------- ---------------------- 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.
B-16
POSITION PRINCIPAL OCCUPATIONS NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS - ------------------------ --------- ---------------------- *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.
- ------------ * "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 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
TOTAL COMPENSATION FROM FUND AGGREGATE AND FUND COMPENSATION COMPLEX PAID NAME OF DIRECTOR FROM FUND TO DIRECTORS - --------------------------------------- ------------ --------------- 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)*
- ------------------------ * 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 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 (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 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 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 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 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 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.
FISCAL YEAR ENDED SEPTEMBER 30, 2000 1999 1998 ---------- ---------- ---------- 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%
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 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 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: 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.
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 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 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 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 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 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 The following table sets forth the rates of the CDSC applicable to redemption of Class B shares:
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE YEAR SINCE PURCHASE OF DOLLARS INVESTED OR PAYMENT MADE REDEMPTION PROCEEDS - ------------ ------------------------- First....................................................... 5.0% Second...................................................... 4.0% Third....................................................... 3.0% Fourth...................................................... 2.0% Fifth....................................................... 1.0% Sixth....................................................... 1.0% Seventh..................................................... None
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 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.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION 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.
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 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 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 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 The following chart shows how much you would need in monthly investments to achieve specified lump sums to finance your investment goals.(2)
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000 - -------------------- -------- -------- -------- -------- 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."
- ------------------------ (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 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.
TAX-DEFERRED COMPOUNDING(1) CONTRIBUTIONS PERSONAL MADE OVER: SAVINGS IRA - ------------- -------- -------- 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
- ------------------------ (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 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 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.
1 YEAR 5 YRS 10 YRS SINCE INCEPTION -------------- -------- -------- ------------------ 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)
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.
1 YEAR 5 YRS 10 YRS SINCE INCEPTION -------------- -------- -------- ------------------ 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)
B-41 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 Common Stocks Long-Term Gov't. Bonds Inflation 11.4% 5.1% 3.1%
- ------------ (1)Source: Ibbotson Associates. All rights reserved. Common stock returns are based on the Standard & Poor's 500 Composite Stock Price Index, a market-weighted, unmanaged index of 500 common stocks in a variety of industry sectors. It is a commonly used indicator of broad stock price movements. This chart is for illustrative purposes only and is not intended to represent the performance of any particular investment or fund. Investors cannot invest directly in an index. Past performance is not a guarantee of future results. B-42 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 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 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 PORTFOLIO OF INVESTMENTS AS PRUDENTIAL SMALL COMPANY OF SEPTEMBER 30, 1999 VALUE FUND, INC. - ------------------------------------------------------------
SHARES DESCRIPTION VALUE (NOTE 1) - --------------------------------------------------------------- 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
- -------------------------------------------------------------------------------- See Notes to Financial Statements. B-46 PORTFOLIO OF INVESTMENTS AS PRUDENTIAL SMALL COMPANY OF SEPTEMBER 30, 1999 VALUE FUND, INC. - ------------------------------------------------------------
SHARES DESCRIPTION VALUE (NOTE 1) - -------------------------------------------------------------- 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
- -------------------------------------------------------------------------------- See Notes to Financial Statements. B-47 PORTFOLIO OF INVESTMENTS AS PRUDENTIAL SMALL COMPANY OF SEPTEMBER 30, 1999 VALUE FUND, INC. - ------------------------------------------------------------
SHARES DESCRIPTION VALUE (NOTE 1) - -------------------------------------------------------------- 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
- -------------------------------------------------------------------------------- See Notes to Financial Statements. B-48 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. PORTFOLIO OF INVESTMENTS AS OF SEPTEMBER 30, 1999 - ------------------------------------------------------------
SHARES DESCRIPTION VALUE (NOTE 1) - --------------------------------------------------------------- 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 ------------ ------------
- --------------- ADR--American Depository Receipt. (a) Non-income producing security. - -------------------------------------------------------------------------------- See Notes to Financial Statements. B-49 PRUDENTIAL SMALL COMPANY STATEMENT OF ASSETS AND LIABILITIES VALUE FUND, INC. - --------------------------------------------------------------------------------
ASSETS September 30, 1999 ------------------ 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 ------------------ ------------------
- -------------------------------------------------------------------------------- See Notes to Financial Statements. B-50 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. STATEMENT OF OPERATIONS - ------------------------------------------------------------
YEAR ENDED NET INVESTMENT INCOME (LOSS) SEPTEMBER 30, 1999 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 ------------------ ------------------
PRUDENTIAL SMALL COMPANY VALUE FUND, INC. STATEMENT OF CHANGES IN NET ASSETS - ------------------------------------------------------------
INCREASE (DECREASE) YEAR ENDED SEPTEMBER 30, IN NET ASSETS 1999 1998 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 ------------------ -------------- ------------------ --------------
- -------------------------------------------------------------------------------- See Notes to Financial Statements. B-51 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 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 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:
Class A SHARES AMOUNT - ----------------------------------- ----------- ------------- 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 ----------- ------------- ----------- ------------- Class B SHARES AMOUNT - ----------------------------------- ----------- ------------- 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 ----------- ------------- ----------- ------------- Class 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 ----------- ------------- ----------- ------------- Class Z - ----------------------------------- 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 ----------- ------------- ----------- -------------
- -------------------------------------------------------------------------------- B-54 PRUDENTIAL SMALL COMPANY FINANCIAL HIGHLIGHTS VALUE FUND, INC. - --------------------------------------------------------------------------------
CLASS A ------------------------------------------------------------ YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- 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%
- --------------- (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 PRUDENTIAL SMALL COMPANY FINANCIAL HIGHLIGHTS VALUE FUND, INC. - --------------------------------------------------------------------------------
CLASS B ------------------------------------------------------------ YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- 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)%
- --------------- (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 PRUDENTIAL SMALL COMPANY FINANCIAL HIGHLIGHTS VALUE FUND, INC. - --------------------------------------------------------------------------------
CLASS C ----------------------------------------------------- YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------ ------ 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)%
- --------------- (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 PRUDENTIAL SMALL COMPANY FINANCIAL HIGHLIGHTS VALUE FUND, INC. - --------------------------------------------------------------------------------
CLASS Z ---------------------------------------------------- MARCH 1, 1996(d) YEAR ENDED SEPTEMBER 30, THROUGH ---------------------------------- SEPTEMBER 30, 1999 1998 1997 1996 -------- -------- -------- ------------- 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)
- --------------- (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 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 (This page has been left blank intentionally.) B-60 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Portfolio of Investments as of March 31, 2000 (Unaudited)
SHARES DESCRIPTION VALUE (NOTE 1) - ------------------------------------------------------------------------------------------ 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
See Notes to Financial Statements B-61 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
SHARES DESCRIPTION VALUE (NOTE 1) - ------------------------------------------------------------------------------------------ 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
See Notes to Financial Statements B-62 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
SHARES DESCRIPTION VALUE (NOTE 1) - ------------------------------------------------------------------------------------------ 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
See Notes to Financial Statements B-63 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
SHARES DESCRIPTION VALUE (NOTE 1) - ------------------------------------------------------------------------------------------ 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
See Notes to Financial Statements B-64 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
SHARES DESCRIPTION VALUE (NOTE 1) - ------------------------------------------------------------------------------------------ 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
See Notes to Financial Statements B-65 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
SHARES DESCRIPTION VALUE (NOTE 1) - ------------------------------------------------------------------------------------------ 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
See Notes to Financial Statements B-66 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.
SHARES DESCRIPTION VALUE (NOTE 1) - ------------------------------------------------------------------------------------------ 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 -------------- --------------
- ------------------------------ ADR--American Depository Receipt. (a) Non-income producing security. See Notes to Financial Statements B-67 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Statement of Assets and Liabilities
MARCH 31, 2000 - -------------------------------------------------------------------------------------- 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 -------------- --------------
See Notes to Financial Statements B-68 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Statement of Assets and Liabilities (Unaudited) Cont'd.
MARCH 31, 2000 - -------------------------------------------------------------------------------------- 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 -------------- --------------
See Notes to Financial Statements B-69 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Statement of Operations (Unaudited)
SIX MONTHS ENDED MARCH 31, 2000 - ---------------------------------------------------------------------------------------- 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 ----------------- -----------------
See Notes to Financial Statements B-70 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Statement of Changes in Net Assets (Unaudited)
SIX MONTHS ENDED YEAR ENDED MARCH 31, 2000 SEPTEMBER 31, 1999 - ----------------------------------------------------------------------------------- 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 -------------- ------------------ -------------- ------------------
See Notes to Financial Statements B-71 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 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 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 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 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:
CLASS A SHARES AMOUNT - ---------------------------------------------------------- ----------- ------------- 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) ----------- ------------- ----------- ------------- CLASS B - ---------------------------------------------------------- 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) ----------- ------------- ----------- -------------
B-76 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Notes to Financial Statements (Unaudited)
CLASS B SHARES AMOUNT - ---------------------------------------------------------- ----------- ------------- 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) ----------- ------------- ----------- ------------- CLASS 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 ----------- ------------- ----------- ------------- CLASS Z - ---------------------------------------------------------- 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) ----------- ------------- ----------- -------------
See Notes to Financial Statements B-77 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Financial Highlights (Unaudited)
CLASS A ---------------- SIX MONTHS ENDED MARCH 31, 2000 - ---------------------------------------------------------------------------------------- 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%
- ------------------------------ (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 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Financial Highlights (Unaudited) Cont'd.
CLASS A - ---------------------------------------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, - ---------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- $ 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%
See Notes to Financial Statements B-79 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Financial Highlights (Unaudited) Cont'd.
CLASS B ---------------- SIX MONTHS ENDED MARCH 31, 2000 - ---------------------------------------------------------------------------------------- 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%
- ------------------------------ (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 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Financial Highlights (Unaudited) Cont'd.
CLASS B - ---------------------------------------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, - ---------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- $ 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%
See Notes to Financial Statements B-81 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Financial Highlights (Unaudited) Cont'd.
CLASS C ---------------- SIX MONTHS ENDED MARCH 31, 2000 - ---------------------------------------------------------------------------------------- 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%
- ------------------------------ (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 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Financial Highlights (Unaudited) Cont'd.
CLASS C - ---------------------------------------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, - ---------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- $ 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%
See Notes to Financial Statements B-83 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Financial Highlights (Unaudited) Cont'd.
CLASS Z ---------------- SIX MONTHS ENDED MARCH 31, 2000 - ---------------------------------------------------------------------------------------- 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%
- ------------------------------ (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 PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Financial Highlights (Unaudited) Cont'd.
CLASS Z - ------------------------------------------------------------------------------------- MARCH 1, 1996(d) YEAR ENDED SEPTEMBER 30, THROUGH SEPTEMBER 30, - ------------------------------------------------------------------------------------- 1999 1998 1997 1996 - ------------------------------------------------------------------------------------- $ 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%
See Notes to Financial Statements B-85 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 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
Small Stocks $6,640.79 Common Stocks $2,845.63 Long-Term Bonds $ 40.22 Treasury Bills $ 15.64 Inflation $ 9.40
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 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
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 - -------------------------------------------------------------------------------------------------------------------------------- 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
(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 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 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%
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 Capital Appreciation and Reinvesting Dividends $474,094 Capital Appreciation Only $159,597
Source: Lipper Inc. Used with permission. All rights reserved. This chart is used for illustrative purposes only and is not intended to represent the past, present or future performance of any Prudential Mutual Fund. Common stock total return is based on the Standard & Poor's 500 Composite Stock Price Index, a market-value-weighted index made up of 500 of the largest stocks in the U.S. based upon their stock market value. Investors cannot invest directly in indexes. II-3 --------------------------------------------------------- WORLD STOCK MARKET CAPITALIZATION BY REGION WORLD TOTAL: $20.7 TRILLION EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC U.S. 49.00% Europe 32.50% Pacific Basin 16.40% Canada 2.10%
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 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 (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 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.
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS - ---------------- ------------------ --------------------- 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
(b) Jennison Associates LLC (Jennison) C-3 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.
POSITIONS AND POSITIONS AND OFFICES WITH OFFICES WITH NAME(1) UNDERWRITER REGISTRANT - ------- ------------- ------------- 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
- ------------------------ (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 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 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.
SIGNATURE TITLE DATE --------- ----- ---- /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
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). (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 EX-99.(A)(6) 2 a2024616zex-99_a6.txt ARTICLES OF AMENDMENT ARTICLES OF AMENDMENT OF PRUDENTIAL SMALL COMPANY VALUE FUND, INC. Prudential Small Company Value Fund, Inc., a Maryland corporation having its principal offices in Baltimore, Maryland and Newark, New Jersey (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The charter of the Corporation is hereby amended by striking out Article I and inserting in lieu thereof the following: The name of the corporation (hereinafter called the "Corporation") is Prudential Small Company Fund, Inc. SECOND: The foregoing amendment does not change the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption of the capital stock of the Corporation and does not increase the authorized stock of the Corporation. THIRD: The foregoing amendment is limited to changes expressly permitted by Section 2-605 of the Maryland General Corporation Law and have been approved by a majority of the entire Board of Directors of the Corporation without action by the stockholders in accordance with Section 2-605(a)(1) of the Maryland General Corporation Law. FOURTH: The foregoing amendment to the Charter of the Corporation shall become effective at 9:00 a.m. on May 30, 2000. IN WITNESS WHEREOF, PRUDENTIAL SMALL COMPANY VALUE FUND, INC., has caused these presents to be signed in its name and on its behalf by its Vice President and attested by its Secretary on May 23, 2000. PRUDENTIAL SMALL COMPANY VALUE FUND, INC. By: /s/ Robert F. Gunia ------------------- Robert F. Gunia Vice President Attest: /s/ Marguerite E. H. Morrison ------------------------------ Marguerite E.H. Morrison Secretary THE UNDERSIGNED, Vice President of Prudential Small Company Value Fund, Inc., who executed on behalf of said Corporation the foregoing amendments to the charter of which this certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing amendments to the charter to be the corporate act of said Corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects under the penalties of perjury. /s/ Robert F. Gunia \ ------------------- Robert F. Gunia Vice President -2- EX-99.(B) 3 a2024616zex-99_b.txt BYLAWS PRUDENTIAL SMALL COMPANY VALUE FUND, INC. By-Laws ARTICLE I STOCKHOLDERS Section 1. PLACE OF MEETING. All meetings of the stockholders shall be held at the principal office of the Corporation in the State of Maryland or at such other place within the United States as may from time to time be designated by the Board of Directors and stated in the notice of such meeting. Section 2. ANNUAL MEETING. The annual meeting of the stockholders of the Corporation shall be held in the month of January of each year on such date and at such hour as may from time to time be designated by the Board of Directors and stated in the notice of such meeting, for the transaction of such business as may properly be brought before the meeting; provided, however, that an annual meeting of stockholders is not required to be held in any year in which the election of Directors is not required to be acted upon by stockholders pursuant to the Investment Company Act of 1940. Section 3. SPECIAL OR EXTRAORDINARY MEETINGS. Special or extraordinary meetings of the stockholders for any purpose or purposes may be called by the Chairman of the Board, the President or a majority of the Board of Directors, and shall be called by the Secretary upon receipt of the request in writing signed by stockholders holding not less than 25% of the common stock issued and outstanding and entitled to vote thereat. Such request shall state the purpose or purposes of the proposed meeting. The Secretary shall inform such stockholders of the reasonably estimated costs of preparing and mailing such notice of meeting and upon payment to the Corporation of such costs, the Secretary shall give notice stating the purpose or purposes of the meeting as required in this Article and By-Law to all stockholders entitled to notice of such meeting. No special meeting need be called upon the request of the holders of shares entitled to cast less than a majority of all votes entitled to be cast at such meeting to consider any matter which is substantially the same as a matter voted upon at any special meeting of stockholders held during the preceding twelve months. Section 4. NOTICE OF MEETINGS OF STOCKHOLDERS. Not less than ten days' and not more than ninety days' written or printed notice of every meeting of stockholders, stating the time and place thereof (and the general nature of the business proposed to be transacted at any special or extraordinary meeting), shall be given to each stockholder entitled to vote thereat by leaving the same with him or at his residence or usual place of business or by mailing it, postage prepaid, and addressed to him at his address as it appears upon the books of the Corporation. If mailed, notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder as aforesaid. No notice of the time, place or purpose of any meeting of stockholders need be given to any stockholder who attends in person or by proxy or to any stockholder who, in writing executed and filed with the records of the meeting, either before or after the holding thereof, waives such notice. Section 5. RECORD DATES. The Board of Directors may fix, in advance, a date not exceeding ninety days preceding the date of any meeting of stockholders, any dividend payment date or any date for the allotment of rights, as a record date for the determination of the stockholders entitled to notice of and to vote at such meeting or entitled to receive such dividends or rights, as the case may be; and only stockholders of record on such date shall be entitled to notice of and to vote at such meeting or to receive such dividends or rights, as the case may be. In the case of a meeting of stockholders, such date shall not be less than ten days prior to the date fixed for such meeting. Section 6. QUORUM, ADJOURNMENT OF MEETINGS. The presence in person or by proxy of the holders of record of a majority of the shares of the common stock of the Corporation issued and outstanding and entitled to vote thereat shall constitute a quorum at all meetings of the stockholders except as otherwise provided in the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the holders of a majority of the stock present in person or by proxy shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite number of stockholders entitled to vote at such meeting shall be present. At such adjourned meeting at which the requisite amount of stock entitled to vote thereat shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 7. VOTING AND INSPECTORS. At all meetings, stockholders of record entitled to vote thereat shall have one vote for each share of common stock standing in his/her name on the books of the Corporation (and such stockholders of record holding fractional shares, if any, shall have proportionate voting rights) on the date for the determination of stockholders entitled to vote at such meeting, either in person or by proxy. A stockholder may sign a writing authorizing another person to act as proxy. Signing may be accomplished by the stockholder or the stockholder's authorized agent signing the writing or causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signature. A stockholder may authorize another person to act as proxy by transmitting, or authorizing the transmission of, a telegram, cablegram, datagram, or other means of electronic transmission to the person authorized to act as proxy or to a proxy solicitation firm, proxy support service organization, or other person authorized by the person who will act as proxy to receive the transmission. All elections shall be had and all questions decided by a majority of the votes cast at a duly constituted meeting, except as otherwise provided by statute or by the Articles of Incorporation or by these By-Laws. At any election of Directors, the Chairman of the meeting may, and upon the request of the holders of ten percent (10%) of the stock entitled to vote at such election shall, appoint two inspectors of election who shall first subscribe an oath or affirmation to execute faithfully the duties of inspectors at such election with strict impartiality and according to the best of their ability and shall after the election make a certificate of the result of the vote taken. No candidate for the office of Director shall be appointed such Inspector. Section 8. CONDUCT OF STOCKHOLDERS' MEETINGS. The meetings of the stockholders shall be presided over by the Chairman of the Board, or if he is not present, by the President, or if he is not present, by a Vice-President, or if none of them is present by a Chairman to be elected at the meeting. The Secretary of the Corporation, if present, shall act as a Secretary of such meetings, or if he is not present, an Assistant Secretary shall so act; if neither the Secretary nor the Assistant Secretary is present, then the meeting shall elect its Secretary. Section 9. CONCERNING VALIDITY OF PROXIES, BALLOTS, ETC. At every meeting of the stockholders, all proxies shall be received and taken in charge of and all ballots shall be received and canvassed by the Secretary of the meeting, who shall decide all questions concerning the qualification of voters, the validity of the proxies and the acceptance or rejection of votes, unless inspectors of election shall have been appointed by the Chairman of the meeting, in which event such inspectors of election shall decide all such questions. ARTICLE II BOARD OF DIRECTORS Section 1. NUMBER AND TENURE OF OFFICE. The business and affairs of the Corporation shall be conducted and managed by a Board of Directors of not less than three nor more than thirteen Directors, as may be determined from time to time by vote of a majority of the Directors then in office. Directors need not be stockholders. Section 2. VACANCIES. In case of any vacancy in the Board of Directors through death, resignation or other cause, other than an increase in the number of Directors, a majority of the remaining Directors, although a majority is less than a quorum, by an affirmative vote, may elect a successor to hold office until the next annual meeting of stockholders or until his successor is chosen and qualifies. Section 3. INCREASE OR DECREASE IN NUMBER OF DIRECTORS. The Board of Directors, by the vote of a majority of the entire Board, may increase the number of Directors and may elect Directors to fill the vacancies created by any such increase in the number of Directors until the next annual meeting or until their successors are duly chosen and qualified. The Board of Directors, by the vote of a majority of the entire Board, may likewise decrease the number of Directors to a number not less than three. Section 4. PLACE OF MEETING. The Directors may hold their meetings, have one or more offices, and keep the books of the Corporation, outside the State of Maryland, at any office or offices of the Corporation or at any other place as they may from time to time by resolution determine, or in the case of meetings, as they may from time to time by resolution determine or as shall be specified or fixed in the respective notices or waivers of notice thereof. Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such time and on such notice as the Directors may from time to time determine. The annual meeting of the Board of Directors shall be held as soon as practicable after the annual meeting of the stockholders for the election of Directors. Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held from time to time upon call of the Chairman of the Board, the President, the Secretary or two or more of the Directors, by oral or telegraphic or written notice duly served on or sent or mailed to each Director not less than one day before such meeting. No notice need be given to any Director who attends in person or to any Director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Such notice or waiver of notice need not state the purpose or purposes of such meeting. Section 7. QUORUM. One-third of the Directors then in office shall constitute a quorum for the transaction of business, provided that a quorum shall in no case be less than two Directors. If at any meeting of the Board there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum shall be obtained. The act of the majority of the Directors present at any meeting at which there is a quorum shall be the act of the Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation or by these By-Laws. Section 8. OPERATING COMMITTEE. The Board of Directors may, by the affirmative vote of a majority of the entire Board, appoint from the Directors an Operating Committee to consist of such number of Directors (not less than three) as the Board may from time to time determine. The Chairman of the Committee shall be elected by the Board of Directors. The Board of Directors by such affirmative vote shall have power at any time to change the members of such Committee and may fill vacancies in the Committee by election from the Directors. When the Board of Directors is not in session, to the extent permitted by law the Operating Committee shall have and may exercise any or all of the powers of the Board of Directors in the management of the business and affairs of the Corporation. The Operating Committee may fix its own rules of procedure, and may meet when and as provided by such rules or by resolution of the Board of Directors, but in every case the presence of a majority shall be necessary to constitute a quorum. During the absence of a member of the Operating Committee, the remaining members may appoint a member of the Board of Directors to act in his place. Section 9. OTHER COMMITTEES. The Board of Directors, by the affirmative vote of a majority of the whole Board, may appoint from the Directors other committees which shall in each case consist of such number of Directors (not less than one) and shall have and may exercise such powers as the Board may determine in the resolution appointing them. A majority of all the members of any such committee may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to change the members and powers of any such committee, to fill vacancies and to discharge any such committee. Section 10. TELEPHONE MEETINGS. Members of the Board of Directors or a committee of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at the meeting. Section 11. ACTION WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if a written consent to such action is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of the proceedings of the Board or committee. Section 12. COMPENSATION OF DIRECTORS. No Director shall receive any stated salary or fees from the Corporation for his services as such if such Director is, otherwise than by reason of being such Director, an interested person (as such term is defined by the Investment Company Act of 1940) of the Corporation or of its investment adviser, administrator or principal underwriter. Except as provided in the preceding sentence, Directors shall be entitled to receive such compensation from the Corporation for their services as may from time to time be voted by the Board of Directors. Section 13. NOMINATING COMMITTEE. The Board of Directors may by the affirmative vote of a majority of the entire Board appoint from its members a Nominating Committee composed of two or more Directors who are not "interested persons" (as defined in the Investment Company Act of 1940) of the Corporation, as the Board may from time to time determine. The Nominating Committee shall be empowered to elect its own Chairman who may call, or direct the Secretary of the Corporation to call, meetings in accordance with the notice provisions of these By-Laws otherwise applicable to meetings of the Board of Directors. The Nominating Committee shall recommend to the Board a slate of persons who are not "interested persons" (as defined in the Investment Company Act of 1940) of the Corporation, which may include members of the Nominating Committee, to be nominated for election as Directors by the stockholders at each annual meeting of stockholders and to fill any vacancy occurring for any reason among the Directors who are not such interested persons. ARTICLE III OFFICERS Section 1. EXECUTIVE OFFICERS. The executive officers of the Corporation shall be chosen by the Board of Directors as soon as may be practicable after the annual meeting of the stockholders. These may include a Chairman of the Board (who shall be a Director) or a Chairman of the Fund and shall include a President, one or more Vice-Presidents (the number thereof to be determined by the Board of Directors), a Secretary and a Treasurer. The Board of Directors or the Operating Committee may also in its discretion appoint Assistant Secretaries, Assistant Treasurers and other officers, agents and employees, who shall have such authority and perform such duties as the Board or the Operating Committee may determine. The Board of Directors may fill any vacancy which may occur in any office. Any two offices, except those of President and Vice-President, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law or these By-Laws to be executed, acknowledged or verified by two or more officers. Section 2. TERM OF OFFICE. The term of office of all officers shall be one year and until their respective successors are chosen and qualified. Any officer may be removed from office at any time with or without cause by the vote of a majority of the whole Board of Directors. Section 3. POWER AND DUTIES. The officers of the Corporation shall have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as may from time to time be conferred by the Board of Directors or the Operating Committee. ARTICLE IV CAPITAL STOCK Section 1. CERTIFICATES FOR SHARES. Each stockholder of the Corporation shall be entitled to a certificate or certificates for the full shares of stock of the Corporation owned by him in such form as the Board may from time to time prescribe. Section 2. TRANSFER OF SHARES. Shares of the Corporation shall be transferable on the books of the Corporation by the holder thereof in person or by his duly authorized attorney or legal representative, upon surrender and cancellation of certificates, if any, for the same number of shares, duly endorsed or accompanied by proper instruments of assignment and transfer, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require; in the case of shares not represented by certificates, the same or similar requirements may be imposed by the Board of Directors. Section 3. STOCK LEDGERS. The stock ledgers of the Corporation, containing the name and address of the stockholders and the number of shares held by them respectively, shall be kept at the principal office of the Corporation or, if the Corporation employs a Transfer Agent, at the office of the Transfer Agent of the Corporation. Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors or the Operating Committee may determine the conditions upon which a new certificate of stock of the Corporation of any class may be issued in place of a certificate which is alleged to have been lost, stolen or destroyed; and may, in its discretion, require the owner of such certificate or his legal representative to give bond, with sufficient surety, to the Corporation and each Transfer Agent, if any, and to indemnify it and each Transfer Agent against any and all loss or claims which may arise by reason of the issue of a new certificate in the place of the one so lost, stolen or destroyed. ARTICLE V CORPORATE SEAL The Board of Directors may provide for a suitable corporate seal, in such form and bearing such inscriptions as it may determine. ARTICLE VI FISCAL YEAR The fiscal year of the Corporation shall begin on the first day of October and shall end on the thirtieth day of September in each year. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS (a) The Corporation shall indemnify present and former directors, officers, employees and agents of the Corporation (each, a "Covered Person") against judgments, fines, settlements and expenses to the fullest extent authorized, and in the manner permitted, by applicable federal and state law. (b) The Corporation shall advance the expenses of Covered Persons who are parties to any Proceeding to the fullest extent authorized, and in the manner permitted, by applicable federal and state law. For purposes of this paragraph, "Proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative. (c) Pursuant and subject to paragraphs (a) and (b), the Corporation shall indemnify each Covered Person against, or advance the expenses of any Covered Person for, the amount of any deductible provided in any liability insurance policy maintained by the Corporation. ARTICLE VIII CUSTODIAN Section 1. The Corporation shall have as custodian or custodians one or more trust companies or banks of good standing, each having a capital, surplus and undivided profits aggregating not less than fifty million dollars ($50,000,000), and, to the extent required by the Investment Company Act of 1940, the funds and securities held by the Corporation shall be kept in the custody of one or more such custodians, provided such custodian or custodians can be found ready and willing to act, and further provided that the Corporation may use as subcustodians, for the purpose of holding any foreign securities and related funds of the Corporation, such foreign banks as the Board of Directors may approve and as shall be permitted by law. Section 2. The Corporation shall upon the resignation or inability to serve of its custodian or upon change of the custodian: (i) in case of such resignation or inability to serve, use its best efforts to obtain a successor custodian; (ii) require that the cash and securities owned by the Corporation be delivered directly to the successor custodian; and (iii) in the event that no successor custodian can be found, submit to the stockholders before permitting delivery of the cash and securities owned by the Corporation otherwise than to a successor custodian, the question whether or not this Corporation shall be liquidated or shall function without a custodian. ARTICLE IX CHECKS, NOTES, ETC. All checks and drafts on the Corporation's bank account and all bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be signed by such officer or officers, or agents, as shall be thereunto authorized from time to time by the Board of Directors. ARTICLE X AMENDMENT OF BY-LAWS The By-Laws of the Corporation may be altered, amended, added to or repealed by the stockholders or by majority vote of the entire Board of Directors; but any such alteration, amendment, addition or repeal of the By-Laws by action of the Board of Directors may be altered or repealed by stockholders. As amended as of March 1, 2000. EX-99.(D)(3) 4 a2024616zex-99_d3.txt AMENDMENT TO SUBADVISORY AGREEMENT AMENDMENT TO SUBADVISORY AGREEMENT PRUDENTIAL SMALL COMPANY VALUE FUND, INC. AMENDMENT made as of this 1st day of January, 2000, between Prudential Investments Fund Management LLC ("PIFM"), and The Prudential Investment Corporation ("PIC"). WHEREAS, PIFM, either itself or as successor to Prudential Mutual Fund Management, Inc., and PIC have entered into a Subadvisory Agreement (the "Agreement") dated January 31, 1989, with respect to the management of Prudential Small Company Value Fund, Inc. (formerly Prudential-Bache Growth Opportunity Fund, Inc.) (the "Fund"); and WHEREAS, the Agreement provides that PIC shall provide investment advisory services to the Fund, subject to oversight by PIFM; and WHEREAS, PIFM and PIC desire to amend the Agreement with respect to the compensation to be paid by PIFM to PIC for services provided by PIC pursuant to the Agreement. NOW, THEREFORE, for and in consideration of the continuation of the Agreement for its current term, and other good and valuable consideration, PIFM and PIC hereby amend the Agreement to provide for the compensation to be paid by PIFM to PIC at the annual rate of .455 of 1 % of the Fund's average daily net assets, effective as of January 1, 2000, for the same term, including renewals, as the Agreement and upon the same terms and conditions as described in the Agreement. IN WITNESS WHEREOF, PIMS and PIC have signed this Amendment as of the day and year first above written. PRUDENTIAL INVESTMENTS THE PRUDENTIAL INVESTMENT FUND MANAGEMENT LLC CORPORATION By: /s/ Robert F. Gunia By: /s/ John R. Strangfeld, Jr. --------------------------- --------------------------- Name: Robert F. Gunia Name: John R. Strangfeld, Jr. ------------------------ ------------------------- Title: Executive Vice President Title: President ------------------------ ------------------------- EX-99.(D)(4) 5 a2024616zex-99_d4.txt INTERIM SUBADVISORY AGREEMENT PRUDENTIAL SMALL COMPANY FUND, INC. INTERIM SUBADVISORY AGREEMENT Agreement made as of this [24th] day of August, 2000 between Prudential Investments Fund Management LLC (the Manager) and Jennison Associates LLC (the Subadviser or Jennison). WHEREAS, the Manager has entered into a Management Agreement, dated January 31, 1989 (the Management Agreement), with Prudential Small Company Fund, Inc., formerly Prudential-Bache Growth Opportunity Fund, Inc. (the Fund), a diversified, open-end management investment company registered under the Investment Company Act of 1940 (the 1940 Act); and WHEREAS, The Prudential Investment Corporation (PIC) has provided subadvisory services to the Fund under a Subadvisory Agreement dated January 31, 1989 with the Manager; and WHEREAS, certain investment advisory responsibilities are being transitioned from PIC to Jennison; and WHEREAS, PIFM desires to retain the Subadviser to provide investment advisory services to the Fund, and the Subadviser is willing to render such investment advisory services; and WHEREAS, this Agreement is intended to supersede the Subadvisory Agreement, dated January, 31, 1989, between the Manager and PIC. NOW, THEREFORE, the Parties agree as follows: 1. (a) Subject to the supervision of the Manager and the Board of Directors of the Fund, the Subadviser shall manage the investment operations of the Fund as specified in Section 5 below, and the composition of the Fund's portfolio, including the purchase, retention and disposition thereof, in accordance with the Fund's investment objectives, policies and restrictions as stated in the Prospectus (such Prospectus and Statement of Additional Information as currently in effect and as amended or supplemented from time to time, being herein called the "Prospectus"), and subject to the following understandings: 1 (i) The Subadviser shall provide supervision of the Fund's investments and determine from time to time what investments and securities will be purchased, retained, sold or loaned by the Fund, and what portion of the assets will be invested or held uninvested as cash. (ii) In the performance of its duties and obligations under this Agreement, the Subadviser shall act in conformity with the Articles of Incorporation, By-Laws and Prospectus of the Fund and with the instructions and directions of the Manager and of the Board of Directors of the Fund, and will conform to and comply with the requirements of the 1940 Act, the Internal Revenue Code of 1986 and all other applicable federal and state laws and regulations. In connection therewith, the Subadviser shall, among other things, prepare and file such reports as are, or may in the future be, required by the Securities and Exchange Commission. (iii) The Subadviser shall determine the securities and futures contracts to be purchased or sold by the Fund, and will place orders with or through such persons, brokers, dealers or futures commission merchants (including but not limited to Prudential Securities Incorporated) to carry out the policy with respect to brokerage as set forth in the Fund's Prospectus or as the Board of Directors may direct from time to time. In providing the Fund with investment supervision, it is recognized that the Subadviser will give primary consideration to securing the most favorable price and efficient execution. Within the framework of this policy, the Subadviser may consider the financial responsibility, research and investment information and other services provided by brokers, dealers or futures commission merchants who may effect or be a party to any such transaction or other transactions to which the Subadviser's other clients may be a party. It is understood that Prudential Securities Incorporated may be used as principal broker for securities transactions, but that no formula has been adopted for allocation of the Fund's investment transaction business. It is also understood that it is desirable for the Fund that the Subadviser have access to supplemental investment and market research and security and economic analysis provided by brokers or futures commission merchants who may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers on the basis of seeking the most favorable price and efficient execution. Therefore, the Subadviser is authorized to place orders for the purchase and sale of securities and futures contracts for the Fund with such brokers or futures commission merchants, subject to review by the Fund's Board of Directors from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers or 2 futures commission merchants may be useful to the Subadviser in connection with the Subadviser's services to other clients. On occasions when the Subadviser deems the purchase or sale of a security or futures contract to be in the best interest of the Fund as well as other clients of the Subadviser, the Subadviser, to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities or futures contracts to be sold or purchased in order to obtain the most favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities or futures contracts so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Subadviser in the manner the Subadviser considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such other clients. (iv) The Subadviser shall maintain all books and records with respect to the Fund's portfolio transactions required by subparagraphs (b)(5), (6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act, and shall render to the Fund's Board of Directors such periodic and special reports as the Board of Directors may reasonably request. The Subadviser shall make reasonably available its employees and officers for consultation with any of the Board's members or officers or employees of the Fund with respect to any matter discussed herein, including, without limitation, the valuation of the Fund's securities. (v) The Subadviser shall provide the Fund's Custodian on each business day with information relating to all transactions concerning the Fund's assets, and shall provide the Manager with such information upon request of the Manager. (vi) The investment management services provided by the Subadviser hereunder are not to be deemed exclusive, and the Subadviser shall be free to render similar services to others. 3 (b) The Subadviser shall authorize and permit any of its directors, officers and employees who may be elected as Directors or officers of the Fund to serve in the capacities in which they are elected. Services to be furnished by the Subadviser under this Agreement may be furnished through the medium of any of such directors, officers or employees. (c) The Subadviser shall keep the Fund's books and records required to be maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall timely furnish to the Manager all information relating to the Subadviser's services hereunder needed by the Manager to keep the other books and records of the Fund required by Rule 31a-1 under the 1940 Act. The Subadviser agrees that all records which it maintains for the Fund are the property of the Fund, and the Subadviser will surrender promptly to the Fund any of such records upon the Fund's request, provided, however, that the Subadviser may retain a copy of such records. The Subadviser further agrees to preserve for the periods prescribed by Rule 31a-2 of the Commission under the 1940 Act any such records as are required to be maintained by it pursuant to paragraph 1(a) hereof. 2. The Manager shall continue to have responsibility for all services to be provided to the Fund pursuant to the Management Agreement and, as more particularly discussed above, shall oversee and review the Subadviser's performance of its duties under this Agreement. 3. The Subadviser shall not be liable for any error of judgment or for any loss suffered by the Fund or the Manager in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the Subadviser's part in the performance of its duties or from its reckless disregard of its obligations and duties under this Agreement. 4. For the services provided pursuant to this Agreement, the Manager shall pay the Subadviser as full compensation therefor, a fee equal to an annual rate of 0.455% of the average daily net assets of the Fund under the management of the Subadviser. 4 The compensation earned by the Subadviser under this Agreement shall be held in an interest-bearing escrow account with the Fund's custodian or a bank. If a majority of the Fund's outstanding voting securities approve an agreement with the Subadviser by the end of the 150-day period beginning with the effective date of this Agreement, the amount in the escrow account (including interest earned) shall be paid to the Subadviser. If a majority of the Fund's outstanding voting securities do not approve an agreement with the Subadviser by the end of the 150-day period beginning with the effective date of this Agreement, the Subadviser shall be paid, out of the escrow account, the lesser of (i) any costs incurred by the Subadviser in performing this Agreement (plus interest earned on that amount while in escrow); or (ii) the total amount in the escrow account (including interest earned). 5. This Agreement shall continue in effect for a period of up to 150 days from the date hereof until an agreement with the Subadviser is approved by a majority of the Fund's outstanding voting securities; provided, however, that this Agreement may be terminated by the Board of Directors of the Fund or a majority of the Fund's outstanding voting securities on not more than 10 days written notice to the Manager and the Subadviser. This Agreement shall terminate automatically in the event of its assignment (as defined in the 1940 Act) or upon the termination of the Management Agreement. 6. Nothing in this Agreement shall limit or restrict the right of any of the Subadviser's directors, officers, or employees who may also be a Director, officer or employee of the Fund to engage in any other business or to devote his or her time and attention in part to the management or other aspects of any business, whether of a similar or a dissimilar nature, nor limit or restrict the Subadviser's right to engage in any other business or to render services of any kind to any other corporation, firm, individual or association. 7. During the term of this Agreement, the Manager agrees to furnish the Subadviser at its principal office all Prospectuses, proxy statements, reports to shareholders, sales literature or other material prepared for distribution to shareholders of the Fund or the public, which refer to the Subadviser in any way, prior to use thereof and not to use material if the Subadviser reasonably objects in writing five business days (or such other time as may be mutually agreed) after receipt thereof. Sales literature may be furnished to the Subadviser hereunder by first-class or overnight mail, facsimile transmission equipment or hand delivery. 8. This Agreement may be amended by mutual consent, but the consent of 5 the Fund must be obtained in conformity with the requirements of the 1940 Act. 9. This Agreement shall be governed by the laws of the State of New Jersey. IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC BY: -------------------------------- Robert F. Gunia President JENNISON ASSOCIATES LLC BY: -------------------------------- Karen E. Kohler Senior Vice President 6 EX-99.(P)(1) 6 a2024616zex-99_p1.txt FUND CODE OF ETHICS PRUDENTIAL SMALL COMPANY FUND, INC. (THE FUND) CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1 UNDER THE INVESTMENT COMPANY ACT OF 1940 (THE CODE) 1. PURPOSES The Code has been adopted by the Board of Directors/Trustees of the Fund, in accordance with Rule 17j-1(c) under the Investment Company Act of 1940 (the Act) and in accordance with the following general principles: (1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF SHAREHOLDERS FIRST. Investment company personnel should scrupulously avoid serving their own personal interests ahead of shareholders' interests in any decision relating to their personal investments. (2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY. Investment company personnel must not only seek to achieve technical compliance with the Code but should strive to abide by its spirit and the principles articulated herein. (3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS. Investment company personnel must avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of shareholders, including, but not limited to the receipt of unusual investment opportunities, perquisites, or gifts of more than a DE MINIMIS value from persons doing or seeking business with the Fund. Rule 17j-1 under the Act generally proscribes fraudulent or manipulative practices with respect to a purchase or sale of a security held or to be acquired (as such term is defined in Section 2.) by an investment company, if effected by an associated person of such company. The purpose of the Code is to establish procedures consistent with the Act and Rule 17j-1 to give effect to the following general prohibitions as set forth in Rule 17j-1(b) as follows: (a) It shall be unlawful for any affiliated person of or Principal Underwriter for a registered investment company, or any affiliated person of an investment adviser of or principal underwriter for a registered investment company in connection with the purchase or sale, directly or indirectly, by such person of a security held or to be acquired, by such registered investment company: (1) To employ any device, scheme or artifice to defraud such registered investment company; (2) To make to such registered investment company any untrue statement of a material fact or omit to state to such registered investment company a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; (3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such registered investment company; or (4) To engage in any manipulative practice with respect to such registered investment company. 2. DEFINITIONS (a) "Access Person" means any director/trustee, officer, general partner or Advisory Person (including any Investment Personnel, as that term is defined herein) of the Fund, the Manager, the Adviser/Subadviser, or the Principal Underwriter. (b) "Adviser/Subadviser" means the Adviser or Subadviser of 2 the Fund or both as the context may require. (c) "Advisory Person" means (i) any employee of the Fund, Manager or Adviser/Subadviser (or of any company in a control relationship to the Fund, Manager or Adviser/Subadviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by the Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security. (d) "Beneficial Ownership" will be interpreted in the same manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining which security holdings of a person are subject to the reporting and short-swing profit provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except that the determination of direct or indirect beneficial ownership will apply to all securities which an Access Person has or acquires (EXHIBIT A). (e) "Complex" means the group of registered investment companies for which Prudential Investments Fund Management LLC serves as Manager; provided, however, that with respect to Access Persons of the Subadviser (including any unit or subdivision thereof), "Complex" means the group of registered investment companies in the Complex advised by the Subadviser or unit or subdivision thereof. (f) "Compliance Officer" means the person designated by the Manager, the Adviser/Subadviser, or Principal Underwriter (including his or her designee) as having responsibility for compliance with the requirements of the Code. (g) "Control" will have the same meaning as that set forth in Section 2(a)(9) of the Act. (h) "Disinterested Director/Trustee" means a Director/ Trustee of the Fund who is not an "interested person" of the Fund within the meaning of Section 2(a)(19) of the Act. An interested Director/Trustee who would not otherwise be deemed to be an Access Person, shall be treated as a Disinterested Director/Trustee for purposes of compliance with the provisions of the Code. (i) "Initial Public Offering" means an offering of securities 3 registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934. (j) "Investment Personnel" means: (a) Portfolio Managers and other Advisory Persons who provide investment information and/or advice to the Portfolio Manager(s) and/or help execute the Portfolio Manager's(s') investment decisions, including securities analysts and traders ; and (b) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security. (k) "Manager" means Prudential Investments Fund Management, LLC. (l) "Portfolio Manager" means any Advisory Person who has the direct responsibility and authority to make investment decisions for the Fund. (m) "Private placement" means a limited offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such Securities Act. (n) "Security" will have the meaning set forth in Section 2(a)(36) of the Act, except that it will not include shares of registered open-end investment companies, direct obligations of the Government of the United States, , short-term debt securities which are "government securities" within the meaning of Section 2(a)(16) of the Act, bankers' acceptances, bank certificates of deposit, commercial paper and such other money market instruments as are designated by the Compliance Officer. For purposes of the Code, an "equivalent Security" is one that has a substantial economic relationship to another Security. This would include, among other things, (1) a Security that is exchangeable for or convertible into another Security, (2) with respect to an equity Security, a Security having the same issuer (including a private issue by the same issuer) and any derivative, option or warrant relating to that Security and (3) with respect to a fixed-income Security, a Security having the same issuer, maturity, coupon and rating. (o) "Security held or to be acquired" means any Security or any equivalent Security which, within the most recent 15 days: (1) is or has been held by the Fund; or (2) is being considered by the Fund or its investment adviser for purchase by the Fund. 4 3. APPLICABILITY The Code applies to all Access Persons and the Compliance Officer shall provide each Access Person with a copy of the Code. The prohibitions described below will only apply to a transaction in a Security in which the designated Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership. The Compliance Officer will maintain a list of all Access Persons who are currently, and within the past five years, subject to the Code. 4. PROHIBITED PURCHASES AND SALES A. INITIAL PUBLIC OFFERINGS No Investment Personnel may acquire any Securities in an initial public offering. For purposes of this restriction, "Initial Public Offerings" shall not include offerings of government and municipal securities. B. PRIVATE PLACEMENTS No Investment Personnel may acquire any Securities in a private placement without prior approval. (i) Prior approval must be obtained in accordance with the preclearance procedure described in Section 6 below. Such approval will take into account, among other factors, whether the investment opportunity should be reserved for the Fund and its shareholders and whether the opportunity is being offered to the Investment Personnel by virtue of his or her position with the Fund. The Adviser/Subadviser shall maintain a record of such prior approval and reason for same, for at least 5 years after the end of the fiscal year in which the approval is granted. 5 (ii) Investment Personnel who have been authorized to acquire Securities in a private placement must disclose that investment to the chief investment officer (including his or her designee) of the Adviser/Subadviser (or of any unit or subdivision thereof) or the Compliance Officer when they play a part in any subsequent consideration of an investment by the Fund in the issuer. In such circumstances, the Fund's decision to purchase Securities of the issuer will be subject to an independent review by appropriate personnel with no personal interest in the issuer. C. BLACKOUT PERIODS (i) Except as provided in Section 5 below, Access Persons are prohibited from executing a Securities transaction on a day during which any investment company in the Complex has a pending "buy" or "sell" order in the same or an equivalent Security and until such time as that order is executed or withdrawn; provided, however, that this prohibition shall not apply to Disinterested Directors/Trustees except if they have actual knowledge of trading by any fund in the Complex and, in any event, only with respect to those funds on whose boards they sit. This prohibition shall also not apply to Access Persons of the Subadviser who do not, in the ordinary course of fulfilling his or her official duties, have access to information regarding the purchase and sale of Securities for the Fund and are not engaged in the day-to-day operations of the Fund; provided that Securities investments effected by such Access Persons during the proscribed 6 period are not effected with knowledge of the purchase or sale of the same or equivalent Securities by any fund in the Complex. A "pending 'buy' or 'sell' order" exists when a decision to purchase or sell a Security has been made and communicated. (ii) Portfolio Managers are prohibited from buying or selling a Security within seven calendar days before or after the Fund trades in the same or an equivalent Security. Nevertheless, a personal trade by any Investment Personnel shall not prevent a Fund in the same Complex from trading in the same or an equivalent security. However, such a transaction shall be subject to independent review by the Compliance Officer. (iii) If trades are effected during the periods proscribed in (i) or (ii) above, except as provided in (iv) below with respect to (i) above, any profits realized on such trades will be promptly required to be disgorged to the Fund. (iv) A transaction by Access Persons (other than Investment Personnel) inadvertently effected during the period proscribed in (i) above will not be considered a violation of the Code and disgorgement will not be required so long as the transaction was effected in accordance with the preclearance procedures described in Section 6 below and without prior knowledge of trading by any fund in the Complex in the same or an equivalent Security. D. SHORT-TERM TRADING PROFITS Except as provided in Section 5 below, Investment Personnel are prohibited from profiting from a purchase and sale, or sale and purchase, of the same or an equivalent 7 Security within any 60 calendar day period. If trades are effected during the proscribed period, any profits realized on such trades will be immediately required to be disgorged to the Fund. E. SHORT SALES No Access Person may sell any security short which is owned by any Fund in the Complex. Access Persons may, however make short sales when he/she owns an equivalent amount of the same security. F. OPTIONS No Access Person may write a naked call option or buy a naked put option on a security owned by any Fund in the Complex. Access Persons may purchase options on securities not held by any Fund in the Complex, or purchase call options or write put options on securities owned by any Fund in the Complex, subject to preclearance and the same restrictions applicable to other Securities. Access Persons may write covered call options or buy covered put options on a Security owned by any Fund in the Complex at the discretion of the Compliance Officer. G. INVESTMENT CLUBS No Access Person may participate in an investment club. 5. EXEMPTED TRANSACTIONS Subject to preclearance in accordance with Section 6 below with respect to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C) and 4(D) will not apply to the following: (a) Purchases or sales of Securities effected in any account 8 over which the Access Person has no direct or indirect influence or control or in any account of the Access Person which is managed on a discretionary basis by a person other than such Access Person and with respect to which such Access Person does not in fact influence or control such transactions. (b) Purchases or sales of Securities (or their equivalents) which are not eligible for purchase or sale by any fund in the Complex. (c) Purchases or sales of Securities which are non-volitional on the part of either the Access Person or any fund in the Complex. (d) Purchases of Securities which are part of an automatic dividend reinvestment plan. (e) Purchases effected upon the exercise of rights issued by an issuer PRO RATA to all holders of a class of its Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. (f) Any equity Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 500 shares or less in the aggregate, if (i) the Access Person has no prior knowledge of activity in such security by any fund in the Complex and (ii) the issuer is listed on The New York Stock Exchange or has a market capitalization (outstanding shares multiplied by the current price per share) greater than $1 billion (or a corresponding market capitalization in foreign markets). (g) Any fixed-income Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 100 units ($100,000 principal amount) or less in the aggregate, if the Access Person has no prior knowledge of transactions in such Securities by any fund in the Complex. (h) Any transaction in index options effected on a broad-based index (See Exhibit B.)1 (i) Purchases or sales of Securities which receive the prior approval of the Compliance Officer (such person having no personal interest in such purchases or sales), based on a determination that no abuse is involved and that such purchases and sales are not likely to have any economic impact on any fund in the Complex or on its ability to - -------- 1 Exhibit B will be amended by the Compliance Officer as necessary. 9 purchase or sell Securities of the same class or other Securities of the same issuer. (j) Purchases or sales of Unit Investment Trusts. 6. PRECLEARANCE Access Persons (other than Disinterested Directors/Trustees) must preclear all personal Securities investments with the exception of those identified in subparts (a), (c), (d), (h) and (j) of Section 5 above. All requests for preclearance must be submitted to the Compliance Officer for approval. All approved orders must be executed no later than 5:00 p.m. local time on the business day following the date preclearance is granted. If any order is not timely executed, a request for preclearance must be resubmitted. 7. REPORTING (a) Disinterested Directors/Trustees shall report to the Secretary of the Fund or the Compliance Officer the information described in Section 7(b) hereof with respect to transactions in any Security in which such Disinterested Director/Trustee has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Security ONLY if such Disinterested Director/Trustee, at the time of that transaction knew or, in the ordinary course of fulfilling his or her official duties as a Director/Trustee of the Fund, should have known that, during the 15-day period immediately preceding or subsequent to the date of the transaction in a Security by such Director/Trustee, such Security is or was purchased or sold by the Fund or was being considered for purchase or sale by the Fund, the Manager or Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is not required to make a report with respect to 10 transactions effected in any account over which such Director/Trustee does not have any direct or indirect influence or control or in any account of the Disinterested Director/Trustee which is managed on a discretionary basis by a person other than such Director/Trustee and with respect to which such Director/Trustee does not in fact influence or control such transactions. The Secretary of the Fund or the Compliance Officer shall maintain such reports and such other records to the extent required by Rule 17j-1 under the Act. (b) Every report required by Section 7(a) hereof shall be made not later than ten days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information: (i) The date of the transaction, the title and the number of shares, and the principal amount of each Security involved; (ii) The nature of the transaction (I.E., purchase, sale or any other type of acquisition or disposition); (iii) The price at which the transaction was effected; (iv) The name of the broker, dealer or bank with or through whom the transaction was effected; and (v) The date that the report is submitted. (c) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates. 8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW Access Persons (other than Disinterested Directors/Trustees) are required to direct their brokers to supply, on a timely basis, duplicate copies of confirmations of all 11 personal Securities transactions and copies of periodic statements for all Securities accounts in which such Access Persons have a Beneficial Ownership interest to the Compliance Officer. Such instructions must be made upon becoming an Access Person and promptly as new accounts are established, but no later than ten days after the end of a calendar quarter, with respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect beneficial interest of the Access Person. Notification must be made in writing and a copy of the notification must be submitted to Compliance. This notification will include the broker, dealer or bank with which the account was established and the date the account was established. Compliance with this Code requirement will be deemed to satisfy the reporting requirements imposed on Access Persons under Rule 17j-1(d), provided, however, that such confirmations and statements contain all the information required by Section 7. b. hereof and are furnished within the time period required by such section. The Compliance Officer will periodically review the personal investment activity and holdings reports of all Access Persons (including Disinterested Directors/Trustees with respect to Securities transactions reported pursuant to Section 7 above). 9. DISCLOSURE OF PERSONAL HOLDINGS Within ten days after an individual first becomes an Access Person and thereafter on an annual basis, each Access Person (other than Disinterested Directors/Trustees) must disclose all personal Securities holdings. Such disclosure must be made in writing and be as of the date the individual first became an Access Person with respect to the initial report and by January 30 of each year, including 12 holdings information as of December 31, with respect to the annual report. All such reports shall include the following: title, number of shares and principal amount of each security held, name of broker, dealer or bank with whom these securities are held and the date of submission by the Access Person. 10. GIFTS Access Persons are prohibited from receiving any gift or other thing of more than $100 in value from any person or entity that does business with or on behalf of the Fund. Occasional business meals or entertainment (theatrical or sporting events, etc.) are permitted so long as they are not excessive in number or cost. 11. SERVICE AS A DIRECTOR Investment Personnel are prohibited from serving on the boards of directors of publicly traded companies, absent prior authorization based upon a determination that the board service would be consistent with the interests of the Fund and its shareholders. In the limited instances that such board service is authorized, Investment Personnel will be isolated from those making investment decisions affecting transactions in Securities issued by any publicly traded company on whose board such Investment Personnel serves as a director through the use of "Chinese Wall" or other procedures designed to address the potential conflicts of interest. 12. CERTIFICATION OF COMPLIANCE WITH THE CODE Access Persons are required to certify annually as follows: (i) that they have read and understood the Code; (ii) that they recognize that they are subject to the Code; 13 (iii) that they have complied with the requirements of the Code; and (iv) that they have disclosed or reported all personal Securities transactions required to be disclosed or reported pursuant to the requirements of the Code. 13. CODE VIOLATIONS All violations of the Code will be reported to the Board of Directors/Trustees of the Fund on a quarterly basis. The Board of Directors/Trustees may take such action as it deems appropriate. 14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES The Board of Directors/Trustees will be provided with an annual report which at a minimum: (i) certifies to the Board that the Fund, Manager, Investment Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably necessary to prevent its Access persons from violating its Code. (ii) summarizes existing procedures concerning personal investing and any changes in the procedures made during the preceding year; (iii) identifies material Code or procedural violations and sanctions imposed in response to those material violations; and (iv) identifies any recommended changes in existing restrictions or procedures based upon the Fund's experience under the Code, evolving industry practices, or developments in applicable laws and regulations. The Board will review such report and determine if any further action is required. 14 EXPLANATORY NOTES TO CODE 1. No comparable Code requirements have been imposed upon Prudential Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors or officers who are not Directors/Trustees or Officers of the Fund since they are deemed not to constitute Access Persons or Advisory Persons as defined in paragraphs (e)(1) and (2) of Rule 17j-1. Dated: February 29, 2000 15 EXHIBIT A DEFINITION OF BENEFICIAL OWNERSHIP The term "beneficial ownership" of securities would include not only ownership of securities held by an access person for his or her own benefit,whether in bearer form or registered in his or her own name or otherwise, but also ownership of securities held for his or her benefit by other (regardless of whether or how they are registered) such as custodians, brokers, executors, administrators, or trustees (including trusts in which he or she has only a remainder interest), and securities held for his or her account by pledges, securities owned by a partnership in which he or she should regard as a personal holding corporation. Correspondingly, this term would exclude securities held by an access person for the benefit of someone else. Ordinarily, this term would not include securities held by executors or administrators in estates in which an access person is a legatee or beneficiary unless there is a specific legacy to such person of such securities or such person is the sole legatee or beneficiary and there are other assets in the estate sufficient to pay debts ranking ahead of such legacy, or the securities are held in the estate more than a year after the decedent's death. Securities held in the name of another should be considered as "beneficially" owned by an access person where such person enjoys "benefits substantially equivalent to ownership". The SEC has said that although the final determination of beneficial ownership is a question to be determined in the light of the facts of the particular case, generally a person is regarded as the beneficial owner of securities held in the name of his or her spouse and their minor children. Absent special circumstances such relationship ordinarily results in such person obtaining benefits substantially equivalent to ownership, e.g., application of the income derived from such securities to maintain a common home, to meet expenses which such person otherwise would meet from other sources, or the ability to exercise a controlling influence over the purchase, sale or voting of such securities. An access person also may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contact, understanding, relationship, agreement or other arrangement, he obtains therefrom benefits substantially equivalent to those of ownership. Moreover, the fact that the holder is a relative or relative of a spouse and sharing the same home as an access person may in itself indicate that the access person would obtain benefits substantially equivalent to those of ownership from securities held in the name of such relative. Thus, absent countervailing facts, it is expected that securities held by relatives who share the same home as an access person will be treated as being beneficially owned by the access person. An access person also is regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, even though he does not obtain therefrom the aforementioned benefits of ownership, if he can vest or revest title in himself at once or at some future time. EXHIBIT B INDEX OPTIONS ON A BROAD-BASED INDEX
TICKER SYMBOL DESCRIPTION - ---------------------------------------- ---------------------------------- NIK Nikkei 300 Index CI/Euro - ---------------------------------------- ---------------------------------- OEX S&P 100 Close/Amer Index - ---------------------------------------- ---------------------------------- OEW S&P 100 Close/Amer Index - ---------------------------------------- ---------------------------------- OEY S&P 100 Close/Amer Index - ---------------------------------------- ---------------------------------- SPB S&P 500 Index - ---------------------------------------- ---------------------------------- SPZ S&P 500 Open/Euro Index - ---------------------------------------- ---------------------------------- SPX S&P 500 Open/Euro Index - ---------------------------------------- ---------------------------------- SXZ S&P 500 (Wrap) - ---------------------------------------- ---------------------------------- SXB S&P 500 Open/Euro Index - ---------------------------------------- ---------------------------------- RUZ Russell 2000 Open/Euro Index - ---------------------------------------- ---------------------------------- RUT Russell 2000 Open/Euro Index - ---------------------------------------- ---------------------------------- MID S&P Midcap 400 Open/Euro Index - ---------------------------------------- ---------------------------------- NDX NASDAQ- 100 Open/Euro Index - ---------------------------------------- ---------------------------------- NDU NASDAQ- 100 Open/Euro Index - ---------------------------------------- ---------------------------------- NDZ NASDAQ- 100 Open/Euro Index - ---------------------------------------- ---------------------------------- NDV NASDAQ- 100 Open/Euro Index - ---------------------------------------- ---------------------------------- NCZ NASDAQ- 100 Open/Euro Index - ---------------------------------------- ---------------------------------- SML S&P Small Cap 600 - ---------------------------------------- ---------------------------------- TPX U.S. Top 100 Sector - ---------------------------------------- ---------------------------------- SPL S&P 500 Long-Term Close - ---------------------------------------- ---------------------------------- ZRU Russell 2000 L-T Open./Euro - ---------------------------------------- ---------------------------------- VRU Russell 2000 Long-Term Index - ---------------------------------------- ----------------------------------
EX-99.(P)(2) 7 a2024616zex-99_p2.txt MANAGER'S, INVEST ADVSR'S, & DIST'S CODE OF ETHICS PRUDENTIAL INVESTMENT CORPORATION PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1 UNDER THE INVESTMENT COMPANY ACT OF 1940 (THE CODE) 1. PURPOSES The Code has been adopted by the Board of Directors/Trustees or the Duly Appointed Officer-In-Charge of the Prudential Mutual Fund (hereinafter, referred to as the "Fund"), the Manager, the Adviser/Subadviser, and the Principal Underwriter in accordance with Rule 17j-1(c) under the Investment Company Act of 1940 (the Act) and in accordance with the following general principles: (1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF SHAREHOLDERS FIRST. Investment company personnel should scrupulously avoid serving their own personal interests ahead of shareholders' interests in any decision relating to their personal investments. (2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY. Investment company personnel must not only seek to achieve technical compliance with the Code but should strive to abide by its spirit and the principles articulated herein. (3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS. Investment company personnel must avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of shareholders, including, but not limited to the receipt of unusual investment opportunities, perquisites, or gifts of more than a DE MINIMIS value from persons doing or seeking business with the Fund. Rule 17j-1 under the Act generally proscribes fraudulent or manipulative practices with respect to a purchase or sale of a security held or to be acquired (as such term is defined in Section 2.) by an investment company, if effected by an associated person of such company. The purpose of the Code is to establish procedures consistent with the Act and Rule 17j-1 to give effect to the following general prohibitions as set forth in Rule 17j-1(b) as follows: (a) It shall be unlawful for any affiliated person of or Principal Underwriter for a registered investment company, or any affiliated person of an investment adviser of or principal underwriter for a registered investment company in connection with the purchase or sale, directly or indirectly, by such person of a security held or to be acquired, by such registered investment company: (1) To employ any device, scheme or artifice to defraud such registered investment company; (2) To make to such registered investment company any untrue statement of a material fact or omit to state to such registered investment company a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; (3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such registered investment company; or 2 (4) To engage in any manipulative practice with respect to such registered investment company. 2. DEFINITIONS (a) "Access Person" means any director/trustee, officer, general partner or Advisory Person (including any Investment Personnel, as that term is defined herein) of the Fund, the Manager, the Adviser/Subadviser, or the Principal Underwriter. (b) "Adviser/Subadviser" means the Adviser or Subadviser of the Fund or both as the context may require. (c) "Advisory Person" means (i) any employee of the Fund, Manager or Adviser/Subadviser (or of any company in a control relationship to the Fund, Manager or Adviser/Subadviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by the Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security. (d) "Beneficial Ownership" will be interpreted in the same manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining which security holdings of a person are subject to the reporting and short-swing profit provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except that the determination of direct or indirect beneficial ownership will apply to all securities which an Access Person has or acquires (EXHIBIT A). (e) "Complex" means the group of registered investment companies for which Prudential Investments Fund Management LLC serves as Manager; provided, however, that with respect to Access Persons of the Subadviser (including any unit or subdivision thereof), "Complex" means the group of registered investment companies in the Complex advised by the Subadviser or unit or subdivision thereof. (f) "Compliance Officer" means the person designated by the Manager, the Adviser/Subadviser, or Principal Underwriter (including his or her designee) as having responsibility for compliance with the requirements of the Code. (g) "Control" will have the same meaning as that set forth in 3 Section 2(a)(9) of the Act. (h) "Disinterested Director/Trustee" means a Director/ Trustee of the Fund who is not an "interested person" of the Fund within the meaning of Section 2(a)(19) of the Act. An interested Director/Trustee who would not otherwise be deemed to be an Access Person, shall be treated as a Disinterested Director/Trustee for purposes of compliance with the provisions of the Code. (i) "Initial Public Offering" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934. (j) "Investment Personnel" means: (a) Portfolio Managers and other Advisory Persons who provide investment information and/or advice to the Portfolio Manager(s) and/or help execute the Portfolio Manager's(s') investment decisions, including securities analysts and traders ; and (b) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security. (k) "Manager" means Prudential Investments Fund Management, LLC. (l) "Portfolio Manager" means any Advisory Person who has the direct responsibility and authority to make investment decisions for the Fund. (m) "Private placement" means a limited offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such Securities Act. (n) "Security" will have the meaning set forth in Section 2(a)(36) of the Act, except that it will not include shares of registered open-end investment companies, direct obligations of the Government of the United States, , short-term debt securities which are "government securities" within the meaning of Section 2(a)(16) of the Act, bankers' acceptances, bank certificates of deposit, commercial paper and such other money market instruments as are designated by the Compliance Officer. For purposes of the Code, an "equivalent Security" is one that has a 4 substantial economic relationship to another Security. This would include, among other things, (1) a Security that is exchangeable for or convertible into another Security, (2) with respect to an equity Security, a Security having the same issuer (including a private issue by the same issuer) and any derivative, option or warrant relating to that Security and (3) with respect to a fixed-income Security, a Security having the same issuer, maturity, coupon and rating. (o) "Security held or to be acquired" means any Security or any equivalent Security which, within the most recent 15 days: (1) is or has been held by the Fund; or (2) is being considered by the Fund or its investment adviser for purchase by the Fund. 3. APPLICABILITY The Code applies to all Access Persons and the Compliance Officer shall provide each Access Person with a copy of the Code. The prohibitions described below will only apply to a transaction in a Security in which the designated Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership. The Compliance Officer will maintain a list of all Access Persons who are currently, and within the past five years, subject to the Code. 4. PROHIBITED PURCHASES AND SALES A. INITIAL PUBLIC OFFERINGS No Investment Personnel may acquire any Securities in an initial public offering. For purposes of this restriction, "Initial Public Offerings" shall not include offerings of government and municipal securities. B. PRIVATE PLACEMENTS No Investment Personnel may acquire any Securities in a private placement without prior approval. 5 (i) Prior approval must be obtained in accordance with the preclearance procedure described in Section 6 below. Such approval will take into account, among other factors, whether the investment opportunity should be reserved for the Fund and its shareholders and whether the opportunity is being offered to the Investment Personnel by virtue of his or her position with the Fund. The Adviser/Subadviser shall maintain a record of such prior approval and reason for same, for at least 5 years after the end of the fiscal year in which the approval is granted. (ii) Investment Personnel who have been authorized to acquire Securities in a private placement must disclose that investment to the chief investment officer (including his or her designee) of the Adviser/Subadviser (or of any unit or subdivision thereof) or the Compliance Officer when they play a part in any subsequent consideration of an investment by the Fund in the issuer. In such circumstances, the Fund's decision to purchase Securities of the issuer will be subject to an independent review by appropriate personnel with no personal interest in the issuer. C. BLACKOUT PERIODS (i) Except as provided in Section 5 below, Access Persons are prohibited from executing a Securities transaction on a day during which any investment company in the Complex has a pending "buy" or "sell" order in the same or an equivalent Security and until such time as that order is executed or withdrawn; 6 provided, however, that this prohibition shall not apply to Disinterested Directors/Trustees except if they have actual knowledge of trading by any fund in the Complex and, in any event, only with respect to those funds on whose boards they sit. This prohibition shall also not apply to Access Persons of the Subadviser who do not, in the ordinary course of fulfilling his or her official duties, have access to information regarding the purchase and sale of Securities for the Fund and are not engaged in the day-to-day operations of the Fund; provided that Securities investments effected by such Access Persons during the proscribed period are not effected with knowledge of the purchase or sale of the same or equivalent Securities by any fund in the Complex. A "pending 'buy' or 'sell' order" exists when a decision to purchase or sell a Security has been made and communicated. (ii) Portfolio Managers are prohibited from buying or selling a Security within seven calendar days before or after the Fund trades in the same or an equivalent Security. Nevertheless, a personal trade by any Investment Personnel shall not prevent a Fund in the same Complex from trading in the same or an equivalent security. However, such a transaction shall be subject to independent review by the Compliance Officer. (iii) If trades are effected during the periods proscribed in (i) or (ii) above, except as provided in (iv) below with respect to (i) above, any profits realized on such trades will be promptly required to be disgorged to the Fund. 7 (iv) A transaction by Access Persons (other than Investment Personnel) inadvertently effected during the period proscribed in (i) above will not be considered a violation of the Code and disgorgement will not be required so long as the transaction was effected in accordance with the preclearance procedures described in Section 6 below and without prior knowledge of trading by any fund in the Complex in the same or an equivalent Security. D. SHORT-TERM TRADING PROFITS Except as provided in Section 5 below, Investment Personnel are prohibited from profiting from a purchase and sale, or sale and purchase, of the same or an equivalent Security within any 60 calendar day period. If trades are effected during the proscribed period, any profits realized on such trades will be immediately required to be disgorged to the Fund. E. SHORT SALES No Access Person may sell any security short which is owned by any Fund in the Complex. Access Persons may, however make short sales when he/she owns an equivalent amount of the same security. F. OPTIONS No Access Person may write a naked call option or buy a naked put option on a security owned by any Fund in the Complex. Access Persons may purchase options on securities not held by any Fund in the Complex, or purchase call options or write put options on securities owned by any Fund in the Complex, subject to preclearance and the same restrictions applicable to other Securities. Access Persons may write covered call options or buy covered put options on a Security owned by any Fund in the 8 Complex at the discretion of the Compliance Officer. G. INVESTMENT CLUBS No Access Person may participate in an investment club. 5. EXEMPTED TRANSACTIONS Subject to preclearance in accordance with Section 6 below with respect to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C) and 4(D) will not apply to the following: (a) Purchases or sales of Securities effected in any account over which the Access Person has no direct or indirect influence or control or in any account of the Access Person which is managed on a discretionary basis by a person other than such Access Person and with respect to which such Access Person does not in fact influence or control such transactions. (b) Purchases or sales of Securities (or their equivalents) which are not eligible for purchase or sale by any fund in the Complex. (c) Purchases or sales of Securities which are non-volitional on the part of either the Access Person or any fund in the Complex. (d) Purchases of Securities which are part of an automatic dividend reinvestment plan. (e) Purchases effected upon the exercise of rights issued by an issuer PRO RATA to all holders of a class of its Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. (f) Any equity Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 500 shares or less in the aggregate, if (i) the Access Person has no prior knowledge of activity in such security by any fund in the Complex and (ii) the issuer is listed on The New York Stock Exchange or has a market capitalization (outstanding shares multiplied by the current price per share) greater than $1 billion (or a corresponding market capitalization in foreign markets). (g) Any fixed-income Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 100 units 9 ($100,000 principal amount) or less in the aggregate, if the Access Person has no prior knowledge of transactions in such Securities by any fund in the Complex. (h) Any transaction in index options effected on a broad-based index (See Exhibit B.)/1/ (i) Purchases or sales of Securities which receive the prior approval of the Compliance Officer (such person having no personal interest in such purchases or sales), based on a determination that no abuse is involved and that such purchases and sales are not likely to have any economic impact on any fund in the Complex or on its ability to purchase or sell Securities of the same class or other Securities of the same issuer. (j) Purchases or sales of Unit Investment Trusts. 6. PRECLEARANCE Access Persons (other than Disinterested Directors/Trustees) must preclear all personal Securities investments with the exception of those identified in subparts (a), (c), (d), (h) and (j) of Section 5 above. All requests for preclearance must be submitted to the Compliance Officer for approval. All approved orders must be executed no later than 5:00 p.m. local time on the business day following the date preclearance is granted. If any order is not timely executed, a request for preclearance must be resubmitted. 7. REPORTING (a) Disinterested Directors/Trustees shall report to the Secretary of the Fund or the Compliance Officer the information described in Section 7(b) hereof with respect to transactions in any Security in which such Disinterested Director/Trustee has, or by - -------- /1/ Exhibit B will be amended by the Compliance Officer as necessary. 10 reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Security ONLY if such Disinterested Director/Trustee, at the time of that transaction knew or, in the ordinary course of fulfilling his or her official duties as a Director/Trustee of the Fund, should have known that, during the 15-day period immediately preceding or subsequent to the date of the transaction in a Security by such Director/Trustee, such Security is or was purchased or sold by the Fund or was being considered for purchase or sale by the Fund, the Manager or Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is not required to make a report with respect to transactions effected in any account over which such Director/Trustee does not have any direct or indirect influence or control or in any account of the Disinterested Director/Trustee which is managed on a discretionary basis by a person other than such Director/Trustee and with respect to which such Director/Trustee does not in fact influence or control such transactions. The Secretary of the Fund or the Compliance Officer shall maintain such reports and such other records to the extent required by Rule 17j-1 under the Act. (b) Every report required by Section 7(a) hereof shall be made not later than ten days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information: (i) The date of the transaction, the title and the number of shares, and the principal amount of each Security involved; (ii) The nature of the transaction (I.E., purchase, sale or any other type of acquisition or disposition); (iii) The price at which the transaction was effected; (iv) The name of the broker, dealer or bank with or through whom the 11 transaction was effected; and (v) The date that the report is submitted. (c) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates. 8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW Access Persons (other than Disinterested Directors/Trustees) are required to direct their brokers to supply, on a timely basis, duplicate copies of confirmations of all personal Securities transactions and copies of periodic statements for all Securities accounts in which such Access Persons have a Beneficial Ownership interest to the Compliance Officer. Such instructions must be made upon becoming an Access Person and promptly as new accounts are established, but no later than ten days after the end of a calendar quarter, with respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect beneficial interest of the Access Person. Notification must be made in writing and a copy of the notification must be submitted to Compliance. This notification will include the broker, dealer or bank with which the account was established and the date the account was established. Compliance with this Code requirement will be deemed to satisfy the reporting requirements imposed on Access Persons under Rule 17j-1(d), provided, however, that such confirmations and statements contain all the information required by Section 7. b. hereof and are furnished within the time period required by such section. 12 The Compliance Officer will periodically review the personal investment activity and holdings reports of all Access Persons (including Disinterested Directors/Trustees with respect to Securities transactions reported pursuant to Section 7 above). 9. DISCLOSURE OF PERSONAL HOLDINGS Within ten days after an individual first becomes an Access Person and thereafter on an annual basis, each Access Person (other than Disinterested Directors/Trustees) must disclose all personal Securities holdings. Such disclosure must be made in writing and be as of the date the individual first became an Access Person with respect to the initial report and by January 30 of each year, including holdings information as of December 31, with respect to the annual report. All such reports shall include the following: title, number of shares and principal amount of each security held, name of broker, dealer or bank with whom these securities are held and the date of submission by the Access Person. 10. GIFTS Access Persons are prohibited from receiving any gift or other thing of more than $100 in value from any person or entity that does business with or on behalf of the Fund. Occasional business meals or entertainment (theatrical or sporting events, etc.) are permitted so long as they are not excessive in number or cost. 11. SERVICE AS A DIRECTOR Investment Personnel are prohibited from serving on the boards of directors of publicly traded companies, absent prior authorization based upon a determination that the board service would be consistent with the interests of the Fund and its shareholders. In the limited instances that such board service is authorized, 13 Investment Personnel will be isolated from those making investment decisions affecting transactions in Securities issued by any publicly traded company on whose board such Investment Personnel serves as a director through the use of "Chinese Wall" or other procedures designed to address the potential conflicts of interest. 12. CERTIFICATION OF COMPLIANCE WITH THE CODE Access Persons are required to certify annually as follows: (i) that they have read and understood the Code; (ii) that they recognize that they are subject to the Code; (iii) that they have complied with the requirements of the Code; and (iv) that they have disclosed or reported all personal Securities transactions required to be disclosed or reported pursuant to the requirements of the Code. 13. CODE VIOLATIONS All violations of the Code will be reported to the Board of Directors/Trustees of the Fund on a quarterly basis. The Board of Directors/Trustees may take such action as it deems appropriate. 14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES The Board of Directors/Trustees will be provided with an annual report which at a minimum: (i) certifies to the Board that the Fund, Manager, Investment Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably necessary to prevent its Access persons from violating its Code. 14 (ii) summarizes existing procedures concerning personal investing and any changes in the procedures made during the preceding year; (iii) identifies material Code or procedural violations and sanctions imposed in response to those material violations; and (iv) identifies any recommended changes in existing restrictions or procedures based upon the Fund's experience under the Code, evolving industry practices, or developments in applicable laws and regulations. The Board will review such report and determine if any further action is required. 15 EXPLANATORY NOTES TO CODE 1. No comparable Code requirements have been imposed upon Prudential Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors or officers who are not Directors/Trustees or Officers of the Fund since they are deemed not to constitute Access Persons or Advisory Persons as defined in paragraphs (e)(1) and (2) of Rule 17j-1. Dated: February 29, 2000 16 EXHIBIT A DEFINITION OF BENEFICIAL OWNERSHIP The term "beneficial ownership" of securities would include not only ownership of securities held by an access person for his or her own benefit, whether in bearer form or registered in his or her own name or otherwise, but also ownership of securities held for his or her benefit by other (regardless of whether or how they are registered) such as custodians, brokers, executors, administrators, or trustees (including trusts in which he or she has only a remainder interest), and securities held for his or her account by pledges, securities owned by a partnership in which he or she should regard as a personal holding corporation. Correspondingly, this term would exclude securities held by an access person for the benefit of someone else. Ordinarily, this term would not include securities held by executors or administrators in estates in which an access person is a legatee or beneficiary unless there is a specific legacy to such person of such securities or such person is the sole legatee or beneficiary and there are other assets in the estate sufficient to pay debts ranking ahead of such legacy, or the securities are held in the estate more than a year after the decedent's death. Securities held in the name of another should be considered as "beneficially" owned by an access person where such person enjoys "benefits substantially equivalent to ownership". The SEC has said that although the final determination of beneficial ownership is a question to be determined in the light of the facts of the particular case, generally a person is regarded as the beneficial owner of securities held in the name of his or her spouse and their minor children. Absent special circumstances such relationship ordinarily results in such person obtaining benefits substantially equivalent to ownership, e.g., application of the income derived from such securities to maintain a common home, to meet expenses which such person otherwise would meet from other sources, or the ability to exercise a controlling influence over the purchase, sale or voting of such securities. An access person also may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contact, understanding, relationship, agreement or other arrangement, he obtains therefrom benefits substantially equivalent to those of ownership. Moreover, the fact that the holder is a relative or relative of a spouse and sharing the same home as an access person may in itself indicate that the access person would obtain benefits substantially equivalent to those of ownership from securities held in the name of such relative. Thus, absent countervailing facts, it is expected that securities held by relatives who share the same home as an access person will be treated as being beneficially owned by the access person. An access person also is regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, even though he does not obtain therefrom the aforementioned benefits of ownership, if he can vest or revest title in himself at once or at some future time. EXHIBIT B INDEX OPTIONS ON A BROAD-BASED INDEX
TICKER SYMBOL DESCRIPTION - ---------------------------------------- ------------------------------------ NIK Nikkei 300 Index CI/Euro - ---------------------------------------- ------------------------------------ OEX S&P 100 Close/Amer Index - ---------------------------------------- ------------------------------------ OEW S&P 100 Close/Amer Index - ---------------------------------------- ------------------------------------ OEY S&P 100 Close/Amer Index - ---------------------------------------- ------------------------------------ SPB S&P 500 Index - ---------------------------------------- ------------------------------------ SPZ S&P 500 Open/Euro Index - ---------------------------------------- ------------------------------------ SPX S&P 500 Open/Euro Index - ---------------------------------------- ------------------------------------ SXZ S&P 500 (Wrap) - ---------------------------------------- ------------------------------------ SXB S&P 500 Open/Euro Index - ---------------------------------------- ------------------------------------ RUZ Russell 2000 Open/Euro Index - ---------------------------------------- ------------------------------------ RUT Russell 2000 Open/Euro Index - ---------------------------------------- ------------------------------------ MID S&P Midcap 400 Open/Euro Index - ---------------------------------------- ------------------------------------ NDX NASDAQ- 100 Open/Euro Index - ---------------------------------------- ------------------------------------ NDU NASDAQ- 100 Open/Euro Index - ---------------------------------------- ------------------------------------ NDZ NASDAQ- 100 Open/Euro Index - ---------------------------------------- ------------------------------------ NDV NASDAQ- 100 Open/Euro Index - ---------------------------------------- ------------------------------------ NCZ NASDAQ- 100 Open/Euro Index - ---------------------------------------- ------------------------------------ SML S&P Small Cap 600 - ---------------------------------------- ------------------------------------ TPX U.S. Top 100 Sector - ---------------------------------------- ------------------------------------ SPL S&P 500 Long-Term Close - ---------------------------------------- ------------------------------------ ZRU Russell 2000 L-T Open./Euro - ---------------------------------------- ------------------------------------ VRU Russell 2000 Long-Term Index - ---------------------------------------- ------------------------------------
EX-99.(P)(3) 8 a2024616ex-99_p3.txt JENNISON CODE OF ETHICS JENNISON ASSOCIATES LLC JENNISON ASSOCIATES LLC CODE OF ETHICS, POLICY ON INSIDER TRADING AND PERSONAL TRADING POLICY AS AMENDED DECEMBER 6, 1999 1 SECTION I CODE OF ETHICS FOR JENNISON ASSOCIATES LLC This Code sets forth rules, regulations and standards of conduct for the employees of Jennison Associates LLC. It bears the approval of the Corporation's Board of Directors and applies to Jennison Associates and all subsidiaries. The Code incorporates The Prudential Insurance Company of America's ethics policies as well as additional policies specific to Jennison Associates LLC. Prudential's Code of Ethics, "Making the Right Choices", may be found as Exhibit Q in Jennison Associates' Compliance Manual. The prescribed guidelines assure that the high ethical standards long maintained by Jennison continue to be applied. The purpose of the Code is to preclude circumstances which may lead to or give the appearance of conflicts of interest, insider trading, or unethical business conduct. The rules prohibit certain activities and personal financial interests as well as require disclosure of personal investments and related business activities of all directors, officers and employees. ERISA and the federal securities laws define an investment advisor as a fiduciary who owes his clients a duty of undivided loyalty, who shall not engage in any activity in conflict with the interests of the client. As a fiduciary, our personal and corporate ethics must be above reproach. Actions which expose any of us or the organization to even the appearance of impropriety must not occur. The excellent name of our firm continues to be a direct reflection of the conduct of each of us in everything we do. Being fully aware of and strictly adhering to the Code of Ethics is the responsibility of each Jennison Associates employee. 2 CONFIDENTIAL INFORMATION Employees may become privy to confidential information (information not generally available to the public) concerning the affairs and business transactions of Jennison, companies researched by us for investment, our present and prospective clients, suppliers, officers and other staff members. Confidential information also includes trade secrets and other proprietary information of the Corporation such as business or product plans, systems, methods, software, manuals and client lists. Safeguarding confidential information is essential to the conduct of our business. Caution and discretion are required in the use of such information and in sharing it only with those who have a legitimate need to know. A) PERSONAL USE: Confidential information obtained or developed as a result of employment with the Corporation is not to be used or disclosed for the purpose of furthering any private interest or as a means of making any personal gain. Use or disclosure of such information could result in civil or criminal penalties against the Corporation or the individual responsible for disclosing such information. Further guidelines pertaining to confidential information are contained in the "Policy Statement on Insider Trading." (Set forth on page 8 in the section dedicated specifically to Insider Trading.) B) RELEASE OF CLIENT INFORMATION: Information concerning a client which has been requested by third persons, organizations or governmental bodies may only be released with the consent of the client involved. All requests for information concerning a client (other than routine credit inquiries), including requests pursuant to the legal process (such as subpoenas or court orders) must be promptly referred to Karen E. Kohler. No information may be released, nor should the client involved be contacted, until so directed by Karen E. Kohler. In order to preserve the rights of our clients and to limit the firm's liability concerning the release of client proprietary information, care must be taken to: * Limit use and discussion of information obtained on the job to normal business activities. * Request and use only information which is related to our business needs. * Restrict access to records to those with proper authorization and legitimate business needs. * Include only pertinent and accurate data in files which are used as a basis for taking action or making decisions. 3 CONFLICTS OF INTEREST You should avoid actual or apparent conflicts of interest - that is, any personal interest outside the Company which could be placed ahead of your obligations to our clients, Jennison Associates or The Prudential Insurance Company of America. Conflicts may exist even when no wrong is done. The opportunity to act improperly may be enough to create the appearance of a conflict. We recognize and respect an employee's right of privacy concerning personal affairs, but we must require a full and timely disclosure of any situation which could result in a conflict of interest or even the appearance of a conflict. Whether or not a conflict exists will be determined by the Company, not by the employee involved. To reinforce our commitment to the avoidance of potential conflicts of interest, the following rules have been adopted: 1) YOU MAY NOT, without first having secured prior approval from the Board of Directors, serve as a director, officer, employee, partner or trustee - nor hold any other position of substantial interest - in any outside business enterprise. You do not need prior approval, however, if the following three conditions are met: one, the enterprise is a family firm owned principally by other members of your family; two, the family business is not doing business with Jennison or The Prudential; and three, the services required will not interfere with your duties or your independence of judgment. Significant involvement by employees in outside business activity is generally unacceptable. In addition to securing prior approval for outside business activities, you will be required to disclose all relationships with outside enterprises annually. * Note - The above deals only with positions in business enterprises. It does not effect Jennison's practice of permitting employees to be associated with governmental, educational, charitable, religious or other civic organizations. These activities may be entered into without prior consent, but must still be disclosed on an annual basis. 2) YOU MAY NOT act on behalf of Jennison in connection with any transaction in which you have a personal interest. This rule does not apply to any personal interest resulting from your participation in any Jennison or Prudential plan in the nature of incentive compensation, or in the case of a plan which provides for direct participation in specific transactions by Jennison's Board of Directors. 3) YOU MAY NOT, without prior approval from the Board of Directors, have a substantial interest in any outside business which, to your knowledge, is involved currently in a business transaction with Jennison or The Prudential, or is engaged in businesses similar to any business engaged in by Jennison. A substantial interest includes any investment in the outside business involving an amount greater than 10 percent of your gross assets, or $10,000 if that amount is larger, or involving an ownership interest greater than 2 percent of the outstanding equity interests. You do not need approval to invest in open-ended registered investment companies such as investments in mutual funds and similar enterprises which are publicly owned. 4 4) YOU MAY NOT, without prior approval of the Board of Directors, engage in any transaction involving the purchase of products and/or services from Jennison, except on the same terms and conditions as they are offered to the public. Plans offering services to employees approved by the Board of Directors are exempt from this rule. 5.) YOU MAY NOT purchase an equity interest in any competitor. Employees and their immediate families are also prohibited from investing in securities of a client or supplier with whom the staff member regularly deals even if the securities are widely traded. OTHER BUSINESS ACTIVITIES ISSUES REGARDING THE RETENTION OF SUPPLIERS: The choice of our suppliers must be based on quality, reliability, price, service, and technical advantages. GIFTS: Jennison employees and their immediate families should not solicit, accept, retain or provide any gifts or favors which might influence decisions you or the recipient must make in business transactions involving Jennison or which others might reasonably believe could influence those decisions. Even a nominal gift should not be accepted if, to a reasonable observer, it might appear that the gift would influence your business decisions. Modest gifts and favors, which would not be regarded by others as improper, may be accepted or given on an occasional basis. Examples of such gifts are those received as normal business courtesies (i.e. meals or golf games); non-cash gifts of nominal value (such as received at Holiday time); gifts received because of kinship, marriage or social relationships entirely beyond and apart from an organization in which membership or an official position is held as approved by the Corporation. Entertainment which satisfies these requirements and conforms to generally accepted business practices also is permissible. Please reference the Gifts and Entertainment section of Jennison Associates' Compliance Manual for a more detailed explanation of Jennison's policy towards gifts and entertainment. IMPROPER PAYMENTS - KICKBACKS: In the conduct of the Corporation's business, no bribes, kickbacks, or similar remuneration or consideration of any kind are to be given or offered to any individual or organization or to any intermediaries such as agents, attorneys or other consultants, for the purpose of influencing such individual or organization in obtaining or retaining business for, or directing business to, the Corporation. BOOKS, RECORDS AND ACCOUNTS: The integrity of the accounting records of the Corporation is essential. All receipts and expenditures, including personal expense statements must be supported by documents that accurately and properly describe such expenses. Staff members responsible for approving expenditures or for keeping books, records and accounts for the Corporation are required to approve and record all expenditures and other entries based upon proper supporting documents so that the accounting records of the Corporation are maintained in reasonable detail, reflecting accurately and fairly all transactions of the Corporation including the 5 disposition of its assets and liabilities. The falsification of any book, record or account of the Corporation, the submission of any false personal expense statement, claim for reimbursement of a non-business personal expense, or false claim for an employee benefit plan payment are prohibited. Disciplinary action will be taken against employees who violate these rules, which may result in dismissal. LAWS AND REGULATIONS: The activities of the Corporation must always be in full compliance with applicable laws and regulations. It is the Company's policy to be in strict compliance with all laws and regulations applied to our business. We recognize, however, that some laws and regulations may be ambiguous and difficult to interpret. Good faith efforts to follow the spirit and intent of all laws is expected. To ensure compliance, the Corporation intends to educate its employees on laws related to Jennison's activities which may include periodically issuing bulletins, manuals and memoranda. Staff members are expected to read all such materials and be familiar with their content. OUTSIDE ACTIVITIES & POLITICAL AFFILIATIONS: Jennison Associates does not contribute financial or other support to political parties or candidates for public office except where lawfully permitted and approved in advance in accordance with procedures adopted by Jennison's Board of Directors. Employees may, of course, make political contributions, but only on their own behalf; they will not be reimbursed by the Company for such contributions. Legislation generally prohibits the Corporation or anyone acting on its behalf from making an expenditure or contribution of cash or anything else of monetary value which directly or indirectly is in connection with an election to political office; as, for example granting loans at preferential rates or providing non-financial support to a political candidate or party by donating office facilities. Otherwise, individual participation in political and civic activities conducted outside of normal business hours is encouraged, including the making of personal contributions to political candidates or activities. Employees are free to seek and hold an elective or appointive public office, provided you do not do so as a representative of the Company. However, you must conduct campaign activities and perform the duties of the office in a manner that does not interfere with your responsibilities to the firm. 6 COMPLIANCE WITH THE CODE & CONSEQUENCES IF VIOLATION OF THE CODE OCCURS: Each year all employees will be required to complete a form certifying that they have read this booklet, understand their responsibilities, and are in compliance with the requirements set forth in this statement. This process should remind us of the Company's concern with ethical issues and its desire to avoid conflicts of interest or their appearance. It should also prompt us to examine our personal circumstances in light of the Company's philosophy and policies regarding ethics. Certain key employees will be required to complete a form verifying that they have complied with all company procedures and filed disclosures of significant personal holdings and corporate affiliations. If any staff member has reason to believe that any situation may have resulted in a violation of any provision of the Code of Ethics, whether by that staff member or by another, the matter must be reported promptly to Karen E. Kohler. Violation of any provision of the Code of Ethics by any staff member may constitute grounds for disciplinary action, including dismissal. 7 SECTION II INSIDER TRADING As a result of recent legislative events, particularly the enactment of the Insider Trading and Securities Fraud Enforcement Act of 1988, the Securities Exchange Acts and the Investment Advisors Act of 1940 require that all investment advisors establish, maintain and enforce policies and supervisory procedures designed to prevent the misuse of material, non-public information by such investment advisor, and any associated person. This section of the Code sets forth Jennison Associates' policy statement on insider trading. It explains some of the terms and concepts associated with insider trading, as well as the civil and criminal penalties for insider trading violations. In addition, it sets forth the necessary procedures required to implement Jennison Associates' Insider Trading Policy Statement. This policy applies to all Jennison Associates' employees, as well as the employees of all affiliated companies. 8 JENNISON ASSOCIATES' POLICY STATEMENT AGAINST INSIDER TRADING When contemplating a transaction for your personal account, or an account in which you may have a direct or indirect personal or family interest, we must be certain that such transaction is not in conflict with the interests of our clients. Specific rules in this area are difficult, and in the final analysis, each of us must make our own determination as to whether a transaction is in conflict with client interests. Although it is not possible to anticipate all potential conflicts of interest, we have tried to set a standard that protects the firm's clients, yet is also practical for our employees. The Company recognizes the desirability of giving its corporate personnel reasonable freedom with respect to their investment activities, on behalf of themselves, their families, and in some cases non-client accounts (i.e. charitable or educational organizations on whose boards of directors corporate personnel serve). However, personal investment activity may conflict with the interests of the Company's clients. In order to avoid such conflicts -- or even the appearance of conflicts -- the Company has adopted the following policy: Jennison Associates LLC forbids any director, officer or employee from trading, either personally or on behalf of clients or others, on material, non-public information or communicating material, non-public information to others in violation of the law. Said conduct is deemed to be "insider trading." Such policy applies to every director, officer and employee and extends to activities within and outside their duties at Jennison Associates. Every director, officer, and employee is required to read and retain this policy statement. Questions regarding Jennison Associates' Insider Trading policy and procedures should be referred to Karen E. Kohler or John H. Hobbs. EXPLANATION OF RELEVANT TERMS AND CONCEPTS Although insider trading is illegal, Congress has not defined "insider", "material" or "non-public information". Instead the courts have developed definitions of these terms. Set forth below are very general descriptions of these terms. However, it is usually not easily determined whether information is "material" or "non-public" and, therefore, whenever you have any questions as to whether information is material or non-public, consult with Karen E. Kohler. Do not make this decision yourself. 1) WHO IS AN INSIDER? 9 The concept of an "insider" is broad. It includes officers, directors and employees of a company. A person may be a "temporary insider" if he or she enters into a special confidential relationship in the conduct of a company's affairs and as a result is given access to information solely for the company's purposes. Examples of temporary insiders are the company's attorneys, accountants, consultants and bank lending officers, as well as the employees of such organizations. Jennison Associates and its employees may become "temporary insiders" of a company in which we invest, in which we advise, or for which we perform any other service. An outside individual may be considered an insider, according to the Supreme Court, if the company expects the outsider to keep the disclosed non-public information confidential or if the relationship suggests such a duty of confidentiality. 2) WHAT IS MATERIAL INFORMATION? Trading on inside information is not a basis for liability unless the information is material. Material Information is defined, as: * Information, for which there is a substantial likelihood, that a reasonable investor would consider important in making his or her investment decisions, or * Information that is reasonably certain to have a substantial effect on the price of a company's securities. Information that directors, officers and employees should consider material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, a significant increase or decline in orders, significant new products or discoveries, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments. In addition, knowledge about Jennison Associates' trading information and patterns may be deemed material. 3) WHAT IS NON-PUBLIC INFORMATION? Information is "non-public" until it has been effectively communicated to the market place. One must be able to point to some fact to show that the information is generally available to the public. For example, information found in a report filed with the SEC, or appearing in Dow Jones, REUTERS ECONOMICS SERVICES, THE WALL STREET JOURNAL or other publications of general circulation would be considered public. 4) MISAPPROPRIATION THEORY Under the "misappropriation" theory liability is established when trading occurs on material non-public information that is stolen or misappropriated from any other person. In U.S. V. CARPENTER, a columnist defrauded THE WALL STREET JOURNAL by stealing non-public information from the JOURNAL and using it for trading in the securities markets. Note that the misappropriation 10 theory can be used to reach a variety of individuals not previously thought to be encompassed under the fiduciary duty theory. 5) WHO IS A CONTROLLING PERSON? "Controlling persons" include not only employers, but any person with power to influence or control the direction of the management, policies or activities of another person. Controlling persons may include not only the Company, but its directors and officers. PENALTIES FOR INSIDER TRADING VIOLATIONS Penalties for trading on or communicating material non-public information are more severe than ever. The individuals involved in such unlawful conduct may be subject to both civil and criminal penalties. A controlling person may be subject to civil or criminal penalties for failing to establish, maintain and enforce Jennison Associates' Policy Statement against Insider Trading and/or if such failure permitted or substantially contributed to an insider trading violation. Individuals can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation. Penalties include: a. CIVIL INJUNCTIONS b. TREBLE DAMAGES c. DISGORGEMENT OF PROFITS d. JAIL SENTENCES - Under the new laws, the maximum jail sentences for criminal securities law violations increased from 5 years to 10 years. e. CIVIL FINES - Persons who committed the violation may pay up to three times the profit gained or loss avoided, whether or not the person actually benefited. f. CRIMINAL FINES - The employer or other "controlling persons" may pay up to $2,500,000. g. Violators will be barred from the securities industry. 11 SECTION III IMPLEMENTATION PROCEDURES & POLICY The following procedures have been established to assist the officers, directors and employees of Jennison Associates in preventing and detecting insider trading as well as to impose sanctions against insider trading. Every officer, director and employee must follow these procedures or risk serious sanctions, including possible dismissal, substantial personal liability and criminal penalties. If you have any questions about these procedures you should consult Karen E. Kohler or John H. Hobbs. 1) IDENTIFYING INSIDE INFORMATION Before trading for yourself or others, including client accounts managed by Jennison Associates, in the securities of a company about which you may have potential inside information, ask yourself the following questions: i. IS THE INFORMATION MATERIAL? *Would an investor consider this information important in making his or her investment decisions? ** Would this information substantially effect the market price of the securities if generally disclosed? ii. IS THE INFORMATION NON-PUBLIC? * To whom has this information been provided? ** Has the information been effectively communicated to the marketplace by being published in REUTERS, THE WALL STREET JOURNAL, or other publications of general circulation? If, after consideration of the above, you believe that the information is material and non-public, or if you have questions as to whether the information is material and non-public, you should take the following steps: i. Report the matter immediately to Karen E. Kohler or John H. Hobbs. If neither are available you should contact Mr. Louis Begley, our attorney at Debevoise and Plimpton ((212)909-6000). ii. Do not repurchase or sell the securities on behalf of yourself or others, including client accounts managed by Jennison Associates. iii. Do not communicate the information inside or outside Jennison Associates, other than to Karen E. Kohler, John H. Hobbs, or Mr. Begley our outside counsel. iv. After Karen E. Kohler, John H. Hobbs, or Mr. Begley has reviewed the issue, you will be instructed to continue the prohibitions against trading and communication, or you will be allowed to trade and communicate the information. 12 2) RESTRICTING ACCESS TO MATERIAL NON-PUBLIC INFORMATION Information that you identify as material and non-public may not be communicated to anyone, including persons within Jennison Associates LLC, except as provided above. In addition, care should be taken so that such information is secure. For example, files containing material non-public information should be locked; access to computer files containing non-public information should be restricted. Jennison employees have no obligation to the clients of Jennison Associates to trade or recommend trading on the basis of material, non-public (inside) information in their possession. Jennison's fiduciary responsibility to its clients requires that the firm and its employees regard the limitations imposed by Federal securities laws. 3) ALLOCATION OF BROKERAGE To supplement its own research and analysis, to corroborate data compiled by its staff, and to consider the views and information of others in arriving at its investment decisions, Jennison Associates, consistent with its efforts to secure best price and execution, allocates brokerage business to those broker-dealers in a position to provide such services. It is the firm's policy not to allocate brokerage in consideration of the attempted furnishing of material non-public (inside) information. Employees, in recommending the allocation of brokerage to broker-dealers, should not give consideration to the provision of any material non-public (inside) information. The policy of Jennison Associates as set forth in this statement should be brought to the attention of such broker-dealer. 4) RESOLVING ISSUES CONCERNING INSIDER TRADING If doubt remains as to whether information is material or non-public, or if there is any unresolved question as to the applicability or interpretation of the foregoing procedures and standards, or as to the propriety of any action, it must be discussed with Karen E. Kohler or John H. Hobbs before trading or communicating the information to anyone. This code will be distributed to all Jennison Associates personnel. Periodically or upon request, Karen E. Kohler will meet with such personnel to review this statement of policy, including any developments in the law and to answer any questions of interpretation or application of this policy. From time to time this statement of policy will be revised in the light of developments in the law, questions of interpretation and application, and practical experience with the procedures contemplated by the statement. 13 SECTION IV JENNISON ASSOCIATES PERSONAL TRADING POLICY 1. GENERAL POLICY AND PROCEDURES The management of Jennison Associates is fully aware of and in no way wishes to deter the security investments of its individual employees. The securities markets, whether equity, fixed income, international or domestic, offer individuals alternative methods of enhancing their personal investments. Due to the nature of our business and our fiduciary responsibility to our client funds, we must protect the firm and its employees from the possibilities of both conflicts of interest and illegal insider trading in regard to their personal security transactions. We have adopted the following policies and procedures on employee personal trading to insure against violations of the law. These policies and procedures are in addition to those set forth in the Code of Ethics and the Policy Statement Against Insider Trading. 2. RECORDKEEPING REQUIREMENTS Jennison Associates, as an investment advisor, is required by Rule 204-2 of the under the Investment Advisers Act of 1940, to keep records of every transaction in securities in which any of its personnel has any direct or indirect beneficial ownership, except transactions effected in any account over which neither the investment adviser nor any advisory representative of the investment adviser has any direct or indirect influence or control and transactions in securities which are direct obligations of the United States, mutual funds and high-quality short-term instruments. This includes transactions for the personal accounts of an employee, as well as, transactions for the accounts of other members of their immediate family (including the spouse, minor children, and adults living in the same household with the officer, director, or employee) for which they or their spouse have any direct or indirect influence or control and trusts of which they are trustees or other accounts in which they have any direct or indirect beneficial interest or direct or indirect influence or control, unless the investment decisions for the account are made by an independent investment manager in a fully discretionary account. Jennison recognizes that some of its employees may, due to their living arrangements, be uncertain as to their obligations under this Personal Trading Policy. If an employee has any question or doubt as to whether they have direct or indirect influence or control over an account, he or she must consult with the Compliance Department as to their status and obligations with respect to the account in question. In addition, Jennison, as a subadviser to investment companies registered under the Investment Company Act of 1940 (e.g., mutual funds), is required by Rule 17j-1 under the 14 Investment Company Act to review and keep records of personal investment activities of "access persons" of these funds, unless the access person does not have direct or indirect influence or control of the accounts. An "access person" is defined as any director, officer, general partner or Advisory Person of a Fund or Fund's Investment Adviser. "Advisory Person" is defined as any employee of the Fund or investment adviser (or of any company in a control relationship to the Fund or investment adviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of investments by a Fund, or whose functions relate to the making of any recommendations with respect to the purchases or sales. Therefore, Jennison's "access persons" and "advisory persons" include the following: portfolio managers, investment analysts, traders, officers and directors. 1) ACCESS PERSONS: PORTFOLIO MANAGERS, INVESTMENT ANALYSTS, TRADERS, AND OTHER JENNISON OFFICERS AND DIRECTORS Access Persons are required to provide the Compliance Department with the following: A) INITIAL HOLDINGS REPORTS: Within 10 days of commencement of employment, an initial holdings report detailing all personal investments (including private placements, and index futures contracts and options thereon, but excluding US Treasury securities, mutual fund shares, and short-term high quality debt instruments). The report should contain the following information: 1. the title, number of shares and principal amount of each investment in which the Access Person had any direct or indirect beneficial ownership; 2. The name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person; and 3. The date that the report is submitted by the Access Person. B) QUARTERLY REPORTS: 1. TRANSACTION REPORTING:Within 10 days after the end of a calendar quarter, with respect to any transaction during the quarter in investments in which the Access Person had any direct or indirect beneficial ownership: a. The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each investment involved; b. The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); c. The price of the investment at which the transaction was effected; d. The name of the broker, dealer or bank with or through which the transaction was effected; and e. The date that the report is submitted by the Access Person. 15 2. PERSONAL SECURITIES ACCOUNT REPORTING: Within 10 days after the end of a calendar quarter, with respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person: a. The name of the broker, dealer or bank with whom the Access Person established the account; b. The date the account was established; and c. The date that the report is submitted by the Access Person. To facilitate compliance with this reporting requirement, Jennison Associates requires that a duplicate copy of all trade confirmations and brokerage statements be supplied directly to Jennison Associates' Compliance Department and to the Prudential's Corporate Compliance Department. In addition, the Compliance Department must also be notified immediately upon the creation of any new personal investment accounts. C) ANNUAL HOLDINGS REPORTS Annually, the following information (which information must be current as of a date no more than 30 days before the report is submitted): 1. The title, number of shares and principal amount of each investment in which the Access Person had any direct or indirect beneficial ownership; 2. The name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and 3. The date that the report is submitted by the Access Person. D) A copy of all discretionary investment advisory contracts or agreements between the officer, director or employee and his investment advisors. E) A copy of Schedule B, Schedule D, and Schedule E from federal income tax returns on an annual basis. 2)ALL OTHEREMPLOYEES OF JENNISON ASSOCIATES In order to ensure compliance with these regulations, all other employees of Jennison Associates shall submit to the Compliance Department: A.) Upon commencement of employment and no less than annually thereafter, a report of all personal securities holdings and a report of every personal brokerage account in which they have any direct or indirect beneficial interest. The Compliance Department must also be notified immediately upon the creation of any new personal investment accounts. 16 The report must disclose the following material: * Name and type of account - single, joint, trust, partnership, etc. * A statement disclosing the general purpose of the account (e.g., as a trustee of XYZ College, I have agreed in accordance with the school's Board of Directors to invest funds on behalf of XYZ for the benefit of its annual scholarship fund). * The institution, bank, or otherwise, where the account is maintained. B.) A report, including confirmation and quarter-end brokerage statements, of every security transaction in which they, their immediate families (including the spouse, minor children, and adults living in the same household with the officer, director, or employee) for which they or their spouse have any direct or indirect influence or control), and trusts of which they are trustees or any other account in which they have a beneficial interest and have participated or direct or indirect influence or control. To facilitate this aspect of employee securities trading, Jennison Associates requires that a duplicate copy of all trade confirmations and brokerage statements be supplied directly to Jennison Associates' Compliance Department and to the Prudential's Corporate Compliance Department. C.) A copy of all discretionary investment advisory contracts or agreements between the officer, director or employee and his investment advisors. D.) A copy of Schedule B, Schedule D, and Schedule E from federal income tax returns on an annual basis. 3) NON-EMPLOYEE DIRECTORS A.) Jennison recognizes that a director not employed by Jennison (i.e., directors designated by The Prudential Insurance Company of America to sit on Jennison's Board of Directors) is subject to his or her employer's own code of ethics, a copy of which and any amendments thereto shall have been made available to Jennison's Compliance Department. The Compliance Department of the non-employee director's employer must represent quarterly to the Jennison Compliance Department that the non-employee director has complied with the recordkeeping and other procedures of its code of ethics during the most recent calendar quarter. Such representation shall also state that such policies and procedures shall be deemed adequate for compliance with both Prudential's and Jennison's Codes of Ethics. If there have been any violations of the employer's code of ethics by such non-employee director, the employer's Compliance Department must submit a detailed report of such violations and what remedial action, if any was taken. 17 B.) Non-employee directors shall be exempt from supplying a copy of Schedule B, D, and Schedule E from their federal income tax returns. C.) Additionally, all non-employee directors shall be exempt from the pre-clearance procedures as described below. 3. PRE-CLEARANCE PROCEDURES All directors, officers, and employees of Jennison Associates may need to obtain clearance from the Personal Investment Committee prior to effecting any securities transaction in which they or their immediate families (including the spouse, minor children, and adults living in the same household with the officer, director, or employee) for which they or their spouse have any direct or indirect influence or control, have a beneficial interest on behalf of a trust of which they are trustee, or for any other account in which they have a beneficial interest or direct or indirect influence or control. Determination as to whether or not a particular transaction requires pre-approval should be made by consulting the "Compliance and Reporting of Personal Transactions Matrix" found on Exhibit A. Please note, voluntary tender offers are a recent addition to the "Compliance and Reporting of Personal Transactions" matrix. They are both a reportable transaction and one that requires pre-approval. Approval of tendering shares into a tender offer shall be determined on a case-by-case basis by the Personal Investment Committee. The Personal Investment Committee will make its decision of whether to clear a proposed trade on the basis of the personal trading restrictions set forth -below. A member of the Compliance Department shall promptly notify the officer, director, or employee of approval or denial to trade the requested security. Notification of approval or denial to trade may be verbally given as soon as possible; however, it shall be confirmed in writing within 24 hours of the verbal notification. Please note that the approval granted will be valid ONLY for that day in which the approval has been obtained; provided, however, that approved orders for securities traded in certain foreign markets may be executed within 2 business days from the date pre-clearance is granted, depending on the time at which approval is granted and the hours of the markets on which the security is traded are open. In other words, if a trade was not effected on the day for which approval was originally sought, a new approval form must be re-submitted on each subsequent day in which trading may occur. Or, if the security for which approval has been granted is traded on foreign markets, approval is valid for an additional day (i.e., the day for which approval was granted and the day following the day for which approval was granted). Only transactions where the investment decisions for the account are made by an independent investment manager in a fully discretionary account will be exempt from the pre-clearance procedures. Copies of the agreement of such discretionary accounts, as well as transaction statements or another comparable portfolio report, must be submitted on a quarterly basis to the Compliance Department for review and record retention. 18 Written notice of your intended securities activities must be filed for approval prior to effecting any transaction for which prior approval is required. The name of the security, the date, the nature of the transaction (purchase or sale), the price, the name and relationship to you of the account holder (self, son, daughter, spouse, father, etc.), and the name of the broker-dealer or bank involved in the transaction must be disclosed in such written notice. Such written notice should be submitted on the Pre-Clearance Transaction Request Forms (Equity/Fixed Income) which can be obtained from the Compliance Department. If proper procedures are not complied with, action will be taken against the employee. All violations shall go before the Personal Investment Committee and Jennison's Compliance Committee. The violators may be asked to reverse the transaction and/or transfer the security or profits gained over to the accounts of Jennison Associates. In addition, penalties for personal trading violations shall be determined in accordance with the penalties schedule set forth in Section 5, "Penalties for Violating Jennison Associates' Personal Trading Policies." Each situation and its relevance will be given due weight. If non-compliance with the pre-clearance procedure becomes repetitive, dismissal, by the Board of Directors, of the employee can result. 4. PERSONAL TRADING POLICY The following rules, regulations and restrictions have been set forth by the Board of Directors and apply to the personal security transactions of all employees. These rules will govern whether clearance for a proposed transaction will be granted. These rules also apply to the sale of securities once the purchase of a security has been pre-approved and completed. No director, officer or employee of the Company may effect for himself, an immediate family member (including the spouse, minor children, and adults living in the same household with the officer, director, or employee) for which they or their spouse have any direct or indirect influence or control, or any trust of which they are trustee, or any other account in which they have a beneficial interest or direct or indirect influence or control any transaction in a security, or recommend any such transaction in a security, of which, to his/her knowledge, the Company has effected the same for any of its clients, if such transaction would in any way conflict with, or be detrimental to, the interests of such client, or if such transaction was effected with prior knowledge of material, non-public information. Except in particular cases in which the Personal Investment Committee has determined in advance that proposed transactions would not conflict with the foregoing policy, the following rules shall govern all transactions (and recommendations) by all corporate personnel for their own accounts, for their immediate family's accounts (including accounts of the spouse, minor children, and adults living in the same household with the officer, director, or employee) for which they or their spouse have any direct or indirect influence or control, and any trust of which they are trustee, or any other account in which they have a beneficial interest or direct or indirect influence or control. The provisions of the following paragraphs do not necessarily imply that the Personal Investment Committee will conclude that the transactions or recommendations to which they 19 relate are in violation of the foregoing policy, but rather are designed to indicate the transactions for which PRIOR APPROVAL should be obtained to ensure that no conflict occurs. A. PERSONAL TRADING BY ALL EMPLOYEE DIRECTORS, OFFICERS, AND EMPLOYEES (1.) Neither any security recommended, or proposed to be recommended to any client for purchase, nor any security purchased or proposed to be purchased for any client may be purchased by any corporate personnel if such purchase will interfere in any way with the orderly purchase of such security by any client. (2.) Neither any security recommended, or proposed to be recommended to any client for sale, nor any security sold, or proposed to be sold, for any client may be sold by any corporate personnel if such sale will interfere in any way with the orderly sale of such security by any client. (3.) No security may be sold after being recommended to any client for purchase or after being purchased for any client, and no security may be purchased after being recommended to any client for sale or after being sold for any client, if the sale or purchase is effected with a view to making a profit on the anticipated market action of the security resulting from such recommendation, purchase or sale. (4.) In order to prevent even the appearance of a violation of this rule or a conflict of interest with a client account , you should refrain from trading in the seven (7) calendar days before and after Jennison trades in that security. If an employee trades during a blackout period, disgorgement may be required. For example, if an Employee's trade is pre-approved and executed and subsequently, within seven days of the transaction, the Firm trades on behalf of Jennison's clients, the Jennison Personal Investment Committee shall review the personal trade in light of firm trading activity and determine on a case by case basis the appropriate action. If the Personal Investment Committee finds that a client is disadvantaged by the personal trade, the trader may be required to reverse the trade and disgorge to the firm any difference due to any incremental price advantage over the client's transaction. B. SHORT-TERM TRADING PROFITS All directors (both employees and non-employees), officers, and employees of Jennison Associates are prohibited from profiting in their own accounts and the accounts of their immediate families (including the spouse, minor children, and adults living in the same household with the officer, director, or employee) for which they or their spouse have any direct or indirect influence or control or any trust of which they are a trustee, or for any other account in which they have a beneficial interest or direct or indirect influence or control from the purchase and 20 sale, or the sale and purchase of the same or equivalent securities within 60 calendar days. Any profits realized from the purchase and sale or the sale and purchase of the same (or equivalent) securities within the 60 day restriction period shall be disgorged to the firm, net of taxes. "Profits realized" shall be calculated consistent with interpretations under section 16(b) of the Securities Exchange Act of 1934, as amended, and the regulations thereunder, which require matching any purchase and sale that occur with in a 60 calendar day period across all accounts over which a Jennison director, officer or employee has a direct or indirect beneficial interest (including accounts that hold securities held by members of a person's immediate family sharing the same household) over which the person has direct or indirect control or influence without regard to the order of the purchase or the sale during the period. As such, a person who sold a security and then repurchased the same (or equivalent) security would need to disgorge a profit if matching the purchase and the sale would result in a profit. Conversely, if matching the purchase and sale would result in a loss, profits would not be disgorged. The prohibition on short-term trading profits shall not apply to trading of index options and index futures contracts and options on index futures contracts on broad based indices. However, such transactions remain subject to the pre-clearance procedures and other applicable procedures. A list of broad-based indices is provided on Exhibit B. C. No purchase of a security by any of the corporate personnel shall be made if the purchase would deprive any of Jennison's clients of an investment opportunity, after taking into account (in determining whether such purchase would constitute an investment opportunity) the client's investments and investment objectives and whether the opportunity is being offered to corporate personnel by virtue of his or her position at Jennison. D. None of the corporate personnel may purchase new issues of either common stock or convertible securities except in accordance with item E below. This prohibition does not apply to new issues of shares of open-end investment companies. All corporate personnel shall also obtain prior written approval of the Personal Investment Committee in the form of a completed "Request to Buy or Sell Securities" form before effecting any purchase of securities on a `private placement' basis. Such approval will take into account, among other factors, whether the investment opportunity should be reserved for Jennison's clients and whether the opportunity is being offered to corporate personnel by virtue of his or her position at Jennison. E. Subject to the pre-clearance and reporting procedures, corporate personnel may purchase securities on the date of issuance, provided that such securities are acquired in the secondary market. Upon requesting approval of such transactions, employees must acknowledge that he or she is aware that such request for approval may not be submitted until AFTER the security has been issued to the public and is trading at prevailing market prices in the secondary market. Requests for 21 approval of such transactions must be accompanied by a copy of the final prospectus. Additionally, trade confirmations of executions of such transaction must be received by the Compliance Department no later than the close of business on the day following execution of such trade. If such trade confirmation is not received, the employee may be requested to reverse (subject to pre-approval) the trade, and any profits or losses avoided must be disgorged to the firm. F. Subject to the preclearance and reporting procedures, corporate personnel may effect purchases upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent that such rights were acquired from such issuer, and sales of such rights so acquired. In the event that approval to exercise such rights is denied, subject to preclearance and reporting procedures, corporate personnel may obtain permission to sell such rights on the last day that such rights may be traded. G. Any transactions in index futures contracts and index options, including those effected on a broad-based index, are subject to the preclearance and reporting requirements. H. No director, officer, or employee of Jennison Associates may profit in their personal securities accounts or the accounts of their immediate families (including the spouse, minor children, and adults living in the same household with the officer, director, or employee) for which they or their spouse have any direct or indirect influence or control or any trust of which they are a trustee, or for any other account in which they have a beneficial interest or direct or indirect influence or control by short selling or purchasing put options on securities that represent a position in any portfolios managed by Jennison on behalf of its clients. Any profits realized from such transactions shall be disgorged to the Firm, net of taxes. Put options, short sales and short sales against the box are subject to the preclearance rules. I. No employee, director, or officer of Jennison Associates may participate in investment clubs. J. While participation in employee stock purchase plans and employee stock option plans need not be pre-approved, copies of the terms of the plans should be provided to the Compliance Department as soon as possible so that the application of the various provisions of the Personal Trading Policy may be determined (E.G., pre-approval, reporting, short-term trading profits ban). Corporate personnel must obtain pre-approval for any discretionary disposition of securities or discretionary exercise of options acquired pursuant to participation in an employee stock purchase or employee stock option plan. Nondiscretionary dispositions of securities or exercise are not subject to pre-approval. Additionally, corporate personnel should report holdings of such securities and options on an annual basis. 22 K. Subject to pre-clearance, long-term investing through direct stock purchase plans is permitted. The terms of the plan, the initial investment, and any purchases through automatic debit must be provided to and approved by the Personal Investment Committee. Any changes to the original terms of approval, E.G., increasing, decreasing, or termination of participation in the plan, as well as any sales or discretionary purchase of securities in the plan must be submitted for pre-clearance. Provided that the automatic monthly purchases have been approved by the Personal Investment Committee, each automatic monthly purchase need not be submitted for pre-approval. "Profits realized" for purposes of applying the ban on short-term trading profits will be determined by matching the proposed discretionary purchase or sale transaction against the most recent discretionary purchase or sale, as applicable, not the most recent automatic purchase or sale (if applicable). Additionally, holdings should be disclosed quarterly. EXCEPTIONS TO THE PERSONAL TRADING POLICY Notwithstanding the foregoing restrictions, exceptions to certain provisions (e.g., blackout period, pre-clearance procedures, and short-term trading profits) of the Personal Trading Policy may be granted on a case by case basis when no abuse is involved and the equities of the situation strongly support an exception to the rule. Investments in the following instruments are not bound to the rules and restrictions as set forth above and may be made without the approval of the Investment Compliance Committee: governments, agencies, money markets, repurchase orders, reverse repurchase orders and open-ended registered investment companies. All employees, on a quarterly basis, must sign a statement that they, during said period, have been in full compliance with all personal and insider trading rules and regulations set forth within Jennison Associates' Code of Ethics, Policy Statement on Insider Trading and Personal Trading Policy. 23 5. PENALTIES FOR VIOLATIONS OF JENNISON ASSOCIATES' PERSONAL TRADING POLICIES Violations of Jennison's Personal Trading Policy and Procedures, while in most cases may be inadvertent, must not occur. It is important that every employee abide by the policies established by the Board of Directors. Penalties will be assessed in accordance with the schedules set forth below. THESE, HOWEVER, ARE MINIMUM PENALTIES. THE FIRM RESERVES THE RIGHT TO TAKE ANY OTHER APPROPRIATE ACTION, INCLUDING TERMINATION. All violations and penalties imposed will be reported to Jennison's Compliance Committee on a monthly basis. In addition, the Compliance Committee will provide the Board of Directors with an annual report which at minimum: (1) summarizes existing procedures concerning personal investing and any changes in procedures made during the preceding year; (2) identifies any violations requiring significant remedial action during the preceding year; and (3) identifies any recommended changes in existing restrictions or procedures based upon Jennison's experience under its policies and procedures, evolving industry practices, or developments in applicable laws and regulations. TYPE OF VIOLATION A. PENALTIES FOR FAILURE TO SECURE PRE-APPROVAL The minimum penalties for failure to pre-clear personal securities transactions include POSSIBLE REVERSAL OF THE TRADE, POSSIBLE DISGORGEMENT OF PROFITS, AS WELL AS THE IMPOSITION OF ADDITIONAL CASH PENALTIES. Please note that subsections 2 and 3 have been applied retroactively from its effective date. 1. FAILURE TO PRE-CLEAR PURCHASE Depending on the circumstances of the violation, the individual may be asked to reverse the trade (i.e., the securities must be sold). Any profits realized from the subsequent sale, net of taxes must be turned over to the firm. PLEASE NOTE: The sale or reversal of such trade must be submitted for pre-approval. 2. FAILURE TO PRE-CLEAR SALES THAT RESULT IN LONG-TERM CAPITAL GAINS Depending on the circumstances of the violation, the firm may require that profits realized from the sale of securities that are defined as "long-term capital gains" by Internal Revenue Code (the "IRC") section 1222 and the rules thereunder, as amended, to be turned over to the firm, subject to the following maximum amounts: 24
JALLC POSITION DISGORGEMENT PENALTY Senior Vice Presidents and above Realized long-term capital gain, net of taxes, up to $10,000.00 ------------------------------------------------------------------------------------------ Vice Presidents and Assistant Vice Presidents Realized long-term capital gain, net of taxes, up to $5,000.00 ------------------------------------------------------------------------------------------ All other JALLC Personnel 25% of the realized long-term gain, irrespective of taxes, up to $3,000.00 ------------------------------------------------------------------------------------------
3. FAILURE TO PRE-CLEAR SALES THAT RESULT IN SHORT-TERM CAPITAL GAINS Depending on the nature of the violation, the firm may require that all profits realized from sales that result in profits that are defined as "short-term capital gains" by IRC section 1222 and the rules thereunder, as amended. Please note, however, any profits that result from violating the ban on short-term trading profits are addressed in section 5.C. "Penalties for Violation of Short-Term Trading Profit Rule." 4. ADDITIONAL CASH PENALTIES
VP'S AND ABOVE OTHER JALLC PERSONNEL -------------- --------------------- FIRST OFFENSE None/Warning None/Warning SECOND OFFENSE $1000 $200 THIRD OFFENSE $2000 $300 FOURTH OFFENSE $3000 $400 FIFTH OFFENSE $4000 & Automatic Notification of the $500 & Automatic Notification of the Board Board of Directors of Directors
NOTWITHSTANDING THE FOREGOING, JENNISON RESERVES THE RIGHT TO NOTIFY THE BOARD OF DIRECTORS FOR ANY VIOLATION. Penalties shall be assessed over a rolling three year period. For example, if over a three year period (year 1 through year 3), a person had four violations, two in year 1, and one in each of the following years, the last violation in year 3 would be considered a fourth offense. However, if in the subsequent year (year 4), the person only had one violation of the policy, this violation would be penalized at the third offense level because over the subsequent three year period (from year 2 through year 4), there were only three violations. Thus, if a person had no violations over a three year period, a subsequent offense would be considered a first offense, notwithstanding the fact that the person may have violated the policy prior to the three year period. B. FAILURE TO COMPLY WITH RECORDKEEPING REQUIREMENTS Such violations occur if Jennison does not receive a broker confirmation within ten (10) business days following the end of the quarter in which a transaction occurs or if JACC does not routinely receive brokerage statements. Evidence of written notices to brokers of Jennison's requirement and assistance in resolving problems will be taken into consideration in determining the appropriateness of penalties. 25
VP'S AND ABOVE OTHER JALLC PERSONNEL -------------- --------------------- FIRST OFFENSE None/Warning None/Warning SECOND OFFENSE $200 $50 THIRD OFFENSE $500 $100 FOURTH OFFENSE $600 $200 FIFTH OFFENSE $700& Automatic Notification of the $300 & Automatic Notification of the Board Board
NOTWITHSTANDING THE FOREGOING, JENNISON RESERVES THE RIGHT TO NOTIFY THE BOARD OF DIRECTORS FOR ANY VIOLATION. C. PENALTY FOR VIOLATION OF SHORT-TERM TRADING PROFIT RULE Any profits realized from the purchase and sale or the sale and purchase of the same (or equivalent) securities within 60 calendar days shall be disgorged to the firm, net of taxes. "Profits realized" shall be calculated consistent with interpretations under section 16(b) of the Securities Exchange Act of 1934, as amended, which requires matching any purchase and sale that occur with in a 60 calendar day period without regard to the order of the purchase or the sale during the period. As such, a person who sold a security and then repurchased the same (or equivalent) security would need to disgorge a profit if matching the purchase and the sale would result in a profit. Conversely, if matching the purchase and sale would result in a loss, profits would not be disgorged. D. OTHER POLICY INFRINGEMENTS WILL BE DEALT WITH ON A CASE BY CASE BASIS. PENALTIES WILL BE COMMENSURATE WITH THE SEVERITY OF THE VIOLATION. Serious violations would include: A. Failure to abide by the determination of the Personal Committee. B. Failure to submit pre-approval for securities in which Jennison actively trades. E. DISGORGED PROFITS Profits disgorged to the firm shall be donated to a charitable organization selected by the firm in the name of the firm. Such funds may be donated to such organization at such time as the firm determines. 26 EXHIBIT A COMPLIANCE AND REPORTING OF PERSONAL TRANSACTIONS MATRIX
Investment Sub-Category Required Reportable If Category/Method ------------ Pre-Approval (Y/N) reportable, - --------------- (Y/N) ---------- minimum ------------ reporting frequency - -------------------------------------------------------------------------------------------------------------------- BONDS Treasury Bills, Notes, Bonds N N N/A Agency N Y Quarterly Corporates Y Y Quarterly MBS N Y Quarterly ABS N Y Quarterly CMO's Y Y Quarterly Municipals N Y Quarterly Convertibles Y Y Quarterly STOCKS Common Y Y Quarterly Preferred Y Y Quarterly Rights Y Y Quarterly Warrants Y Y Quarterly Automatic Dividend Reinvestments N N N/A Optional Dividend Reinvestments Y Y Quarterly Direct Stock Purchase Plans with automatic Y Y Quarterly investments Employee Stock Purchase/Option Plan Y* Y * OPEN-END MUTUAL FUNDS Affiliated Investments: N N N/A Non-Affiliated Funds N N N/A CLOSED END FUNDS & UNIT INVESTMENT TRUSTS All Affiliated & Non-Affiliated Funds N Y Quarterly US Funds (including SPDRs, NASDAQ 100 N Y Quarterly Index Tracking Shares) Foreign Funds N Y Quarterly DERIVATIVES Any exchange traded, NASDAQ, or OTC option or futures contract, including, but not limited to: Financial Futures ** Y Quarterly Commodity Futures N Y Quarterly Options on Futures ** Y Quarterly Options on Securities ** Y Quarterly Non-Broad Based Index Options Y Y Quarterly Non Broad Based Index Futures Y Y Quarterly Contracts and Options on Non-Broad Based Index Futures Contracts Broad Based Index Options N Y Quarterly Broad Based Index Futures Contracts N Y Quarterly and Options on Broad Based Index Futures Contracts LIMITED PARTNERSHIPS, PRIVATE PLACEMENTS, & PRIVATE INVESTMENTS Y Y Quarterly VOLUNTARY TENDER OFFERS Y Y Quarterly
* Pre-approval of sales of securities or exercises of options acquired through employee stock purchase or employee stock option plans are required. Holdings are required to be reported annually; transactions subject to pre-approval are required to be reported quarterly. Pre-approval is not required to participate in such plans. ** Pre-approval of a personal derivative securities transaction is required if the underlying security requires pre-approval. 27 EXHIBIT B BROAD-BASED INDICES --------------------------------------------------- Nikkei 300 Index CI/Euro --------------------------------------------------- S&P 100 Close/Amer Index --------------------------------------------------- S&P 100 Close/Amer Index --------------------------------------------------- S&P 100 Close/Amer Index --------------------------------------------------- S&P 500 Index --------------------------------------------------- S&P 500 Open/Euro Index --------------------------------------------------- S&P 500 Open/Euro Index --------------------------------------------------- S&P 500 (Wrap) --------------------------------------------------- S&P 500 Open/Euro Index --------------------------------------------------- Russell 2000 Open/Euro Index --------------------------------------------------- Russell 2000 Open/Euro Index --------------------------------------------------- S&P Midcap 400 Open/Euro Index --------------------------------------------------- NASDAQ- 100 Open/Euro Index --------------------------------------------------- NASDAQ- 100 Open/Euro Index --------------------------------------------------- NASDAQ- 100 Open/Euro Index --------------------------------------------------- NASDAQ- 100 Open/Euro Index --------------------------------------------------- NASDAQ- 100 Open/Euro Index --------------------------------------------------- S&P Small Cap 600 --------------------------------------------------- U.S. Top 100 Sector --------------------------------------------------- S&P 500 Long-Term Close --------------------------------------------------- Russell 2000 L-T Open./Euro --------------------------------------------------- Russell 2000 Long-Term Index ---------------------------------------------------
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