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                                  TARGET FUNDS

                      Statement of Additional Information
                               September 17, 1999

     Target Funds (the Trust) is an open-end, management investment company
currently composed of six separate investment portfolios (the Funds)
professionally managed by Prudential Investments Fund Management LLC (PIFM or
the Manager). Each Fund benefits from discretionary advisory services provided
by an investment adviser (each, an Adviser, collectively, the Advisers)
identified, retained, supervised and compensated by the Manager. The Trust
consists of the following six Funds:

  - Large Capitalization Growth Fund
  - Large Capitalization Value Fund
  - Small Capitalization Growth Fund
  - Small Capitalization Value Fund
  - International Equity Fund
  - Total Return Bond Fund

     The Trust'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 Trust's Prospectus dated September 17, 1999, a copy
of which may be obtained from the Trust upon request.

                               TABLE OF CONTENTS

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                                                              PAGE
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History of the Trust........................................  B-2
Description of the Funds, Their Investments and Risks.......  B-2
Investment Restrictions.....................................  B-32
Management of the Trust.....................................  B-34
Control Persons and Principal Holders of Securities.........  B-36
Investment Advisory and Other Services......................  B-37
Brokerage Allocation and Other Practices....................  B-43
Capital Shares, Other Securities and Organization...........  B-45
Purchase, Redemption and Pricing of Fund Shares.............  B-46
Shareholder Investment Account..............................  B-57
Net Asset Value.............................................  B-62
Taxes, Dividends and Distributions..........................  B-62
Performance Information.....................................  B-65
Report of Independent Accountants...........................  B-67
Financial Statements........................................  B-68
Appendix I -- Historical Performance Data...................  I-1
Appendix II -- General Investment Information...............  II-1
Appendix III -- Information Relating to Prudential..........  III-1
Appendix IV -- Glossary of Indices..........................  IV-1
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MF189B
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                              HISTORY OF THE TRUST

     The Trust was organized as an unincorporated business trust on July 8, 1999
under the laws of the State of Delaware.

             DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS

     (a) CLASSIFICATION.  The Trust is an open-end management investment
company. Each of the Funds is classified as a diversified fund.

     (b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS.  The investment
objectives of the Funds and the principal investment policies and strategies for
seeking to achieve the Funds' objectives are set forth in the Trust's
Prospectus. This section provides additional information on the principal
investment policies and strategies of the Funds, as well as information on
certain non-principal investment policies and strategies. The Funds may not be
successful in achieving their respective objectives and you could lose money.

U.S. GOVERNMENT SECURITIES

     Each Fund may invest in U.S. Government securities.

     U.S. TREASURY SECURITIES.  U.S. Treasury securities include bills, notes,
bonds and other debt securities issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.

     OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES.  Securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government include, but are not limited to, GNMA,
FNMA and FHLMC securities. Obligations of GNMA, the Federal Housing
Administration, Farmers Home Administration and the Export-Import Bank are
backed by the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United States, the
Trust must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments. Such securities include obligations issued by the Student Loan
Marketing Association (SLMA), FNMA and FHLMC, each of which may borrow from the
U.S. Treasury to meet its obligations, although the U.S. Treasury is under no
obligation to lend to such entities. GNMA, FNMA and FHLMC may also issue
collateralized mortgage obligations.

     STRIPPED U.S. GOVERNMENT SECURITIES. A Fund may invest in component parts
of U.S. Government securities, namely either the corpus (principal) of such
obligations or one of the interest payments scheduled to be paid on such
obligations. These obligations may take the form of (1) obligations from which
the interest coupons have been stripped; (2) the interest coupons that are
stripped; and (3) book-entries at a Federal Reserve member bank representing
ownership of obligation components.

     MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES.  A Fund may invest in mortgage backed securities
and other derivative mortgage products, including those representing an
undivided ownership interest in a pool of mortgages, e.g., GNMA, FNMA and FHLMC
certificates where the U.S. Government or its agencies or instrumentalities
guarantees the payment of interest and principal of these securities. However,
these guarantees do not extend to the securities' yield or value, which are
likely to vary inversely with fluctuations in interest rates, nor do these
guarantees extend to the yield or value of a Fund's shares. See "Mortgage-Backed
Securities and Asset Backed Securities" below.

     Mortgages backing the securities which may be purchased by a Fund include
conventional thirty-year fixed-rate mortgages, graduated payment mortgages,
fifteen-year mortgages, adjustable
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rate mortgages and balloon payment mortgages. A balloon payment mortgage backed
security is an amortized mortgage security with installments of principal and
interest, the last installment of which is predominantly principal. All of these
mortgages can be used to create "pass-through securities." A pass-through
security is formed when mortgages are pooled together and undivided interests in
the pool or pools are sold. The cash flow from the mortgages is passed through
to the holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an undivided mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. The remaining expected average life of a pool of
mortgage loans underlying a mortgage backed security is a prediction of when the
mortgage loans will be repaid and is based upon a variety of factors, such as
the demographic and geographic characteristics of the borrowers and the
mortgaged properties, the length of time that each of the mortgage loans has
been outstanding, the interest rates payable on the mortgage loans and the
current interest rate environment.

     In addition to GNMA, FNMA or FHLMC certificates through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, a Fund may also invest in mortgage pass-through
securities issued by the U.S. Government or its agencies and instrumentalities,
commonly referred to as mortgage-backed security strips or MBS strips. MBS
strips are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.

     During periods of declining interest rates, prepayment of mortgages
underlying mortgage backed securities can be expected to accelerate. When
mortgage obligations are prepaid, a Fund reinvests the prepaid amounts in
securities, the yields which reflect interest rates prevailing at that time.
Therefore, a Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages are reinvested in securities which have lower yields
than the prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium generally will result in capital losses.
During periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending the
projected average maturity of the mortgage-backed securities. This maturity
extension risk may effectively change a security which was considered short- or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short- or intermediate-term securities.

     ZERO COUPON SECURITIES. Zero coupon U.S. Government securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon U.S. Government securities do not require the
periodic payment of interest. These investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of cash. These investments
may experience greater volatility in market value than U.S. Government
securities that make regular payments of interest. A Fund accrues income on
these investments for tax

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and accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the liquidation
of other portfolio securities to satisfy the Fund's distribution obligations, in
which case the Fund will forego the purchase of additional income producing
assets with these funds. Zero coupon U.S. Government securities include STRIPS
and CUBES, which are issued by the U.S. Treasury as component parts of U.S.
Treasury bonds and represent scheduled interest and principal payments on the
bonds.

     SPECIAL CONSIDERATIONS.  Fixed-income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed-rate U.S. Government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. Government securities
will not affect investment income from those securities, they may affect the net
asset value of a Fund.

     At a time when a Fund has written call options on a portion of its U.S.
Government securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the Fund
above the strike price would likely be partially or wholly offset by unrealized
losses on call options written by a Fund. The termination of option positions
under these conditions would generally result in the realization of capital
losses, which would reduce a Fund's capital gains distribution. Accordingly, a
Fund would generally seek to realize capital gains to offset realized losses by
selling portfolio securities. In such circumstances, however, it is likely that
the proceeds of such sales would be reinvested in lower yielding securities.

CUSTODIAL RECEIPTS

     Each Fund may invest in receipts evidencing the component parts (corpus or
coupons) of U.S. Government obligations that have not actually been stripped.
Such receipts evidence ownership of component parts of U.S. Government
obligations (corpus or coupons) purchased by a third party (typically an
investment banking firm) and held on behalf of the third party in physical or
book entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. These custodial receipts include
"Treasury Receipts," "Treasury Investment Growth Receipts" (TIGRs) and
"Certificates of Accrual on Treasury Securities" (CATS). Each Fund will not
invest more than 5% of its net assets in such custodial receipts.

     Custodial receipts held by a third party are not issued or guaranteed by
the United States Government and are not considered U.S. Government securities.
Each Fund may also invest in such custodial receipts.

MONEY MARKET INSTRUMENTS

     Each Fund may invest in high-quality money market instruments, including
commercial paper of a U.S. or non-U.S. company or foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. Money market obligations will be generally U.S.
dollar denominated. Commercial paper will be rated, at the time of purchase, at
least "A-2" by S&P or "Prime-2" by Moody's, or the equivalent by another NRSRO
or, if not rated, issued by an entity having an outstanding unsecured debt issue
rated at least "A" or "A-2" by S&P or "A" or "Prime-2" by Moody's or the
equivalent by another NRSRO.

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CORPORATE AND OTHER DEBT OBLIGATIONS

     The Large Capitalization Value Fund, Small Capitalization Value Fund,
International Equity Fund and Total Return Bond Fund may each invest in
corporate and other debt obligations. Except where otherwise indicated, each
Fund will invest in securities rated A or better or determined by the Adviser to
be of comparable quality. These debt securities may have adjustable or fixed
rates of interest and in certain instances may be secured by assets of the
issuer. Adjustable rate corporate debt securities may have features similar to
those of adjustable rate mortgage backed securities, but corporate debt
securities, unlike mortgage backed securities, are not subject to prepayment
risk other than through contractual call provisions which generally impose a
penalty for prepayment. Fixed-rate debt securities may also be subject to call
provisions.

     The market value of fixed-income obligations of the Funds will be affected
by general changes in interest rates, which will result in increases or
decreases in the value of the obligations held by the Funds. The market value of
the obligations held by a Fund can be expected to vary inversely with changes in
prevailing interest rates. Investors also should recognize that, in periods of
declining interest rates, a Fund's yield will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, a Fund's yield
will tend to be somewhat lower. Also, when interest rates are falling, the
inflow of net new money to a Fund from the continuous sale of its shares will
tend to be invested in instruments producing lower yields than the balance of
its portfolio, thereby reducing the Fund's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Fund may invest may not yield as high a level of current income as
might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.

     Ratings made available by S&P, Moody's and other NRSRO's are relative and
subjective and are not absolute standards of quality. Although these ratings are
initial criteria for selection of portfolio investments, each Adviser will also
make its own evaluation of these securities on behalf of the Fund. Among the
factors that will be considered are the long-term ability of the issuers to pay
principal and interest and general economic trends.

     MEDIUM AND LOWER-RATED SECURITIES.  The Total Return Bond Fund may invest
in medium (i.e., rated Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO) and lower-rated securities (i.e., rated lower than Baa by Moody's or
lower than BBB by S&P or the equivalent by another NRSRO). However, the Fund
will not purchase any security rated lower than B by Moody's or S&P or the
equivalent by another NRSRO. Securities rated Baa by Moody's or BBB by S&P or
the equivalent by another NRSRO, although considered investment grade, possess
speculative characteristics, including the risk of default, and changes in
economic or other conditions are more likely to impair the ability of issuers of
these securities to make interest and principal payments than is the case with
respect to issuers of higher-grade bonds.

     Generally, medium or lower-rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds" (i.e., securities
rated lower than Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO), offer a higher current yield than is offered by higher-rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality bonds. In addition, medium and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
The risk of loss due to default by these issuers is significantly greater
because medium and lower-rated securities and unrated securities of comparable
quality generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Advisers, under the supervision of the
Manager and the Trustees, in evaluating the creditworthiness of an issue whether
rated or

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unrated, take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters.

     In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for each Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for a Fund to purchase and may also have the effect
of limiting the ability of a Fund to sell securities at their fair value either
to meet redemption requests or to respond to changes in the economy or the
financial markets.

     Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may have
to replace the security with a lower-yielding security, resulting in a decreased
return for investors. Also, as the principal value of bonds moves inversely with
movements in interest rates, in the event of rising interest rates the value of
the securities held by a Fund may decline proportionately more than a portfolio
consisting of higher-rated securities. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated bonds, resulting in a
decline in the overall credit quality of the securities held by the Fund and
increasing the exposure of the Fund to the risks of lower-rated securities.
Investments in zero coupon bonds may be more speculative and subject to greater
fluctuations in value due to changes in interest rates than bonds that pay
interest currently.

     Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicates. See "Description of Security Ratings" in the
Prospectus.

     Subsequent to its purchase by a Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of these securities by the Fund, but
the Adviser will consider this event in its determination of whether the Fund
should continue to hold the securities.

     COMMERCIAL PAPER.  Each Fund may invest in commercial paper. Commercial
paper consists of short-term (usually from 1 to 270 days) unsecured promissory
notes issued by corporations in order to finance their current operations. A
variable amount master demand note (which is a type of commercial paper)
represents a direct borrowing arrangement involving periodically fluctuating
rates of interest under a letter agreement between a commercial paper issuer and
an institutional lender pursuant to which the lender may determine to invest
varying amounts.

     ADJUSTABLE RATE SECURITIES.  The Large Capitalization Value Portfolio and
Total Return Bond Fund may each invest in adjustable rate securities. Adjustable
rate securities are debt securities having interest rates which are adjusted or
reset at periodic intervals ranging from one month to three years. The interest
rate of an adjustable rate security typically responds to changes in general
market levels of interest. The interest paid on any particular adjustable rate
security is a function of the index upon which the interest rate of that
security is based.

     The adjustable rate feature of the securities in which a Fund may invest
will tend to reduce sharp changes in a Fund's net asset value in response to
normal interest rate fluctuations. As the coupon rates of a Fund's adjustable
rate securities are reset periodically, yields of these portfolio securities
will reflect changes in market rates and should cause the net asset value of a
Fund's shares to fluctuate less dramatically than that of a fund invested in
long-term fixed-rate securities. However, while the adjustable rate feature of
such securities will tend to limit sharp swings in a
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Fund's net asset value in response to movements in general market interest
rates, it is anticipated that during periods of fluctuations in interest rates,
the net asset value of a Fund will fluctuate.

     INFLATION-INDEXED BONDS.  The Total Return Bond Fund may invest in
inflation-indexed bonds issued by governmental entities and corporations.
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. Such bonds generally
are issued at an interest rate lower than typical bonds, but are expected to
retain their principal value over time. The interest rate on these bonds is
fixed at issuance, but over the life of the bond this interest may be paid on an
increasing principal value, which has been adjusted for inflation.

     Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.

FOREIGN SECURITIES

     The International Equity and Total Return Bond Funds may each invest in
foreign equity and debt securities, including securities of foreign
corporations, obligations of foreign branches of U.S. banks and securities
issued by foreign governments.

     A Fund's investments in foreign government securities may include debt
securities issued or guaranteed, as to payment of principal and interest, by
governments, semi-governmental entities, governmental agencies, supranational
entities and other governmental entities (collectively, the Government Entities)
of countries considered stable by an Adviser. A "supranational entity" is an
entity constituted by the national governments of several countries to promote
economic development. Examples of such supranational entities include, among
others, the World Bank, the European Investment Bank and the Asian Development
Bank. Debt securities of "semi-governmental entities" are issued by entities
owned by a national, state, or equivalent government or are obligations of a
political unit that are not backed by the national government's "full faith and
credit" and general taxing powers. Examples of semi-governmental issuers
include, among others, the Province of Ontario and the City of Stockholm.
Foreign government securities also include mortgage-backed securities issued by
foreign government entities including semi-governmental entities.

     A Fund may invest in mortgage-backed securities issued or guaranteed by
foreign government entities including semi-governmental entities, and Brady
Bonds, which are long-term bonds issued by government entities in developing
countries as part of a restructuring of their commercial loans.

     The values of foreign investments are affected by changes in currency rates
or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.

     CURRENCY RISKS.  Because the majority of the securities purchased by the
International Equity Fund are denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value; the value of interest earned; gains and losses realized on the sale
of securities; and net investment income and capital gain, if any, to be
distributed to shareholders by the Fund. If the value of a foreign currency
rises against the U.S. dollar, the value of the Fund's assets denominated in
that currency will increase; correspondingly, if

                                       B-7
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the value of a foreign currency declines against the U.S. dollar, the value of
the Fund's assets denominated in that currency will decrease. Under the Internal
Revenue Code, the Fund is required to separately account for the foreign
currency component of gains or losses, which will usually be viewed under the
Internal Revenue Code as items of ordinary and distributable income or loss,
thus affecting the Fund's distributable income.

     The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental interpretation, speculation and
other economic and political conditions. Although the International Equity Fund
values its assets daily in U.S. dollars, the Fund will not convert its holdings
of foreign currencies to U.S. dollars daily. When the Fund converts its holdings
to another currency, it may incur conversion costs. Foreign exchange dealers may
realize a profit on the difference between the price at which they buy and sell
currencies.

     RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES.  On January 1, 1999, 11 of the 15 member states of the European
Monetary Union introduced the "euro" as a common currency. During a three year
transitional period, the euro will coexist with each participating state's
currency and on July 1, 2002, the euro is expected to become the sole currency
of the participating states. During the transition period, the Funds will treat
the euro as a separate currency from that of any participating state.

     The conversion may adversely affect the Funds if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Funds'
service providers, or by entities with which the Trust or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.

     The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect a Fund's
investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that may occur at
the time of the conversion, such as accrual periods, holiday conventions,
indices, and other features may require the realization of a gain or loss by the
Funds as determined under existing tax law.

     The Trust's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Trust and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Trust's other service providers to address the
conversion. The Trust has not borne any expense relating to these actions.

MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES

     MORTGAGE BACKED SECURITIES -- GENERAL.  The Total Return Bond Fund may
invest in mortgage-backed securities. Mortgage-backed securities are securities
that directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. There are currently three
basic types of mortgage backed securities: (1) those issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities, such as GNMA, FNMA
and FHLMC, described under "U.S. Government Securities" above; (2) those issued
by private issuers that represent an interest in or are collateralized by
mortgage backed securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (3) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
mortgage backed securities without a government guarantee but usually having
some form of private credit enhancement.
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     GNMA CERTIFICATES.  Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities which evidence an
undivided interest in a pool or pools of mortgages. GNMA Certificates are the
"modified pass-through" type, which entitle the holder to receive timely payment
of all interest and principal payments due on the mortgage pool, net of fees
paid to the "issuer" and GNMA, regardless of whether or not the mortgagor
actually makes the payment. The GNMA Certificates will represent a pro rata
interest in one or more pools of the following types of mortgage loans: (1)
fixed rate level payment mortgage loans; (2) fixed rate graduated payment
mortgage loans; (3) fixed rate growing equity mortgage loans; (4) fixed rate
mortgage loans secured by manufactured (mobile) homes; (5) mortgage loans on
multifamily residential properties under construction; (6) mortgage loans on
completed multifamily projects; (7) fixed rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (8) mortgage loans
that provide for adjustments in payments based on periodic changes in interest
rates or in other payment terms of the mortgage loans; and (9) mortgage-backed
serial notes. All of these mortgage loans will be FHA Loans or VA Loans and,
except as otherwise specified above, will be fully-amortizing loans secured by
first liens on one-to-four family housing units.

     FNMA CERTIFICATES.  The Federal National Mortgage Association (FNMA) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. FNMA provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. FNMA acquires
funds to purchase home mortgage loans from many capital market investors that
may not ordinarily invest in mortgage loans directly.

     Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.

     FHLMC SECURITIES.  The Federal Home Loan Mortgage Corporation (FHLMC) is a
corporate instrumentality of the United States created pursuant to the Emergency
Home Finance Act of 1970, as amended (the FHLMC Act). Its purpose is to promote
development of a nationwide secondary market in conventional residential
mortgages. The principal activity of FHLMC consists of the purchase of first
lien, conventional, residential mortgage loans and participation interests in
such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC Certificates.

     FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owned on the underlying pool. FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal.

     FHLMC CERTIFICATES.  FHLMC guarantees to each registered holder of the
FHLMC Certificate the timely payment of interest at the rate provided for by
such FHLMC Certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC Certificate ultimate collection of all principal on
the related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. The obligations
of FHLMC under its guarantee are obligations solely of FHLMC and are not backed
by the full faith and credit of the U.S. Government.

                                       B-9
<PAGE>   10

     FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one-to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. An FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.

     The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if such
mortgage securities are purchased at a discount, an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.

     ADJUSTABLE RATE MORTGAGE SECURITIES.  Adjustable rate mortgage securities
(ARMs) are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. Generally, ARMs have a specified maturity
date and amortize principal over their life. In periods of declining interest
rates, there is a reasonable likelihood that ARMs will experience increased
rates of prepayment of principal.

     The amount of interest on an ARM is calculated by adding a specified
amount, the "margin," to the index, subject to limitations on the maximum and
minimum interest that can be charged. Because the interest rate on ARMs
generally moves in the same direction as market interest rates, the market value
of ARMs tends to be more stable than that of long-term fixed rate securities.

     PRIVATE MORTGAGE PASS-THROUGH SECURITIES.  Private mortgage pass-through
securities are structured similarly to GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed-rate or adjustable rate
mortgage loans. Since private mortgage pass-through securities typically are not
guaranteed by an entity having the credit status of GNMA, FNMA and FHLMC, such
securities generally are structured with one or more types of credit
enhancement. Types of credit enhancements are described under "Types of Credit
Enhancement" below.

     COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES.  CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Multiclass pass-through
securities are equity interests in a trust composed of Mortgage Assets. Payments
of principal and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage
Investment Conduit (REMIC). All future references to CMOs include REMICs.

                                      B-10
<PAGE>   11

     In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on mortgage-backed securities.

     The Total Return Bond Fund also may invest in, among other things, parallel
pay CMOs and Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date. PAC Bonds
always are parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.

     In reliance on a Securities and Exchange Commission (the SEC)
interpretation, the Fund's investments in certain qualifying collateralized
mortgage obligations (CMOs), including CMOs that have elected to be treated as
REMICs, are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. In order to be able to rely on the
SEC's interpretation, the CMOs and REMICs must be unmanaged, fixed-asset
issuers, that (1) invest primarily in mortgage-backed securities, (2) do not
issue redeemable securities, (3) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (4) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that the Fund selects CMOs or REMICs that do not meet
the above requirements, the Fund may not invest more than 10% of its assets in
all such entities, may not invest more than 5% of its total assets in a single
entity, and may not acquire more than 3% of the voting securities of any single
such entity.

     STRIPPED MORTGAGE BACKED SECURITIES.  Stripped mortgage backed securities
or MBS strips are derivative multiclass mortgage securities. In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, the Fund
may purchase MBS strips issued by private originators of, or investors in,
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. See "U.S. Government
Securities--Mortgage Related Securities Issued or Guaranteed by U.S. Government
Agencies and Instrumentalities" above.

     ASSET-BACKED SECURITIES.  The Large Capitalization Value Fund, Small
Capitalization Value Fund and Total Return Bond Fund may each invest in
asset-backed securities. Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables and home equity loans, have been securitized in pass-through
structures similar to the mortgage pass-through structures or in a pay-through
structure similar to the CMO structure. A Fund may invest in these and other
types of asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by mortgage
backed securities. Primarily, these securities do not have the benefit of a
security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, some of which may reduce the ability
to obtain full payment. In the case of automobile receivables, the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting
                                      B-11
<PAGE>   12

possibility that the collateral could be resold. In general, these types of
loans are of shorter average life than mortgage loans and are less likely to
have substantial prepayments.

     TYPES OF CREDIT ENHANCEMENT.  Mortgage backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, those securities may contain elements of
credit support which fall into two categories: (1) liquidity protection and (2)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to seek to ensure that
the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from default seeks to ensure ultimate
payment of the obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction or through a combination of such
approaches. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquencies or losses in excess of those
anticipated could adversely affect the return on an investment in a security. A
Fund will not pay any additional fees for credit support, although the existence
of credit support may increase the price of a security.

     RISK FACTORS RELATING TO INVESTING IN MORTGAGE BACKED AND ASSET-BACKED
SECURITIES.  The yield characteristics of mortgage backed and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a Fund purchases such a security at a premium, a prepayment rate that
is faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite effect of increasing yield
to maturity. Alternatively, if a Fund purchases these securities at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will reduce, yield to maturity. Moreover, slower than expected
prepayments may effectively change a security which was considered short- or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally lead to increased volatility of net asset value because
they tend to fluctuate more widely in response to changes in interest rates than
short- or intermediate-term securities. The Total Return Bond Fund may invest a
portion of its assets in derivative mortgage backed securities such as MBS
Strips which are highly sensitive to changes in prepayment and interest rates.
Each Adviser will seek to manage these risks (and potential benefits) by
diversifying its investments in such securities and, in certain circumstances,
through hedging techniques.

     In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities.

     Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Total Return Bond Fund are likely to be
greater during a period of declining interest rates and, as a result, likely to
be reinvested at lower interest rates than during a period of rising interest
rates. Asset-backed securities, although less likely to experience the same
prepayment rates as mortgage-backed securities, may respond to certain of the
same factors influencing prepayments, while at other times different factors
will predominate. Mortgage-backed securities and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because of
the risk of prepayment. During periods of rising interest rates, the rate of
prepayment of mortgages underlying mortgage-backed securities can be expected to
decline, extending the
                                      B-12
<PAGE>   13

projected average maturity of the mortgage-backed securities. This maturity
extension risk may effectively change a security which was considered short- or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short- or intermediate-term securities.

CONVERTIBLE SECURITIES

     Each Fund may invest in convertible securities. A convertible security is
typically a bond, debenture, corporate note, preferred stock or other similar
security which may be converted at a stated price within a specified period of
time into a specified number of shares of common stock or other equity
securities of the same or a different issuer. Convertible securities are
generally senior to common stocks in a corporation's capital structure, but are
usually subordinated to similar nonconvertible securities. While providing a
fixed income stream (generally higher in yield than the income derivable from a
common stock but lower than that afforded by a similar nonconvertible security),
a convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation attendant upon a
market price advance in the convertible security's underlying common stock.
Convertible securities also include preferred stocks, which technically are
equity securities.

     In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying common 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.

LOAN PARTICIPATIONS

     The Total Return Bond Fund may invest up to 5% of its net assets in high
quality participation interests having remaining maturities not exceeding one
year in loans extended by banks to United States and foreign companies. In a
typical corporate loan syndication, a number of lenders, usually banks
(co-lenders), lend a corporate borrower a specified sum pursuant to the terms
and conditions of a loan agreement. One of the co-lenders usually agrees to act
as the agent bank with respect to the loan. The loan agreement among the
corporate borrower and the co-lenders identifies the agent bank as well as sets
forth the rights and duties of the parties. The agreement often (but not always)
provides for the collateralization of the corporate borrower's obligations
thereunder and includes various types of restrictive covenants which must be met
by the borrower.

     The participation interests acquired by the Fund may, depending on the
transaction, take the form of a direct or co-lending relationship with the
corporate borrower, an assignment of an interest in the loan by a co-lender or
another participant, or a participation in the seller's share of the loan.
Typically, the Fund will look to the agent bank to collect principal of and
interest on a participation interest, to monitor compliance with loan covenants,
to enforce all credit remedies, such as foreclosures on collateral, and to
notify co-lenders of any adverse changes in the borrower's financial condition
or declarations of insolvency. The agent bank in such cases will be qualified to
serve as a custodian for a registered investment company such as the Trust. The
agent bank is compensated for these services by the borrower pursuant to the
terms of the loan agreement.

     When the Fund acts as co-lender in connection with a participation interest
or when the Fund acquires a participation interest the terms of which provide
that the Fund will be in privity with the corporate borrower, the Fund will have
direct recourse against the borrower in the event the borrower fails to pay
scheduled principal and interest. In cases where the Fund lacks such direct
                                      B-13
<PAGE>   14

recourse, the Fund will look to the agent bank to enforce appropriate credit
remedies against the borrower.

     The Manager believes that the principal credit risk associated with
acquiring participation interests from a co-lender or another participant is the
credit risk associated with the underlying corporate borrower. The Fund may
incur additional credit risk, however, when the Fund is in the position of
participant rather than a co-lender because the Fund must assume the risk of
insolvency of the co-lender from which the participation interest was acquired
and that of any person interpositioned between the Fund and the co-lender.
However, in acquiring participation interests, the Fund will conduct analysis
and evaluation of the financial condition of each such co-lender and participant
to ensure that the participation interest meets the Fund's high quality standard
and will continue to do so as long as it holds a participation. For purposes of
the Fund's requirement to maintain diversification for tax purposes, the issuer
of a loan participation will be the underlying borrower. In cases where the Fund
does not have recourse directly against the borrower, both the borrower and each
agent bank and co-lender interposed between the Fund and the borrower will be
deemed issuers of the loan participation for tax diversification purposes.

     For purposes of the Fund's fundamental investment restriction against
investing 25% or more of its total assets in any one industry, the Fund will
consider all relevant factors in determining who is the issuer of a loan
participation including the credit quality of the underlying borrower, the
amount and quality of the collateral, the terms of the loan participation
agreement and other relevant agreements (including any intercreditor
agreements), the degree to which the credit of such intermediary was deemed
material to the decision to purchase the loan participation, the interest
environment, and general economic conditions applicable to the borrower and such
intermediary.

REPURCHASE AGREEMENTS

     Each Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. Each Fund does not currently intend to invest in repurchase agreements
whose maturities exceed one year. The resale price is in excess of the purchase
price, reflecting an agreed-upon rate of return effective for the period of time
a Fund's money is invested in the repurchase agreement. A 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 instruments declines, a Fund will require additional collateral. In
the event of a default, insolvency or bankruptcy by a seller, the Fund will
promptly seek to liquidate the collateral. In such circumstances, the Fund could
experience a delay or be prevented from disposing of the collateral. To the
extent that the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the resale price, the Fund will suffer a
loss.

     The Funds will only enter into repurchase transactions with parties meeting
creditworthiness standards approved by the Trustees. Each Adviser will monitor
the creditworthiness of such parties.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS

     The Total Return Bond Fund may enter into reverse repurchase agreements and
dollar rolls. The proceeds from such transactions will be used for the clearance
of transactions or to take advantage of investment opportunities.

     Reverse repurchase agreements involve sales by the Fund of securities
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.

                                      B-14
<PAGE>   15

     Dollar rolls involve sales by the Fund of securities for delivery in the
current month and a simultaneous contract to repurchase substantially similar
(same type and coupon) securities on a specified future date from the same
party. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or a cash equivalent security position which
matures on or before the forward settlement date of the dollar roll transaction.

     The Fund will segregate with its custodian cash or other liquid assets
equal in value to its obligations in respect of reverse repurchase agreements
and dollar rolls. Reverse repurchase agreements and dollar rolls involve the
risk that the market value of the securities retained by the Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. If the buyer of securities under a reverse
repurchase agreement or dollar roll files for bankruptcy or becomes insolvent,
the Fund's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities.

     Reverse repurchase agreements and dollar rolls, including covered dollar
rolls, are speculative techniques involving leverage and are considered
borrowings by the Fund for purposes of the percentage limitations applicable to
borrowings. See "Borrowing" below.

INTEREST RATE SWAP TRANSACTIONS

     The Total Return Bond Fund may enter into interest rate swap transactions.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, for example, an exchange of
floating rate payments for fixed-rate payments. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing at a later date. The Fund
intends to use these transactions as a hedge and not as a speculative
investment.

     The Fund may enter into either asset-based interest rate swaps or
liability-based interest rate swaps, depending on whether it is hedging its
assets or its liabilities. The Fund will usually enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Since these hedging transactions are entered into for good faith
hedging purposes and cash or other liquid assets are segregated, the Manager and
the Advisers believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to the borrowing restrictions
applicable to the Fund. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or other liquid assets having
an aggregate net asset value at least equal to the accrued excess will be
segregated by a custodian that satisfies the requirements of the Investment
Company Act. To the extent that the Fund enters into interest rate swaps on
other than a net basis, the amount segregated will be the full amount of the
Fund's obligations, if any, with respect to such interest rate swaps, accrued on
a daily basis. The Fund will not enter into any interest rate swaps unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated in the highest rating category of at least one nationally recognized
rating organization at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreement related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.

                                      B-15
<PAGE>   16

     The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in its
forecast of market values, interest rates and other applicable factors, the
investment performance of the Fund would diminish compared to what it would have
been if this investment technique was never used.

     The Fund may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rates swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. This amount will not exceed 5% of the
Fund's net assets. If the other party to an interest rate swap defaults, the
Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. Since interest rate swaps are
individually negotiated, the Fund expects to achieve an acceptable degree of
correlation between its rights to receive interest on its portfolio securities
and its rights and obligations to receive and pay interest pursuant to interest
rate swaps.

ILLIQUID SECURITIES

     Each Fund may hold up to 15% of its net assets in illiquid securities. If a
Fund were to exceed this limit, the Adviser(s) would take reasonable measures to
reduce the Fund's holdings in illiquid securities to no more than 15% of its net
assets within seven days, including the sale of such securities. Illiquid
securities include repurchase agreements which have a maturity of longer than
seven days, and securities that are not readily marketable in securities markets
either within or outside of the United States and securities that have legal or
contractual restrictions on resale (restructured securities). Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.

     Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

     In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.

     Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Manager anticipates that the market for
certain restricted securities such as institutional commercial paper,
convertible securities and foreign securities will expand further as a result of
this regulation and the development of automated

                                      B-16
<PAGE>   17

systems for the trading, clearance and settlement of unregistered securities of
domestic and foreign issuers, such as the PORTAL System sponsored by the NASD.

     Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Trustees. The Advisers will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the Advisers 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 (that is, 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 Adviser; and (2) it
must not be "traded flat" (i.e., without accrued interest) or in default as to
principal or interest. The Funds' investments in Rule 144A securities could have
the effect of increasing illiquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing Rule 144A securities.

     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 designated to effect the counterparty's
economic loss from an early termination, but does allow the Fund to treat the
assets used as "cover" as "liquid." However, with respect to U.S. Government
securities, a Fund may treat the securities it uses as "cover" for written OTC
options on U.S. Government securities as liquid provided it follows a specified
procedure. A Fund may sell such OTC options only to qualified dealers who agree
that a Fund may repurchase any options it writes for a maximum price to be
calculated by a predetermined formula. In such cases, OTC options would be
considered liquid only to the extent that the maximum repurchase price under the
formula exceeds the intrinsic value of the option.

     When a Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that a Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid. The Funds will also treat non-U.S. Government POs
and IOs as illiquid securities so long as the staff of the SEC maintains its
position that such securities are illiquid.

INVESTMENT COMPANY SECURITIES

     The Funds may invest in securities issued by other investment companies
which invest in short-term debt securities and which seek to maintain a $1.00
net asset value per share (money market funds). The Funds may also invest in
securities issued by other investment companies with similar investment
objectives. The International Equity Fund may purchase shares of investment
companies investing primarily in foreign securities, including so-called
"country funds." Country funds have portfolios consisting primarily of
securities of issuers located in one foreign country. Securities of other
investment companies will be acquired within the limits prescribed by the
Investment Company Act. As a shareholder of another investment company, a Fund
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the expenses each Fund bears in connection with its own
operations.

                                      B-17
<PAGE>   18

RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES

     The International Equity Fund and the Total Return Bond Fund may each
engage in various portfolio strategies, including using derivatives, to seek to
reduce certain risks of its investments and to enhance return. A Fund, and thus
its investors, may lose money through any unsuccessful use of these strategies.
These strategies currently include the use of foreign currency forward
contracts, options, futures contracts and options thereon. A 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. See "Taxes, Dividends and
Distributions." If new financial products and risk management techniques are
developed, each Fund may use them to the extent consistent with its investment
objectives and policies.

     RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES -- GENERAL.
Participation in the options and futures markets and in currency exchange
transactions involves investment risks and transaction costs to which a Fund
would not be subject absent the use of these strategies. A Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
an Adviser's predictions of movements in the direction of the securities,
foreign currency or interest rate markets are inaccurate, the adverse
consequences to a 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 Adviser's ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that 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 a 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 a Fund to
sell a portfolio security at a disadvantageous time, due to the need for a Fund
to maintain "cover" or to segregate assets in connection with hedging
transactions.

     OPTIONS TRANSACTIONS.  A Fund may purchase and write (that is, sell) put
and call options on securities, currencies and financial indices that are traded
on U.S. and foreign securities exchanges or in the over-the-counter market (OTC)
to seek to enhance return or to protect against adverse price fluctuations in
securities in its portfolio. These options will be on debt securities,
aggregates of debt securities, financial indices (for example, S&P 500) and U.S.
Government securities. The International Equity Fund may also purchase and write
put and call options on foreign currencies and foreign currency futures. A Fund
may write covered put and call options to attempt to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of a security that it owns against a decline in market value and
purchase call options in an effort to protect against an increase in price of
securities or currencies it intends to purchase. A Fund may also purchase put
and call options to offset previously written put and call options of the same
series.

     A call option gives the purchaser, in exchange for a premium paid, the
right for a specified period of time to purchase the securities or currency
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 or a specified amount of cash to the
purchaser upon receipt of the exercise price. When a Fund writes a call option,
the Fund gives up the potential for gain on the underlying securities or
currency in excess of the exercise price of the option during the period that
the option is open. There is no limitation on the amount of call options a Fund
may write.

     A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities or currency subject to the
option to the writer of the put at the specified

                                      B-18
<PAGE>   19

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 or currency
underlying the option at the exercise price. The Fund, as the writer of a put
option, might, therefore, be obligated to purchase the underlying securities or
currency for more than their current market price.

     A Fund will write only "covered" options. A written option is covered if,
so long as the Fund is obligated under the option, it (1) owns an offsetting
position in the underlying security or currency 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 security; under the second circumstance, in the case of a
written call option, the Fund's losses are potentially unlimited. A Fund may
only write covered put options to the extent that cover for such options does
not exceed 25% of the Fund's net assets. A Fund will not purchase an option if,
as a result of such purchase, more than 20% of its total assets would be
invested in premiums for options and options on futures.

     OPTIONS ON SECURITIES.  The purchaser of a call option has 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). By writing a call option,
the Fund becomes obligated during the term of the option, upon exercise of the
option, to deliver the underlying securities or a specified amount of cash to
the purchaser against receipt of the exercise price. When a Fund writes a call
option, the Fund loses the potential for gain on the underlying securities in
excess of the exercise price of the option during the period that the option is
open.

     The purchaser of a put option has 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. By writing a put option, the Fund becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.

     The writer of an option retains the amount of the premium, although this
amount may be offset or exceeded, in the case of a covered call option, by an
increase and, in the case of a covered put option, by a decline in the market
value of the underlying security during the option period.

     A Fund may wish to protect certain portfolio securities against a decline
in market value at a time when put options on those particular securities are
not available for purchase. The Fund may therefore purchase a put option on
other securities, the values of which the Adviser expects will have a high
degree of positive correlation to the values of such portfolio securities. If
the Adviser's judgment is correct, changes in the value of the put options
should generally offset changes in the value of the portfolio securities being
hedged. If the Adviser's judgment is not correct, the value of the securities
underlying the put option may decrease less than the value of the Fund's
investments and therefore the put option may not provide complete protection
against a decline in the value of the Fund's investments below the level sought
to be protected by the put option.

     A Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options on
other debt securities the values of which the Adviser expects will have a high
degree of positive correlation to the values of the debt securities that the
Fund intends to acquire. In such circumstances the Fund will be subject to risks
analogous to those summarized above in the event that the correlation between
the value of call options so purchased and the value of the securities intended
to be acquired by the Fund is not as close as anticipated and the value of the
securities underlying the call options increases less than the value of the
securities to be acquired by the Fund.

     A Fund may write options on securities in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised, the Fund's
maximum gain will be the premium it received for writing the option,

                                      B-19
<PAGE>   20

adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price of the option. If the option is not
exercised and the price of the underlying security declines, the amount of the
decline will be offset in part, or entirely, by the premium received.

     The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. A Fund may also buy and write
straddles (i.e., a combination of a call and a put written on the same security
at the same strike price where the same segregated collateral is considered
"cover" for both the put and the call). In such cases, a Fund will segregate
with its Custodian cash or other liquid assets equivalent to the amount, if any,
by which the put is "in-the-money," i.e., the amount by which the exercise price
of the put exceeds the current market value of the underlying security. It is
contemplated that a Fund's use of straddles will be limited to 5% of the Fund's
net assets (meaning that the securities used for cover or segregated as
described above will not exceed 5% of the Fund's net assets at the time the
straddle is written). The writing of a call and a put on the same security at
the same stock price where the call and put are covered by different securities
is not considered a straddle for the purposes of this limit. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected that the premium received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call option is exercised in such a transaction, the
Fund's maximum gain will be the premium received by it for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price of the option. If the option is not
exercised and the price of the underlying security declines, the amount of the
decline will be offset in part, or entirely, by the premium received.

     Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.

     Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to the fulfillment of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its counter-party with
no clearing organization guarantee. Thus, when the Fund purchases an OTC option,
it relies on the dealer from which it has purchased the OTC option to make or
take delivery of the securities underlying the option. Failure by the dealer to
do so would result in the loss of the premium paid by the Fund as well as the
loss of the expected benefit of the transaction. As such, the value of an OTC
option is particularly dependent upon the financial viability of the OTC
counterparty.

     Exchange traded options generally have a continuous liquid market while OTC
options may not. When a Fund writes an OTC option, it generally will be able to
close out the OTC options prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally wrote
the OTC option. While the Fund will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate an OTC option at a favorable price
                                      B-20
<PAGE>   21

at any time prior to expiration. Until the Fund is able to effect a closing
purchase transaction in a covered OTC call option the Fund has written, it will
not be able to liquidate securities used as cover until the option expires or is
exercised or different cover is substituted. In the event of insolvency of the
counter party, the Fund may be unable to liquidate an OTC option. With respect
to options written by a Fund, the inability to enter into a closing purchase
transaction could result in material losses to the Fund.

     OTC options purchased by a Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund may
repurchase any OTC options it writes for a maximum price to be calculated by a
formula set forth in the option agreement. The "cover" for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option.

     A call option written by the Fund is "covered" if the Fund owns the
security underlying the option or has an absolute and immediate right to acquire
that security without additional consideration (or for additional consideration
segregated by its Custodian) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Fund holds on a
share-for-share basis a call on the same security 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; where the exercise price of the call held is greater than the
exercise price of the call written, the Fund will segregate cash or other liquid
assets with its Custodian. A put option written by the Fund is "covered" if the
Fund holds on a share-for-share basis a put on the same security as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written; otherwise the Fund will segregate cash or
other liquid assets with its Custodian equivalent in value to the exercise price
of the option. This means that so long as the Fund is obligated as the writer of
a call option, it will own the underlying securities subject to the option or an
option to purchase the same underlying securities, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
segregate with its Custodian for the term of the option cash or other liquid
assets having a value equal to or greater than the exercise price of the option.
In the case of a straddle written by the Fund, the amount segregated will equal
the amount, if any, by which the put is "in-the-money."

     OPTIONS ON GNMA CERTIFICATES.  Options on GNMA Certificates are not
currently traded on any exchange. However, the Total Return Bond Fund may
purchase and write such options should they commence trading on any exchange and
may purchase or write OTC Options on GNMA certificates.

     Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call holding GNMA Certificates as "cover" to satisfy its delivery obligation in
the event of assignment of an exercise notice, may find that its GNMA
Certificates no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered.

     A GNMA Certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Fund closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.

     RISKS OF OPTIONS TRANSACTIONS.  An exchange-traded 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 purchase or write only
those options for which there appears to be an active

                                      B-21
<PAGE>   22

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 exchange-traded options, no secondary market on an exchange may exist.
In such event, it might not be possible to effect closing transactions in
particular options, with the result that the Fund would have to exercise its
exchange-traded options in order to realize any profit and may incur transaction
costs in connection therewith. If the Fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it will
not be able to sell the underlying security until the option expires or it
delivers the underlying security upon exercise.

     Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (6) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date, to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.

     In the event of the bankruptcy of a broker through which the Fund engages
in options transactions, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.

     The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.

     OPTIONS ON SECURITIES INDICES.  The Total Return Bond Fund may purchase and
write call and put options on securities indices in an attempt to hedge against
market conditions affecting the value of securities that the Fund owns or
intends to purchase, and not for speculation. Through the writing or purchase of
index options, the Fund can achieve many of the same objectives as through the
use of options on individual securities. Options on securities indices are
similar to options on a security except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference ]between the closing price of the index and the exercise price
of the option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities that the Fund owns or intends to purchase will probably not correlate
perfectly with movements in the level of an index and, therefore, the Fund bears
the risk that a loss on an index option would not be completely offset by
movements in the price of such securities.

                                      B-22
<PAGE>   23

     When the Fund writes an option on a securities index, it will be required
to deposit with its Custodian, and mark-to-market, eligible securities equal in
value to 100% of the exercise price in the case of a put, or the contract value
in the case of a call. In addition, where the Fund writes a call option on a
securities index at a time when the contract value exceeds the exercise price,
the Fund will segregate and mark-to-market, until the option expires or is
closed out, cash or cash equivalents equal in value to such excess.

     Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.

     RISKS OF OPTIONS ON INDICES.  A Fund's purchase and sale of options on
indices will be subject to risks described above under "Risks of Options
Transactions." In addition, the distinctive characteristics of options on
indices create certain risks that are not present with stock options.

     Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which could
result in substantial losses to the Fund. It is the policy of each Fund to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.

     The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. A Fund
will not purchase or sell any index option contract unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risk in connection with such transactions is no greater than the risk in
connection with options on securities in the index.

     SPECIAL RISKS OF WRITING CALLS ON INDICES.  Because exercises of index
options are settled in cash, a call writer such as a 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, a Fund will write call options on indices only under the circumstances
described herein.

     Price movements in a Fund's security holdings probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of the Fund's
security holdings. It is also possible that the index may rise when the Fund's
stocks do not rise. If this occurred, the Fund would experience a loss on the
call which is not offset by an increase in the value of its portfolio and might
also experience a loss in its portfolio. However, because the value of a
diversified portfolio will, over time, tend to move in the same direction as the
market, movements in the value of the Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.

     Unless a 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 from a bank pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.

     When a Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the
                                      B-23
<PAGE>   24

exercise date but, unlike a call on stock where the Fund would be able to
deliver the underlying securities in settlement, the Fund may have to sell part
of its investment portfolio in order to make settlement in cash, and the price
of such securities might decline before they can be sold. This timing risk makes
certain strategies involving more than one option substantially more risky with
index options than with stock options. For example, even if an index call which
the Fund has written is "covered" by an index call held by the Fund with the
same strike price, the Fund will bear the risk that the level of the index may
decline between the close of trading on the date the exercise notice is filed
with the clearing corporation and the close of trading on the date the Fund
exercises the call it holds or the time the Fund sells the call which, in either
case, would occur no earlier than the day following the day the exercise notice
was filed.

     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 multiplier) to the assigned writer. Although the
Fund may be able to minimize this risk by withholding exercise instructions
until just before the daily cutoff 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 cutoff 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.

     FUTURES CONTRACTS.  The International Equity Fund and Total Return Bond
Fund may each enter into futures contracts and related options which are traded
on a commodities exchange or board of trade to reduce certain risks of its
investments and to attempt to enhance returns, in each case in accordance with
regulations of the Commodity Futures Trading Commission. The Funds, and thus
their investors, may lose money through any unsuccessful use of these
strategies.

     As a purchaser of a futures contract (futures contract), a Fund incurs an
obligation to take delivery of a specified amount of the obligation underlying
the futures contract at a specified time in the future for a specified price. As
a seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price. A Fund may purchase futures contracts on debt securities,
aggregates of debt securities, financial indices and U.S. Government securities
including futures contracts or options linked to LIBOR.

     Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of security and the same delivery date. If the sale price exceeds
the offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting sale
price, the purchaser would realize a loss. There is no assurance that the Fund
will be able to enter into a closing transaction.

     When a Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction an "initial margin" of cash or other liquid
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the exchanges.

     Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith
                                      B-24
<PAGE>   25

deposit on a futures contract which will be returned to the Fund upon the proper
termination of the futures contract. The margin deposits made are
marked-to-market daily and the Fund may segregate with its Custodian, cash or
U.S. Government securities, called "variation margin," in the name of the
broker, which are reflective of price fluctuations in the futures contract.

     OPTIONS ON FUTURES CONTRACTS.  The International Equity Fund and Total
Return Bond Fund may each purchase call and put options on futures contracts
which are traded on an exchange and enter into closing transactions with respect
to such options to terminate an existing position. An option on a futures
contract gives the purchaser the right (in return for the premium paid), and the
writer the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the term of the option. Upon
exercise of the option, the assumption of an offsetting futures position by the
writer and holder of the option will be accompanied by delivery of the
accumulated cash balance in the writer's futures margin account which represents
the amount by which the market price of the futures contract at exercise
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract.

     A Fund may only write "covered" put and call options on futures contracts.
A Fund will be considered "covered" with respect to a call option it writes on a
futures contract if the Fund owns the assets which are deliverable under the
futures contract or an option to purchase that futures contract having a strike
price equal to or less than the strike price of the "covered" option and having
an expiration date not earlier than the expiration date of the "covered" option,
or if it segregates with its Custodian for the term of the option cash or other
liquid assets equal to the fluctuating value of the optioned future. The Fund
will be considered "covered" with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the "covered" option, or if
it segregates with its Custodian for the term of the option cash or other liquid
assets at all times equal in value to the exercise price of the put (less any
initial margin deposited by the Fund with its Custodian with respect to such
option). There is no limitation on the amount of the Fund's assets which can be
segregated.

     A Fund will purchase options on futures contracts for identical purposes to
those set forth above for the purchase of a futures contract (purchase of a call
option or sale of a put option) and the sale of a futures contract (purchase of
a put option or sale of a call option), or to close out a long or short position
in futures contracts. If, for example, the Adviser wished to protect against an
increase in interest rates and the resulting negative impact on the value of a
portion of its U.S. Government securities holdings, it might purchase a put
option on an interest rate futures contract, the underlying security which
correlates with the portion of the securities holdings the Adviser seeks to
hedge.

     LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES.  A Fund may
purchase or sell futures contracts or purchase related options thereon for bona
fide hedging transactions without limit. In addition, the Funds may use futures
contracts and options thereon for any other purpose to the extent that the
aggregate initial margin and option premium does not exceed 5% of the market
value of the Fund's total assets. There is no overall limitation on the
percentage of the Fund's assets which may be subject to a hedge position.
Subject to these limitations and, in accordance with the regulations of the
Commodity Futures Trading Commission (CFTC) the Fund is exempt from registration
as a commodity pool operator.

     RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS.  A Fund's
successful use of futures contracts and related options depends upon the
investment adviser's ability to predict the direction of the market and is
subject to various additional risks. The correlation between movements in the
price of a futures contract and the price of the securities or currencies being
hedged is imperfect and there is a risk that the value of the securities or
currencies being hedged may increase or decrease at a greater rate than a
specified futures contract resulting in losses to a Fund.

                                      B-25
<PAGE>   26

     A Fund may sell a futures contract to protect against the decline in the
value of securities or currencies held by the Fund. However, it is possible that
the futures market may advance and the value of securities held in the Fund's
portfolio may decline. If this were to occur, the Fund would lose money on the
futures contracts and also experience a decline in value in its portfolio
securities.

     If a Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.

     In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either: (1)
a substantial majority (i.e., approximately 75%) of all anticipatory hedge
transactions (transactions in which the Fund does not own at the time of the
transaction, but expects to acquire, the securities underlying the relevant
futures contract) involving the purchase of futures contracts will be completed
by the purchase of securities which are the subject of the hedge, or (2) the
underlying value of all long positions in futures contracts will not exceed the
total value of (a) all short-term debt obligations held by the Fund; (b) cash
held by the Fund; (c) cash proceeds due to the Fund on investments within thirty
days; (d) the margin deposited on the contracts; and (e) any unrealized
appreciation in the value of the contracts.

     If a Fund maintains a short position in a futures contract, it will cover
this position by segregating with its Custodian, cash or other liquid assets
equal in value (when added to any initial or variation margin on deposit) to the
market value of the securities underlying the futures contract. Such a position
may also be covered by owning the securities underlying the futures contract, or
by holding a call option permitting the Fund to purchase the same contract at a
price no higher than the price at which the short position was established.

     In addition, if a Fund holds a long position in a futures contract, it will
segregate cash or other liquid assets equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit) with its
Custodian. Alternatively, the Fund could cover its long position by purchasing a
put option on the same futures contract with an exercise price as high or higher
than the price of the contract held by the Fund.

     Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if the Fund has insufficient cash, it may
be disadvantageous to do so. In addition, the Fund may be required to take or
make delivery of the instruments underlying futures contracts it holds at a time
when it is disadvantageous to do so. The ability to close out options and
futures positions could also have an adverse impact on the Fund's ability to
hedge its portfolio effectively.

     In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the Adviser.

     There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Fund's securities. One such risk
which may arise in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject to
futures contracts (and thereby the futures contract prices) may correlate
imperfectly with the behavior of the cash prices of the Fund's portfolio
securities. Another such risk is that prices of futures contracts may not move
in tandem with the changes in prevailing interest rates against which the Fund
seeks a hedge. A correlation may also be distorted by the fact that the futures
market is

                                      B-26
<PAGE>   27

dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.

     Successful use of futures contracts is also subject to the ability of an
Adviser to forecast movements in the direction of the market and interest rates
and other factors affecting equity securities and currencies generally. In
addition, there may exist an imperfect correlation between the price movements
of futures contracts purchased by the Fund and the movements in the prices of
the securities which are the subject of the hedge. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities and futures market could
result. Price distortions could also result if investors in futures contracts
elect to make or take delivery of underlying securities rather than engage in
closing transactions due to the resultant reduction in the liquidity of the
futures market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures markets could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate trends by the Adviser may still not result in a successful hedging
transaction.

     Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contracts or underlying U.S. Government securities.

     OPTIONS ON CURRENCIES.  Instead of purchasing or selling futures, options
on futures or forward currency exchange contracts, the International Equity Fund
and Total Return Bond Fund may each attempt to accomplish similar objectives by
purchasing put or call options on currencies either on exchanges or in
over-the-counter markets or by writing put options or covered call options on
currencies. A put option gives the Fund the right to sell a currency at the
exercise price until the option expires. A call option gives the Fund the right
to purchase a currency at the exercise price until the option expires. Both
options serve to insure against adverse currency price movements in the
underlying portfolio assets designated in a given currency.

     RISKS OF OPTIONS ON FOREIGN CURRENCIES.  Because there are two currencies
involved, developments in either or both countries affect the values of options
on foreign currencies. Risks include government actions affecting currency
valuation and the movements of currencies from one country to another. The
quantity 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.

     FOREIGN CURRENCY FORWARD CONTRACTS. The International Equity Fund and Total
Return Bond Fund may each enter into foreign currency forward contracts to
protect the value of its Fund against future changes in the level of currency
exchange rates. A Fund may enter into such contracts on a spot, i.e., cash,
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract.

                                      B-27
<PAGE>   28

     A 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 (1) the sale of a foreign currency with
respect to portfolio security positions denominated or quoted in that currency
or in a currency bearing a substantial correlation to the value of that currency
(cross-hedge) or (2) the purchase of a foreign currency when the Adviser
believes that the U.S. dollar may decline against that foreign currency.
Although there are no limits on the number of forward contracts which a Fund may
enter into, a Fund may not position hedge with respect to a particular currency
for an amount greater than the aggregate market value (determined at the time of
making any purchase or sale of foreign currency) of the securities being hedged.

     The precise matching of 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. A Fund does not intend to
enter into such forward contracts to protect the value of its portfolio
securities on a regular or continuous basis. A Fund does not intend to enter
into such forward contracts or maintain a net exposure to such contracts where
the consummation of the contracts would obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's securities holdings or
other assets denominated in that currency.

     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 would 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.

     A Fund's dealing in foreign currency forward contracts will generally be
limited to the transactions described above. Of course, a Fund is not required
to enter into such transactions with regard to its foreign currency-denominated
securities. Also this method of protecting the value of a Fund's securities
holdings against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities which 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, 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
                                      B-28
<PAGE>   29

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 a Fund at one rate, while offering a lesser rate
of exchange should the Fund desire to resell that currency to the dealer.

     The Adviser may use foreign currency hedging techniques, including
cross-currency hedges, to attempt to protect against declines in the U.S. dollar
value of income available for distribution to shareholders and declines in the
net asset value of a Fund's shares resulting from adverse changes in currency
exchange rates. For example, the return available from securities denominated in
a particular foreign currency would diminish in the event the value of the U.S.
dollar increased against such currency. Such a decline could be partially or
completely offset by an increase in value of a position hedge involving a
foreign currency forward contract to (1) sell the currency in which the position
being hedged is denominated, or a currency bearing a substantial correlation to
the value of such currency, or (2) purchase either the U.S. dollar or a foreign
currency expected to perform better than the currency being sold. Position
hedges may, therefore, provide protection of net asset value in the event of a
general rise in the U.S. dollar against foreign currencies. However, a cross-
currency hedge cannot protect against exchange rates perfectly, and if the
Adviser is incorrect in its judgment of future exchange rate relationships, the
Fund could be in a less advantageous position than if such a hedge had not been
established.

     INDEXED COMMERCIAL PAPER. The International Equity Fund and Total Return
Bond Fund may each invest in commercial paper which is indexed to certain
specific foreign currency exchange rates. The terms of such commercial paper
provide that its principal amount is adjusted upwards or downwards (but not
below zero) at maturity to reflect changes in the exchange rate between two
currencies while the obligation is outstanding. A Fund will purchase such
commercial paper with the currency in which it is denominated and, at maturity,
will receive interest and principal payments thereon in that currency, but the
amount of principal payable by the issuer at maturity will change in proportion
to the change (if any) in the exchange rate between the two specified currencies
between the date the instrument is issued and the date the instrument matures.
With respect to its investments in this type of commercial paper, a Fund will
segregate cash or other liquid assets having a value at least equal to the
aggregate principal amount of outstanding commercial paper of this type. While
such commercial paper entails the risk of loss of principal, the potential for
realizing gains as a result of changes in foreign currency exchange rates
enables the Fund to hedge (or cross-hedge) against a decline in the U.S. dollar
value of investments denominated in foreign currencies while providing an
attractive money market rate of return.

     LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK
INDICES, FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES.  A Fund
may write put and call options on stocks only if they are covered, and such
options must remain covered so long as the Fund is obligated as a writer. A Fund
will write put options on foreign currencies and futures contracts on foreign
currencies for bona fide hedging purposes only if there is segregated with the
Fund's Custodian an amount of cash or other liquid assets equal to or greater
than the aggregate exercise price of the puts. In addition, the Fund may use
futures contracts or related options for non-hedging or speculative purposes to
the extent that aggregate initial margin and option premiums do not exceed 5% of
the market value of the Fund's assets. A Fund does not intend to purchase
options on equity securities or securities indices if the aggregate premiums
paid for such outstanding options would exceed 10% of the Fund's total assets.

     Except as described below, a Fund will write call options on indices only
if it holds a portfolio of stocks at least equal to the value of the index times
the multiplier times the number of contracts. When a Fund writes a call option
on a broadly-based stock market index, the Fund will segregate with its
Custodian, or pledge to a broker as collateral for the option, cash or other
liquid assets or "qualified securities" 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.
                                      B-29
<PAGE>   30

     If a Fund has written an option on an industry or market segment index, it
will segregate with its Custodian, or pledge to a broker as collateral for the
option, at least ten "qualified securities," which are stocks of issuers 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. Such stocks 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 15% of the amount so
segregated or pledged in the case of broadly-based stock market index options or
25% of such amount in the case of industry or market segment index options.

     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 so segregate
or pledge an amount in cash or other liquid assets equal in value to the
difference. In addition, when a Fund writes a call on an index which is in-the-
money at the time the call is written, the Fund will segregate with its
Custodian or pledge to the broker as collateral cash or other liquid assets
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
which is listed on a national securities exchange or listed on NASDAQ against
which a 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 its Custodian, it will not be
subject to the requirements described in this paragraph.

     A Fund may engage in futures contracts and options on futures transactions
as a hedge against changes, resulting from market or political conditions, in
the value of the currencies to which the Fund is subject or to which the Fund
expects to be subject in connection with future purchases. A Fund may engage in
such transactions when they are economically appropriate for the reduction of
risks inherent in the ongoing management of the Fund. A Fund may write options
on futures contracts to realize through the receipt of premium income a greater
return than would be realized in the Fund's securities holdings alone.

OTHER INVESTMENT STRATEGIES

     LENDING OF SECURITIES.  Consistent with applicable regulatory requirements,
the Total Return Bond Fund may lend portfolio securities to brokers, dealers and
other financial institutions, provided that such loans are callable at any time
by the Fund, and are at all times secured by cash or other liquid assets or
secured by an irrevocable letter of credit in favor of the Fund in an amount
equal to at least 100% determined daily, of the market value of the loaned
securities. The collateral is segregated pursuant to applicable regulations.
During the time portfolio securities are on loan, the borrower will pay the Fund
an amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. The Fund
cannot lend more than 33 1/3% of the value of its total assets (including the
amount of the loan collateral).

     A loan may be terminated by the borrower or by the Fund at any time. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's Adviser to be
creditworthy pursuant to procedures approved by the Board of Trustees and

                                      B-30
<PAGE>   31

when the income which can be earned from such loans justifies the attendant
risks. Upon termination of the loan, the borrower is required to return the
securities to the Fund. Any gain or loss in the market price during the loan
period would inure to the Fund.

     Since voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned securities,
in whole or in part as may be appropriate, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan of its securities or may share the
interest earned on collateral with the borrower.

     WHEN-ISSUED AND DELAYED DELIVERY SECURITIES.  Each 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 a
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 a Fund at the time
of entering into the transaction. The securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during this period.
While a Fund will only purchase securities on a when-issued, delayed delivery or
forward commitment basis with the intention of acquiring the securities, a Fund
may sell the securities before the settlement date, if it is deemed advisable.
At the time a Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, a Fund will record the transaction and thereafter
reflect the value, each day, of such security in determining the net asset value
of a Fund. At the time of delivery of the securities, the value may be more or
less than the purchase price. A Fund will also segregate with a Fund's custodian
bank cash or other liquid assets equal in value to commitments for such
when-issued or delayed delivery securities; subject to this requirement, a Fund
may purchase securities on such basis without limit. An increase in the
percentage of a Fund's assets committed to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of a Fund's
net asset value. Subject to the segregation requirement, a Fund may purchase
securities without limit. The Adviser does not believe that a Fund's net asset
value or income will be adversely affected by a Fund's purchase of securities on
such basis.

     BORROWING.  The Total Return Bond Fund may borrow from banks or through
dollar rolls or reverse repurchase agreements an amount equal to no more than
33 1/3% of the value of its total assets (calculated when the loan is made) from
banks for temporary, extraordinary or emergency purposes, for the clearance of
transactions or to take advantage of investment opportunities. The Fund may
pledge up to 33 1/3% of its total assets to secure these borrowings.

     The other Funds may each borrow from banks or through dollar rolls or
reverse repurchase agreements an amount equal to no more than 20% of the value
of its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, or for the clearance of transactions. Each
of these Funds may pledge up to 20% of its total assets to secure these
borrowings.

     If a Fund borrows to invest in securities, or if a Fund purchases
securities at a time when borrowings exceed 5% of its total assets, any
investment gains made on the securities in excess of interest paid on the
borrowing will cause the net asset value of the shares to rise faster than would
otherwise be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to a Fund, the net asset value of the
Fund's shares will decrease faster than would otherwise be the case. This is the
speculative characteristic known as "leverage." See "Reverse Repurchase
Agreements and Dollar Rolls" above.

     If any Fund's asset coverage for borrowings falls below 300%, such Fund
will take prompt action (within 3 days) to reduce its borrowings even though it
may be disadvantageous from an investment standpoint to sell securities at that
time.

                                      B-31
<PAGE>   32

SEGREGATED ASSETS

     When a Fund is required to segregate assets in connection with certain
portfolio transactions, it will designate cash or liquid assets as segregated
with the Trust's Custodian, State Street Bank and Trust Company (State Street).
"Liquid assets" mean 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, marked-to-market daily. 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.

(d)  DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS

     When conditions dictate a temporary defensive strategy or pending
investment of proceeds from sales of the Funds' shares, the Funds may invest
without limit in money market instruments, including commercial paper of
domestic and foreign corporations, certificates of deposit, bankers' acceptances
and other obligations of domestic and foreign banks, and obligations issued or
guaranteed by the U.S. Government, its instrumentalities and its agencies.
Commercial paper will be rated, at the time of purchase, at lease "A-2" by S&P
or "Prime-2" by Moody's, or the equivalent by another NRSRO or, if not rated,
issued by an entity having an outstanding unsecured debt issue rated at least
"A" or "A-2" by S&P or "A" or "Prime-2" by Moody's or the equivalent by another
NRSRO. In addition, the Large Capitalization Value and Small Capitalization
Value Portfolios may invest without limit in corporate and other debt
obligations and the Large Capitalization Growth Portfolio may invest without
limit in repurchase agreements when the Adviser believes that a temporary
defensive position is appropriate.

(e)  PORTFOLIO TURNOVER

     Portfolio turnover rate is generally the percentage computed by dividing
the lesser of portfolio purchases or sales (excluding all securities, including
options, whose maturities or expiration date at acquisition were one year or
less) by the monthly average value of the long-term portfolio. High portfolio
turnover (100% or more) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by each
Fund. See "Brokerage Allocation and Other Practices." In addition, high
portfolio turnover may result in increased short-term capital gains, which when
distributed to shareholders, are treated as ordinary income. See "Taxes,
Dividends, and Distributions."

                            INVESTMENT RESTRICTIONS

     The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of a Fund's outstanding voting securities. A "majority of the
outstanding voting securities" of a Fund, when used in this Statement of
Additional Information, means the lesser of (1) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are present in person
or represented by proxy or (2) more than 50% of the outstanding shares.

     A Fund may not:

     1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or variation margin in connection
with options or futures contracts is not considered the purchase of a security
on margin.

     2. Make short sales of securities, or maintain a short position if, when
added together, more than 25% of the value of the Fund's net assets would be (i)
deposited as collateral for the obligation
                                      B-32
<PAGE>   33

to replace securities borrowed to effect short sales and (ii) allocated to
segregated accounts in connection with short sales. Short sales
"against-the-box" are not subject to this limitation.

     3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks or through dollar rolls or reverse repurchase
agreements up to 33 1/3% of the value of its total assets (calculated when the
loan is made) for temporary, extraordinary or emergency purposes, to take
advantage of investment opportunities or for the clearance of transactions and
may pledge its assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
futures contracts and options thereon and with respect to the writing of options
and obligations of the Trust to Trustees pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets or the issuance of a senior
security subject to this restriction.

     4. Purchase any security (other than obligations of the U.S. Government,
its agencies and instrumentalities) if, as a result, with respect to 75% of its
total assets, more than 5% of the Fund's total assets (determined at the time of
investment) would then be invested in securities of a single issuer, except as
permitted by Section 5(b)(1) of the Investment Company Act of 1940 or any
successor provision on the requirements applicable to diversified investment
companies.

     5. Purchase any security (other than obligations of the U.S. Government,
its agencies and instrumentalities) if as a result 25% or more of the Fund's
total assets (determined at the time of investment) would be invested in one or
more issuers having their principal business activities in the same industry.

     6. Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell mortgaged-backed securities, securities
collateralized by mortgages, securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts.

     7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws. Each Fund may purchase restricted securities
without limit.

     8. Make investments for the purpose of exercising control or management.

     9. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the value of the Fund's total assets.
For purposes of this limitation on securities lending, the value of a Fund's
total assets includes the collateral received in the transactions.

   10. Purchase more than 10% of all outstanding voting securities of any one
issuer.

     The foregoing restrictions are fundamental policies that may not be changed
without the approval of a majority of the Fund's voting securities.

     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.

     As a matter of non-fundamental operating policy, a portfolio will not
purchase rights if as a result the Fund would then have more than 5% of its
assets (determined at the time of investment) invested in rights.

                                      B-33
<PAGE>   34

                            MANAGEMENT OF THE TRUST

<TABLE>
<CAPTION>
                              POSITION WITH                PRINCIPAL OCCUPATIONS
      NAME AND AGE(**)          THE TRUST                 DURING PAST FIVE YEARS
      ----------------        -------------               ----------------------
<S>                           <C>             <C>
Eugene C. Dorsey (72)         Trustee         Retired President, Chief Executive Officer and
                                                Trustee of the Gannett Foundation (now
                                                Freedom Forum); former Publisher of four
                                                Gannett newspapers and Vice President of
                                                Gannett Co., Inc.; past Chairman, Independent
                                                Sector, Washington, D.C. (national coalition
                                                of philanthropic organizations); former
                                                Chairman of the American Council for the
                                                Arts; Director of the advisory board of Chase
                                                Manhattan Bank of Rochester; and Trustee or
                                                Director of 18 other funds within the
                                                Prudential Mutual Funds.
*Robert F. Gunia (52)         Trustee and     Chief Administrative Officer (since March 1999)
                              Vice              of Prudential Investments; Vice President
                              President         (since September 1997) of Prudential;
                                                Executive Vice President and Treasurer (since
                                                December 1996), Prudential Investments Fund
                                                Management LLC (PIFM); Senior Vice President
                                                (since March 1987) of Prudential Securities
                                                Incorporated (Prudential Securities);
                                                formerly Chief Administrative Officer (July
                                                1990-September 1996), Director (January
                                                1989-September 1996), and Executive Vice
                                                President, Treasurer and Chief Financial
                                                Officer (June 1987-September 1996) of
                                                Prudential Mutual Fund Management, Inc.; Vice
                                                President and Director (since May 1989) of
                                                The Asia Pacific Fund, Inc. and Director or
                                                Trustee of 44 funds within the Prudential
                                                Mutual Funds.
Robert E. LaBlanc (64)        Trustee         President (since 1981) of Robert E. LaBlanc
                                                Associates, Inc. (telecommunications);
                                                formerly General Partner at Salomon Brothers;
                                                and Vice-Chairman of Continental Telecom;
                                                Director of Storage Technology Corporation,
                                                Titan Corporation, Salient 3 Communications,
                                                Inc. and Tribune Company; Trustee of
                                                Manhattan College; and Trustee or Director of
                                                17 other funds within the Prudential Mutual
                                                Funds.
Douglas H. McCorkindale (60)  Trustee         Vice Chairman (since March 1984) and President
                                                (since September 1997) of Gannett Co. Inc.
                                                (publishing and media); Director of
                                                Continental Airlines, Inc., Gannett Co., Inc.
                                                and Frontier Corporation; and Trustee or
                                                Director of 24 other funds within the
                                                Prudential Mutual Funds.
</TABLE>

                                      B-34
<PAGE>   35

<TABLE>
<CAPTION>
                              POSITION WITH                PRINCIPAL OCCUPATIONS
      NAME AND AGE(**)          THE TRUST                 DURING PAST FIVE YEARS
      ----------------        -------------               ----------------------
<S>                           <C>             <C>
Thomas T. Mooney (57)         Trustee         President of the Greater Rochester Metro
                                                Chamber of Commerce; former Rochester City
                                                Manager; Trustee of Center for Governmental
                                                Research, Inc.; Director of Blue Cross of
                                                Rochester, Executive Service Corps of
                                                Rochester, Monroe County Water Authority,
                                                Rochester Jobs, Inc., Monroe County
                                                Industrial Development Corporation and
                                                Northeast Midwest Institute; President,
                                                Director and Treasurer, First Financial Fund,
                                                Inc. and The High Yield Plus Fund, Inc.; and
                                                Trustee or Director of 34 other funds within
                                                the Prudential Mutual Funds.
*David R. Odenath, Jr. (42)   Trustee         Officer in Charge, President, Chief Executive
                                                Officer and Chief Operating Officer (since
                                                June 1999), PIFM; Senior Vice President
                                                (since June 1999), Prudential; Senior Vice
                                                President (August 1993-May 1999), PaineWebber
                                                Group, Inc.; and Trustee or Director of 47
                                                other funds within the Prudential Mutual
                                                Funds.
Stephen Stoneburn (55)        Trustee         President and Chief Executive Officer (since
                                                June 1996) of Quadrant Media Corp. (a
                                                publishing company); formerly President (June
                                                1995-June 1996) of Argus Integrated Media,
                                                Inc.; Senior Vice President and Managing
                                                Director (January 1993-1995) of Cowles
                                                Business Media; Senior Vice President
                                                (January 1991-1992) and Publishing Vice
                                                President (May 1989-December 1990) of Gralla
                                                Publications (a division of United
                                                Newspapers, U.K.); Senior Vice President of
                                                Fairchild Publications, Inc.; and Director or
                                                Trustee of 17 other funds within the
                                                Prudential Mutual Funds.
*John R. Strangfeld, Jr.      Trustee and     Chief Executive Officer, Chairman, President
(45)                          President         and Director of The Prudential Investment
                                                Corporation (since January 1990); Executive
                                                Vice President of the Prudential Global Asset
                                                Management Group of Prudential (since
                                                February 1998); Chairman of Pricoa Capital
                                                Group (since August 1989); Chief Executive
                                                Officer of Private Asset Management Group of
                                                Prudential (November 1994-December 1998); and
                                                Trustee or Director and President of 47 other
                                                funds within the Prudential Mutual Funds.
Clay T. Whitehead (60)        Trustee         President of National Exchange Inc. (new
                                                business development firm) (since May 1983);
                                                Director or Trustee of 21 other funds within
                                                the Prudential Mutual Funds.
David F. Connor (35)          Secretary       Assistant General Counsel (since March 1998) of
                                                PIFM; Associate Attorney, Drinker Biddle &
                                                Reath LLP prior thereto.
</TABLE>

                                      B-35
<PAGE>   36

<TABLE>
<CAPTION>
                              POSITION WITH                PRINCIPAL OCCUPATIONS
      NAME AND AGE(**)          THE TRUST                 DURING PAST FIVE YEARS
      ----------------        -------------               ----------------------
<S>                           <C>             <C>
Grace C. Torres (40)          Treasurer and   First Vice President (since December 1996) of
                              Principal         PIFM; First Vice President (since March 1993)
                              Financial and     of Prudential Securities; formerly First Vice
                              Accounting        President (March 1994-September 1996) of
                              Officer           Prudential Mutual Fund Management, Inc. and
                                                Vice President (July 1989-March 1994) of
                                                Bankers Trust Corporation.
Stephen M. Ungerman (46)      Assistant       Tax Director (since March 1996) of Prudential
                              Treasurer         Investments; formerly First Vice President
                                                (February 1993-September 1996) of Prudential
                                                Mutual Fund Management, Inc.
</TABLE>

- ---------------

 * "Interested" Trustee, as defined in the Investment Company Act, by reason of
   his or her affiliation with Prudential, Prudential Securities or PIFM.

** The address of the trustees and officers is Gateway Center Three, 100
   Mulberry Street, Newark, New Jersey 07102-4077.

     The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Advisors and Distributor, decide upon matters of general
policy. The Trustees also review the actions of the Trust's officers, who
conduct and supervise the daily business operations of the Trust.

     The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
75.

     Pursuant to the Management Agreement with the Trust, the Manager pays all
compensation of officers and employees of the Trust as well as the fees and
expenses of all Trustees of the Trust who are affiliated persons of the Manager.

     The Trust currently pays each of its Trustees who is not an affiliated
person of the Manager or a Fund's Adviser annual compensation of $5,000, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Trustee may change as a result of the introduction of additional
funds upon the boards of which the Trustee may be asked to serve.

     Trustees may receive their Trustee's fees pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of Trustee's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an exemptive order
from the Commission, at the daily rate of return of a Fund. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Trustee. The Trust's obligation to make payments of deferred Trustees'
fees, together with interest thereon, is a general obligation of the Trust.

              CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

     As of September 7, 1999, the Trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding shares of beneficial interest of
the Portfolios. As of September 7, 1999 (prior to the commencement of the public
offering), PIFM owned all of the shares in each Fund.

                                      B-36
<PAGE>   37

                     INVESTMENT ADVISORY AND OTHER SERVICES

(a) MANAGER AND ADVISERS

     The Manager of the Trust is Prudential Investments Fund Management LLC
(PIFM or the Manager) Gateway Center Three, 100 Mulberry Street, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Trust, comprise the Prudential Mutual Funds. See "How
the Trust is Managed -- Manager" in the Prospectus. As of August 31, 1999, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $71.8 billion. According to the
Investment Company Institute, as of December 31, 1998, the Prudential mutual
funds was the 18th largest family of mutual funds in the United States.

     PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent 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 Trust (the Management
Agreement), PIFM, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations of
the Trust and the composition of the Trust's Funds, including the purchase,
retention, disposition and loan of securities. The Manager is authorized to
enter into subadvisory agreements for investment advisory services in connection
with the management of the Trust and each Fund thereof. The Manager will
continue to have responsibility for all investment advisory services furnished
pursuant to any such investment advisory agreements.

     The Manager will review the performance of all Advisers, and make
recommendations to the Trustees with respect to the retention and renewal of
contracts. In connection therewith, PIFM is obligated to keep certain books and
records of the Trust. PIFM also administers the Trust's business affairs and, in
connection therewith, furnishes the Trust with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company (the Custodian), the Trust's custodian,
and PMFS, the Trust's transfer and dividend disbursing agent. The management
services of PIFM for the Trust are not exclusive under the terms of the
Management Agreement and PIFM is free to, and does, render management services
to others.

     The following table sets forth the annual management fee rates currently
paid by each Fund to PIFM pursuant to the Management Agreement, and the amount
of such fees retained by PIFM, each expressed as a percentage of the Fund's
average daily net assets:

<TABLE>
<CAPTION>
                                                           TOTAL         AMOUNT RETAINED
                        FUND                           MANAGEMENT FEE      BY MANAGER
                        ----                           --------------    ---------------
<S>                                                    <C>               <C>
Large Capitalization Growth Fund.....................      0.70%              0.40%
Large Capitalization Value Fund......................      0.70%              0.40%
Small Capitalization Growth Fund.....................      0.70%              0.30%
Small Capitalization Value Fund......................      0.70%              0.30%
International Equity Fund............................      0.80%              0.40%
Total Return Bond Fund...............................      0.50%              0.25%
</TABLE>

     The fee is computed daily and payable monthly. The Management Agreement
also provides that, in the event the expenses of the Trust (including the fees
of PIFM, 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 Trust'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 Trust's
shares are qualified for

                                      B-37
<PAGE>   38

offer and sale, the compensation due to PIFM will be reduced by the amount of
such excess. Reductions in excess of the total compensation payable to PIFM will
be paid by PIFM to the Trust. No jurisdiction currently limits the Trust's
expenses.

     In connection with its management of the business affairs of the Trust,
PIFM bears the following expenses:

     (a) the salaries and expenses of all of its and the Trust's personnel
except the fees and expenses of Trustees who are not affiliated persons of PIFM
or the Trust's Advisers;

     (b) all expenses incurred by PIFM or by the Trust in connection with
managing the ordinary course of the Trust's business, other than those assumed
by the Trust as described below; and

     (c) the fees payable to each Adviser pursuant to the subadvisory agreements
between PIFM and each Adviser (the Subadvisory Agreement).

     Under the terms of the Management Agreement, the Trust is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Trust's Advisers, (c) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent, including the cost of providing records
to the Manager in connection with its obligation of maintaining required records
of the Trust and of pricing the Trust's shares, (d) the charges and expenses of
legal counsel and independent accountants for the Trust, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Trust in
connection with its securities transactions, (f) all taxes and corporate fees
payable by the Trust to governmental agencies, (g) the fees of any trade
associations of which the Trust may be a member, (h) the cost of share
certificates representing shares of the Trust, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Trust and the fees
and expenses involved in registering and maintaining registration of the Trust
and of its shares with the Commission including the preparation and printing of
the Trust's registration statements and prospectuses for such purposes, (k)
allocable communications expenses with respect to investor services and all
expenses of shareholders' and Trustees' meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders and (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Trust's business.

     The Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Trust in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.

     As noted in the Prospectus, subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Adviser manages the securities held
by the portion of the Fund it serves in accordance with the Fund's stated
investment objectives and policies, makes investment decisions for the portion
of the Fund and places orders to purchase and sell securities on behalf of the
portion of the Fund it manages.

     Each Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the Investment Company Act) or upon the termination of
the Management Agreement. Each Advisory Agreement may be terminated by the
Trust, PIFM or the Adviser upon not more than 60 days' written notice. Each
Advisory Agreement provides that it will continue in effect for a period of more
than two years from its execution only so long as such continuance is
specifically approved at least annually in accordance with the requirements of
the Investment Company Act.

                                      B-38
<PAGE>   39

     The Manager and the Trust have received an exemptive order from the
Securities and Exchange Commission which permits the Manager, subject to certain
conditions, to enter into or amend advisory agreements without obtaining
shareholder approval each time. On September 17, 1999, the sole shareholder of
the Trust voted affirmatively to give the Trust this ongoing authority. With
Board approval, the Manager is permitted to employ new Advisers for the Funds,
change the terms of the Funds' advisory agreements or enter into a new advisory
agreement with an existing Adviser after events that cause an automatic
termination of the old advisory agreement with that Adviser. Shareholders of a
Fund continue to have the right to terminate an advisory agreement for the Fund
at any time by a vote of the majority of the outstanding voting securities of
the Fund. Shareholders will be notified of any Adviser changes or other material
amendments to advisory agreements that occur under these arrangements.

     The Advisers have agreed to the following fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment adviser.

<TABLE>
<CAPTION>
                                                                    TOTAL          ANNUAL FEE PAID
                                                                 MANAGEMENT        BY THE MANAGER
                                                                FEE (AS % OF      TO THE ADVISER(S)
                                                                   AVERAGE        (AS % OF AVERAGE
                            FUND                              DAILY NET ASSETS)   DAILY NET ASSETS)
                            ----                              -----------------   -----------------
<S>                                                           <C>                 <C>
Large Capitalization Growth Fund............................        0.70%                0.30%
Large Capitalization Value Fund.............................        0.70%                0.30%
Small Capitalization Growth Fund............................        0.70%                0.40%
Small Capitalization Value Fund.............................        0.70%                0.40%
International Equity Fund...................................        0.80%                0.40%
Total Return Bond Fund......................................        0.50%                0.25%
</TABLE>

     The Advisers perform all administrative functions associated with serving
as Adviser to a Fund. Subject to the supervision and direction of the Manager
and, ultimately, the Trustees, each Adviser's responsibilities are limited to
managing the securities held by the portion of the Fund it serves in accordance
with the Fund's stated investment objective and policies, making investment
decisions for that portion of the Fund and placing orders to purchase and sell
securities on behalf of the portion of the Fund it manages.

     The following sets forth certain information about each of the Advisers:

LARGE CAPITALIZATION GROWTH FUND

     Columbus Circle Investors (CCI), Metro Center, One Station Place, 8th
Floor, Stamford, Connecticut 06902, serves as one of two Advisers to the Large
Capitalization Growth Fund. CCI is a Delaware general partnership with two
partners. CCIP LLP, CCI's general partner, owns over 99% of CCI. Columbus Circle
Investors Management Inc. (CCIM), the other partner, owns the rest of CCI. Both
CCIP LLP and CCIM are owned by five of the managing directors of CCI. As of June
30, 1999, CCI had approximately $4.5 billion in assets under management.

     Oak Associates, Ltd. (Oak), 3875 Embassy Parkway, Suite 250, Akron, Ohio
44333, serves as the other Adviser to the Large Capitalization Growth Fund. Oak
was founded in April 1985 and has specialized in the large cap market since
inception. It provides investment management services to both individual and
institutional clients and, as of June 30, 1999, had more than $11.5 billion in
assets under management. Oak is registered as an investment adviser under the
Investment Advisers Act of 1940. It is a limited liability company organized
under the laws of the State of Ohio. James D. Oelschlager owns a controlling
interest (99%) of Oak.

LARGE CAPITALIZATION VALUE FUND

     INVESCO Capital Management, Inc. (INVESCO), 1315 Peachtree Street, Suite
500, Atlanta, Georgia 30309, serves as one of two Advisers to the Large
Capitalization Value Fund of the Trust.

                                      B-39
<PAGE>   40

INVESCO, a Delaware corporation, is an indirect, wholly-owned subsidiary of
AMVESCAP PLC, a global money management firm. As of June 30, 1999, INVESCO had
approximately $48 billion of assets under management for clients located
throughout the U.S., Europe and Japan.

     Hotchkis and Wiley, 725 S. Figueroa St., Suite 4000, Los Angeles,
California 90017, is a division of The Merrill Lynch Capital Management Group of
Merrill Lynch Asset Management, L.P. It was established in 1980 and has
specialized in the large-cap market since its inception. As of June 30, 1999,
Hotchkis and Wiley had approximately $15 billion in assets under management for
corporate, public, endowment and foundation, and mutual fund clients. Hotchkis
and Wiley is the adviser for the Hotchkis and Wiley Funds and other mutual
funds.

SMALL CAPITALIZATION GROWTH FUND

     Sawgrass Asset Management, L.L.C. (Sawgrass), 4337 Pablo Oaks Court,
Building 200, Jacksonville, FL 32224, serves as one of two Advisers to the Small
Capitalization Growth Fund. Sawgrass was formed in 1998 as a Delaware limited
liability company. AmSouth Bank owns 50% of the shares of Sawgrass, and
employees of Sawgrass own the remaining 50% of the shares of Sawgrass. AmSouth
Bank is a subsidiary of AmSouth Bancorporation. As of May 24, 1999, Sawgrass had
approximately $425 million in assets under management for corporate, municipal,
public and state retirement plans and mutual funds.

     Fleming Asset Management USA (Fleming USA), 320 Park Avenue, New York, NY
10022 serves as the other Adviser to the Fund. Fleming USA is a division of
Robert Fleming, Inc., which is a wholly-owned subsidiary of Robert Fleming
Holdings.

SMALL CAPITALIZATION VALUE FUND

     Lazard Asset Management (Lazard), 30 Rockefeller Plaza, New York, New York
10112, serves as one of two Advisers to the Small Capitalization Value Fund of
the Trust. Lazard is a division of Lazard Freres & Co. LLC (Lazard Freres), a
New York limited liability company. Lazard provides investment management
services to both individual and institutional clients and, together with its
global affiliates, had more than $68 billion of assets under management as of
June 30, 1999. In addition to portfolio management, Lazard Freres provides a
wide variety of investment banking, brokerage and related services.

     Wood, Struthers & Winthrop Management Corp. (WSW), 277 Park Avenue, New
York, New York 10172, serves as the other Adviser to the Small Capitalization
Value Fund. WSW was founded in 1871 and has specialized in the small-cap market
since 1967. It provides investment management services to both individual and
institutional clients and, as of June 30, 1999, had more than $12 billion in
assets under management. WSW is a subsidiary of Donaldson, Lufkin & Jenrette
Securities Corporation (DLJSC), 277 Park Avenue, New York, New York 10172. DLJSC
is a wholly owned subsidiary of Donaldson Lufkin & Jenrette Inc (DLJ Inc), 35.3%
of which is owned by The Equitable Life Assurance Society of the United States
(LIFE), 787 Seventh Avenue, New York, New York 10019, a wholly-owned subsidiary
of The Equitable Companies Incorporated (Equitable), 787 Seventh Avenue, New
York, New York 10019. Equitable owns directly an additional 42.9% of DLJ Inc.
Approximately 60.8% of the outstanding voting common stock as well as certain
convertible preferred stock of Equitable is beneficially owned by AXA, a French
insurance holding company. A group of five French mutual insurance companies,
Uni Europe Assurance Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha
Assurances Vie Mutuelle, AXA Assurances Vie Mutuelle, and AXA Assurances
I.A.R.D. Mutuelle (the "Mutuelles"), owned directly and indirectly through two
French holding companies, Finaxa and Midi Participations, shares representing
over 50% of the voting shares of AXA. The Mutuelles are owned by approximately
1.5 million policyholders.

                                      B-40
<PAGE>   41

INTERNATIONAL EQUITY FUND

     Lazard serves as the Adviser to the International Equity Fund. Lazard is
more fully described immediately above under "Small Capitalization Value Fund."

TOTAL RETURN BOND FUND

     Pacific Investment Management Company (PIMCO), 840 Newport Center Drive,
Suite 30, Newport Beach, CA 92660, serves as the Adviser to the Total Return
Bond Fund. PIMCO is a subsidiary of PIMCO Advisors L.P. (PIMCO Advisors). The
general partners of PIMCO Advisors are PIMCO Partners, G.P. and PIMCO Advisors
Holdings L.P. (PAH). PIMCO Partners, G.P. is a general partnership between PIMCO
Holding LLC, a Delaware limited liability company and indirect wholly-owned
subsidiary of Pacific Life Insurance Company, and PIMCO Partners LLC, a
California limited liability company controlled by the current Managing
Directors and two former Managing Directors of PIMCO. PIMCO Partners, G.P., is
the sole general partner of PAH. PIMCO is registered as an investment advisor
with the Commission and as a commodity trading advisor with the CFTC. As of
December 31, 1998, PIMCO had approximately $171 billion of assets under
management.

(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS

     Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Trust. PIMS is a subsidiary of
Prudential.

     Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Trust
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Funds' Class A, Class B and Class C shares, respectively.

     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, each 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, a 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 Funds' shares and the
maintenance of related shareholder accounts.

     CLASS A PLAN.  Under the Class A Plan, each 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 July 31, 2000.

                                      B-41
<PAGE>   42

     CLASS B AND CLASS C PLANS.  Under the Class B and Class C Plans, each Fund
may pay the Distributor for its distribution-related expenses with respect to
Class B and Class C shares at an annual rate of up to 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. The Distributor has contractually agreed to limit its
distribution-related fees payable under the Class B and Class C Plans to .75 of
1% of the average daily net assets of the Class B and Class C shares,
respectively, of the Total Return Bond Fund for the fiscal year ending July 31,
2000.

     Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of each 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 will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Trustees, including a majority vote of the Trustees who are
not interested persons of the Trust 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 Trustees), 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 Trustees or
by the vote of the holders of a majority of the outstanding shares of the
applicable class on not more than 60 days', nor less 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, and all material
amendments are required to be approved by the Board of Trustees in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Funds will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.

     Pursuant to each Plan, the Board of Trustees will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Funds by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.

     Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws.

     In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons who
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.

FEE WAIVERS/SUBSIDIES

     PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Funds. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for the Class A shares and, with respect to the Total Return Bond Fund, for
the Class B and Class C shares as described above. Fee waivers and subsidies
will increase a Fund's total return.

                                      B-42
<PAGE>   43

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
equal to the prime rate plus one percent per annum may be added to the 6.25%
limitation. Sales from the reinvestment of dividends and distributions are not
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge of the Fund may not exceed .75 of 1%. The 6.25% limitation applies
to each class of a 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 Trust's portfolio securities
and cash, and in that capacity maintains certain financial and accounting books
and records pursuant to an agreement with the Trust.

     Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Trust.
It is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer agency
services to the Trust, 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 communications and other costs. In addition, the
Trust may pay fees for recordkeeping services in respect of certain eligible
defined benefit plan investors.

     PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036 currently serves as the Trust's independent accountants and, in that
capacity, audits the Trust's annual financial statements.

                    BROKERAGE ALLOCATION AND OTHER PRACTICES

TOTAL RETURN BOND FUND

     The Adviser is responsible for decisions to buy and sell securities,
futures contracts and options thereon for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. Brokers, dealers or futures
commission merchants may receive brokerage commissions on portfolio
transactions, including options, futures, and options on futures transactions
and the purchase and sale of underlying securities upon the exercise of options.
Orders may be directed to any broker, dealer or futures commission merchant,
including to the extent and in the manner permitted by applicable law. The Fund
does not normally incur any brokerage commission expenses on portfolio
transactions. The securities purchased by the Funds 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.

                                      B-43
<PAGE>   44

OTHER FUNDS

     Broker-dealers may receive negotiated brokerage commissions on transactions
in portfolio securities, including options and the purchase and sale of
underlying securities upon the exercise of options. On foreign securities
exchanges, commissions may be fixed. Orders may be directed to any broker,
dealer or futures commission merchant including, to the extent and in the manner
permitted by applicable law, Prudential Securities, one of the Advisers or an
affiliate thereof (an affiliated broker).

     Equity securities traded in the over-the-counter market and bonds,
including convertible bonds, are generally traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission, although
the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain money market
instruments and U.S. Government agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Trust will
not deal with an affiliated broker in any transaction in which such affiliated
broker acts as principal. Thus, for example, a Fund will not deal with an
affiliated broker/dealer acting as market maker, and it will not execute a
negotiated trade with an affiliated broker/dealer if execution involves an
affiliated broker/dealer acting as principal with respect to any part of the
Fund's order.

     In placing orders for securities for the Funds of the Trust, each Adviser
is required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that an Adviser will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable under the circumstances. While an
Adviser generally seeks reasonably competitive spreads or commissions, the Trust
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, an Adviser may consider research and investment
services provided by brokers, dealers or futures commission merchants who effect
or are parties to portfolio transactions of the Trust, an Adviser or an
Adviser's other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by an Adviser in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for an Adviser may be used in managing other
investment accounts. Conversely, brokers, dealers or futures commission
merchants furnishing such services may be selected for the execution of
transactions for such other accounts, whose aggregate assets are far larger than
the Trust's, and the services furnished by such brokers, dealers or futures
commission merchants may be used by an Adviser in providing investment
management for the Trust. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker or futures
commission merchant in the light of generally prevailing rates. Each Adviser's
policy is to pay brokers, dealers and futures commission merchants, other than
to an affiliated broker, higher commissions for particular transactions than
might be charged if a different broker had been selected, on occasions when, in
an Adviser's opinion, this policy furthers the objective of obtaining best price
and execution. In addition, each Adviser is authorized to pay higher commissions
on brokerage transactions for the Trust to brokers, dealers and futures
commission merchants, other than to an affiliated broker, in order to secure
research and investment services described above, subject to review by the
Trustees from time to time as to the extent and continuation of this practice.
The allocation of orders among brokers, dealers and futures commission merchants
and the commission rates paid are reviewed periodically by the Trustees. While
such services are useful and important in supplementing its own research and
facilities, the Advisers believe that the value of such services is not
determinable and does not significantly reduce expenses.

                                      B-44
<PAGE>   45

     Subject to the above considerations, an affiliated broker may act as a
securities broker, dealer or futures commission merchant for the Trust. In order
for an affiliate of an Adviser or Prudential Securities to effect any portfolio
transactions for the Trust, the commissions, fees or other remuneration received
by an affiliated broker must be reasonable and fair compared to the commissions,
fees or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold during a
comparable period of time. This standard would allow an affiliated broker to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Trustees, including a majority of the non-interested Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to an affiliated broker are consistent with the
foregoing standard.

     In accordance with Section 11(a) under the Securities Exchange Act of 1934,
as amended, an affiliated broker may not retain compensation for effecting
transactions on a national securities exchange for the Trust unless the Trust
has expressly authorized the retention of such compensation. Section 11(a)
provides that an affiliated broker must furnish to the Trust at least annually a
statement setting forth the total amount of all compensation retained by such
affiliated broker from transactions effected for the Trust during the applicable
period. Brokerage and futures transactions with an affiliated broker are also
subject to such fiduciary standards as may be imposed by applicable law.

               CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION

     The Trust, organized as an unincorporated business trust in 1999 under the
laws of Delaware, is a trust fund of the type commonly known as a "business
trust."

     The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $.001 par value per share, divided into six series (the
Funds). Each Fund is divided into three classes, designated Class A, Class B and
Class C shares. Each class of shares represents an interest in the same assets
of a Fund and is identical in all respects except that (1) each class is subject
to different 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 and (4) only Class B shares have a conversion
feature. In accordance with the Trust's Declaration of Trust, the Trustees may
authorize the creation of additional series and classes within such series, with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. The voting rights of the shareholders of a series or
class can be modified only by the vote of shareholders of that series or class.

     Shares of the Trust, 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 Trust 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 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 a 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.

     The Trust does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Trust will not be required to hold meetings of
shareholders unless, for example, the election of Trustees 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

                                      B-45
<PAGE>   46

Trust's outstanding shares for the purpose of voting on the removal of one or
more Trustees or to transact any other business.

     Under the Declaration of Trust, the Trustees may authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios with distinct investment objectives
and policies and share purchase, redemption and net asset value procedures) with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. All consideration received by the Trust 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 certain changes in the investment policies related thereto.

     The Trustees have the power to alter the number and the terms of office of
the Trustees, provided that always at least a majority of the Trustees have been
elected by the shareholders of the Trust. 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 Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.

                PURCHASE, REDEMPTION AND PRICING OF FUND SHARES

     Shares of a Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares).

PURCHASE BY WIRE

     For an initial purchase of shares of a Fund by wire, you must complete an
application and telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Target Funds, specifying on the wire the account number
assigned by PMFS and your name and identifying the Fund and class in which you
are eligible to invest (Class A, Class B or Class C 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 a 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 Target Funds, the Fund in
which you would like to invest, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.

ISSUANCE OF FUND SHARES FOR SECURITIES

     Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Trust's investment adviser.

                                      B-46
<PAGE>   47

SPECIMEN PRICE MAKE-UP

     Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Total Return Bond Fund are sold with a
maximum sales charge of 4%, Class A shares of the other Funds are sold with a
maximum sales charge of 5%, Class C* shares are sold with a 1% sales charge, and
Class B* shares are sold at NAV. Using the NAV of the Fund at September 2, 1999,
the maximum offering price of the Funds' shares is as follows:

<TABLE>
<CAPTION>
                                 LARGE CAP   LARGE CAP   SMALL CAP   SMALL CAP                  TOTAL RETURN
                                  GROWTH       VALUE      GROWTH       VALUE     INT'L EQUITY       BOND
                                 ---------   ---------   ---------   ---------   ------------   ------------
<S>                              <C>         <C>         <C>         <C>         <C>            <C>
CLASS A
Net asset value and redemption
  price per Class A share......   $10.00      $10.00      $10.00      $10.00        $10.00         $10.00
Maximum sales charge (Total
  Return Bond Fund -- 4% of
  offering price; Other
  Funds -- 5% of offering
  price).......................      .53         .53         .53         .53           .53            .42
                                  ------      ------      ------      ------        ------         ------
Maximum offering price to
  public.......................   $10.53      $10.53      $10.53      $10.53        $10.53         $10.42
                                  ======      ======      ======      ======        ======         ======
CLASS B
Net asset value, offering price
  and redemption price per
  Class B share*...............   $10.00      $10.00      $10.00      $10.00        $10.00         $10.00
                                  ======      ======      ======      ======        ======         ======
CLASS C
Net asset value and redemption
  price per Class C share*.....   $10.00      $10.00      $10.00      $10.00        $10.00         $10.00
Sales charge (1% of offering
  price).......................      .10         .10         .10         .10           .10            .10
                                  ------      ------      ------      ------        ------         ------
Offering price to public.......   $10.10      $10.10      $10.10      $10.10        $10.10         $10.10
                                  ======      ======      ======      ======        ======         ======
</TABLE>

- ---------------
* Class B and Class C shares are subject to a contingent deferred sales charge
  on certain redemptions.

SELECTING A PURCHASE ALTERNATIVE

     The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:

     All Funds except the Total Return Bond 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

                                      B-47
<PAGE>   48

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.

     Total Return Bond Fund.  If you intend to hold your investment in the Fund
for less than four 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 4% 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 6 years, you should
consider purchasing Class B shares over either Class A or Class C shares. This
is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A and Class C shares would exceed the
cumulative distribution-related fee of the Class B shares after 6 years.

     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 C shares, you would have to hold your investment for more than 6
years for the higher cumulative annual distribution-related fee on those shares
plus 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 C distribution-related fee on the investment, fluctuations in
the NAV, the effect of the return on the investment over this period of time or
redemptions when the CDSC is applicable.

REDUCTION AND WAIVER OF INITIAL SALES CHARGE -- CLASS A SHARES

     Benefit Plans.  Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge if they meet the required
minimum for amount of assets, average
                                      B-48
<PAGE>   49

account balance or number of eligible employees. For more information about
these requirements, call Prudential at (800) 353-2847.

     Other Waivers.  In addition, Class A shares may be purchased at NAV,
through the Distributor or the Transfer Agent, by:

     - officers of the Prudential mutual funds (including the Trust),

     - employees of the Distributor, Prudential Securities, PIFM and their
       subsidiaries and members of the families of such persons who maintain an
       "employee related" account at Prudential Securities or the Transfer
       Agent,

     - employees of subadvisers of the Prudential mutual funds provided that
       purchases at NAV are permitted by such person's employer,

     - Prudential, 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 The Prudential Insurance Company of
       America,

     - 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 Incorporated, Pruco
       Securities Corporation 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 Funds in connection with different pricing options for their
programs. Investors should consider carefully any separate

                                      B-49
<PAGE>   50

transaction and other fees charged by these programs in connection with
investing in each available share class before selecting a share class.

     For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE

     If an investor or eligible group of related investors purchases Class A
shares of a 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 "How to Buy, Sell and Exchange
Shares of the Fund -- Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus of the Funds.

     An eligible group of related Fund investors includes any combination of the
following:

     - an individual,

     - the individual's spouse, their children and their parents,

     - the individual's and spouse's Individual Retirement Account (IRA),

     - any company controlled by the individual (a person, entity or group that
       holds 25% or more of the outstanding voting securities of a company will
       be deemed to control the company, and a partnership will be deemed to be
       controlled by each of its general partners),

     - a trust created by the individual, the beneficiaries of which are the
       individual, his or her spouse, parents or children,

     - a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
       created by the individual or the individual's spouse, 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 charge 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.

LETTER 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. Retirement and group plans may not enter into
a Letter of Intent.

     For purposes of the Letter of Intent, all shares of the Funds 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, Prudential

                                      B-50
<PAGE>   51

Securities or its affiliates, and through your broker will not be aggregated to
determine the reduced sales charge.

     A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.

     The Letter of Intent does not obligate the investor to purchase, nor the
Trust to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the purchaser the amount of excess sales charge, if any, paid
during the thirteen-month period. Investors electing to purchase Class A shares
of the Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.

     The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings.

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 Trust 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
                                      B-51
<PAGE>   52

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.

RIGHTS OF ACCUMULATION

     Reduced sales charges are also available through Rights of Accumulation,
under which an investor or an eligible group of related investors, as described
above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate
the value of their existing holdings of shares of the Funds 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 or 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 charges 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 a 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 a Fund.

     If you hold shares of a Fund through Prudential Securities, you must redeem
your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.

     If you hold shares in non-certificate form, a written request for
redemption signed by you exactly as the account is registered is required. If
you hold certificates, the certificates, signed in the name(s) shown on the face
of the certificates, must be received by the Transfer Agent, the Distributor or
your broker in order for the redemption request to be processed. If redemption
is requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Trust in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your broker.

SIGNATURE GUARANTEE

     If the proceeds of the redemption (1) exceed $100,000, (2) are to be paid
to a person other than the record owner, (3) are to be sent to an address other
than the address on the Transfer Agent's records, or (4) are to be paid to a
corporation, partnership, trust or fiduciary, and your shares are held directly
with the Transfer Agent, the signature(s) on the redemption request and on the
certificates, if any, or stock power must be guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker, dealer or credit union. The Transfer Agent reserves the right to request
additional information from, and make reasonable inquiries of, any

                                      B-52
<PAGE>   53

eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices. In the case of redemptions
from a PruArray Plan, if the proceeds of the redemption are invested in another
investment option of the plan in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.

     Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for a 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 Trustees determine that it would be detrimental to the best
interests of the remaining shareholders of a 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 Trust, however, has elected to be
governed by Rule 18f-1 under the Investment Company Act, under which each 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 Funds, the Trustees 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 Trust 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 a Fund at the NAV next determined after the order is
received, which must be within 90 days after the date of the redemption. Any
CDSC paid in connection with such redemption will be credited (in shares) to
your account. (If less than a full repurchase is made, the credit will be on a
pro rata basis.) You must notify the Transfer Agent, either directly or through
the Distributor or your broker, at the time the repurchase privilege is
exercised to adjust your account for the CDSC you previously paid. Thereafter,
any redemptions will be subject to the CDSC applicable at the time of the
redemption. See "Contingent Deferred Sales Charge" below. Exercise of the
repurchase privilege will generally not affect federal tax treatment of any gain
realized upon redemption. However, if the redemption was made within a 30 day
period of the repurchase and if the redemption resulted in a loss, some or all
of the loss, depending on the amount reinvested, may not be allowed for federal
income tax purposes.

                                      B-53
<PAGE>   54

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 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. 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 The Prudential Special Money
Market Fund, Inc.

     The following table sets forth the rates of the CDSC applicable to
redemption of Class B shares:

<TABLE>
<CAPTION>
                                                       CONTINGENT DEFERRED SALES
                                                        CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE                                     OF DOLLARS INVESTED OR
PAYMENT MADE                                              REDEMPTION PROCEEDS
- -------------------                                    -------------------------
<S>                                                    <C>
First................................................            5.0%
Second...............................................            4.0%
Third................................................            3.0%
Fourth...............................................            2.0%
Fifth................................................            1.0%
Sixth................................................            1.0%
Seventh..............................................            None
</TABLE>

     In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of Class B shares made during the preceding six years
and 18 months for Class C shares; then of amounts representing the cost of
shares held beyond the applicable CDSC period; and finally, of amounts
representing the cost of shares held for the longest period of time within the
applicable CDSC period.

     For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you 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.

                                      B-54
<PAGE>   55

WAIVER OF CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES

     The CDSC will be waived in the case of a redemption following the death or
disability of a shareholder or, in the case of a trust account, following the
death or disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.

     The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.

     Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential Mutual Funds, The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account or units of The
Stable Value Fund.

     Systematic Withdrawal Plan.  The CDSC will be waived (or reduced) on
certain redemptions from a Systematic Withdrawal Plan. On an annual basis, up to
12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase. 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
Trustees of the Trust.

     You must notify the Trust's Transfer Agent either directly or through your
broker at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.

<TABLE>
<CAPTION>
               CATEGORY OF WAIVER                                    REQUIRED DOCUMENTATION
<S>                                                   <C>
Death                                                 A copy of the shareholder's death certificate or, in
                                                      the case of a trust, a copy of the grantor's death
                                                      certificate, plus a copy of the trust agreement
                                                      identifying the grantor.

Disability -- An individual will be considered        A copy of the Social Security Administration award
disabled if he or she is unable to engage in any      letter or a letter from a physician on the
substantial gainful activity by reason of any         physician's letterhead stating that the shareholder
medically determinable physical or mental             (or, in the case of a trust, the grantor) is
impairment which can be expected to result in         permanently disabled. The letter must also indicate
death or to be of long-continued and indefinite       the date of disability.
duration.

Distribution from an IRA or 403(b) Custodial          A copy of the distribution form from the custodial
Account                                               firm indicating (i) the date of birth of the
                                                      shareholder and (ii) that the shareholder is over age
                                                      59 and is taking a normal distribution -- signed by
                                                      the shareholder.

Distribution from Retirement Plan                     A letter signed by the plan administrator/trustee
                                                      indicating the reason for the distribution.

Excess Contributions                                  A letter from the shareholder (for an IRA) or the
                                                      plan administrator/trustee on company letterhead
                                                      indicating the amount of the excess and whether or
                                                      not taxes have been paid.
</TABLE>

     The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.

                                      B-55
<PAGE>   56

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 will also 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 Trust 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 NAVs per share, the number of Eligible Shares calculated
as described above will generally be either more or less than the number of
shares actually purchased approximately seven years before such conversion date.
For example, if 100 shares were initially purchased at $10 per share (for a
total of $1,000) and a second purchase of 100 shares was subsequently made at
$11 per share (for a total of $1,100), 95.24 shares would convert approximately
seven years from the initial purchase (that is, $1,000 divided by $2,100
(47.62%), multiplied by 200 shares equals 95.24 shares). The Manager reserves
the right to modify the formula for determining the number of Eligible Shares in
the future as it deems appropriate on notice to shareholders.

     Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.

     For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of The Prudential Special Money Market Fund,
Inc., the time period during which such shares were held in that money market
fund will be excluded. For example, Class B shares held in The Prudential
Special Money Market Fund, Inc. 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 The Prudential Special Money Market
Fund, Inc., 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 and Class C shares
will not constitute "preferential dividends" under the Internal

                                      B-56
<PAGE>   57

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 share 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 Trust makes available to its
shareholders the following privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

     For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund in which they
have invested. An investor may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends or distributions sent in cash rather than reinvested. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payment will be made directly to the broker.
Any shareholder who receives a cash payment representing a dividend or
distribution may reinvest such dividend or distribution at NAV by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the NAV per share next determined after
receipt of the check or proceeds by the Transfer Agent. Such shareholder will
receive credit for any CDSC paid in connection with the amount of proceeds being
reinvested.

EXCHANGE PRIVILEGE

     The Trust makes available to its shareholders the privilege of exchanging
their shares of each 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 Funds. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. For retirement and group plans having a limited menu of Prudential
mutual funds, the exchange privilege is available for those funds eligible for
investment in the particular program.

     It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.

     In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
whose shares you wish to exchange 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 Trust 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.

                                      B-57
<PAGE>   58

     If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.

     You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.

     In periods of severe market or economic conditions the telephone exchange
of shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.

     CLASS A.  Shareholders of a Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the exchange privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the exchange privilege.

     The following money market funds participate in the Class A exchange
privilege:

       Prudential California Municipal Fund

          (California Money Market Series)

        Prudential Government Securities Trust

          (Money Market Series)
          (U.S. Treasury Money Market Series)

        Prudential Municipal Series Fund

          (Connecticut Money Market Series)
          (Massachusetts Money Market Series)
          (New Jersey Money Market Series)
          (New York Money Market Series)

        Prudential MoneyMart Assets, Inc. (Class A shares)

        Prudential Tax-Free Money Fund, Inc.

     CLASS B AND CLASS C.  Shareholders of a Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. 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 a 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 a Fund from a money market fund during the
month (and are held in the Fund at the end of the month), the entire month will
be included in the CDSC holding period. Conversely, if shares are exchanged into
a money market fund prior to the last day of the month (and are held in the
money market fund on the last day of the month), the entire month will be

                                      B-58
<PAGE>   59

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 a 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.

SPECIAL EXCHANGE PRIVILEGES

     A special exchange privilege is available for shareholders who qualify to
purchase Class A shares at NAV. 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.

     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.

     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 Trust, 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

                                      B-59
<PAGE>   60

projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)

     The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)

<TABLE>
<CAPTION>
         PERIOD OF
          MONTHLY
       INVESTMENTS:          $100,000    $150,000    $200,000    $250,000
       ------------          --------    --------    --------    --------
<S>                          <C>         <C>         <C>         <C>
25 Years...................   $  105      $  158      $  210      $  263
20 Years...................      170         255         340         424
15 Years...................      289         433         578         722
10 Years...................      547         820       1,093       1,366
 5 Years...................    1,361       2,041       2,721       3,402
See "Automatic Investment Plan"
</TABLE>

- ---------------

(1) Source information concerning the costs of education at public and private
    universities is available from The College Board Annual Survey of Colleges,
    1993. Average costs for private institutions include tuition, fees, room and
    board for the 1993-1994 academic year.

(2) The chart assumes an effective rate of return of 8% (assuming monthly
    compounding). This example is for illustrative purposes only and is not
    intended to reflect the performance of an investment in shares of the Fund.
    The investment return and principal value of an investment will fluctuate so
    that an investor's shares when redeemed may be worth more or less than their
    original cost.

AUTOMATIC INVESTMENT PLAN (AIP)

     Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of a 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
Transfer Agent, the Distributor or your broker. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC.

     In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan.

     The Transfer Agent, the Distributor or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.

     Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.

     Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently

                                      B-60
<PAGE>   61

with purchases of additional shares are inadvisable because of the sales charges
applicable to (1) the purchase of Class A and Class C shares and (2) the
redemption of Class B and Class C shares. Each shareholder should consult his or
her own tax adviser with regard to the tax consequences of the plan,
particularly if used in connection with a retirement plan.

TAX-DEFERRED RETIREMENT PLANS

     Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, and the administration, custodial fees and other details are
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)

<TABLE>
<CAPTION>
                CONTRIBUTIONS                  PERSONAL
                 MADE OVER:                    SAVINGS       IRA
                -------------                  --------    --------
<S>                                            <C>         <C>
10 years.....................................  $ 26,165    $ 31,291
15 years.....................................    44,675      58,649
20 years.....................................    68,109      98,846
25 years.....................................    97,780     157,909
30 years.....................................   135,346     244,692
</TABLE>

- ---------------

(1) The chart is for illustrative purposes only and does not represent the
    performance of the Fund or any specific investment. It shows taxable versus
    tax-deferred compounding for the periods and on the terms indicated.
    Earnings in a traditional IRA account will be subject to tax when withdrawn
    from the account. Distributions from a Roth IRA which meet the conditions
    required under the Internal Revenue Code will not be subject to tax upon
    withdrawal from the account.

MUTUAL FUND PROGRAMS

     From time to time, the Funds 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 Trust may waive or reduce
the minimum initial investment requirements in connection with such a program.

     The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial adviser
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an

                                      B-61
<PAGE>   62

investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.

                                NET ASSET VALUE

     Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of each Fund. In
accordance with procedures adopted by the Trustees, the value of securities for
which the primary market is on an exchange shall be valued at the last sales
prices on that exchange on the day of valuation or, if there was no sale on such
day, the average of readily available closing bid and asked prices on such day.
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 Adviser under procedures established by and
under the general supervision of the Trustees. The value of a U.S. Government
security for which quotations are available shall be valued at a price provided
by an independent broker/dealer or pricing service. Pricing services consider
such factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations.

     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 appropriate Adviser to be over-the-counter are
valued at the average of the most recently quoted bid and asked prices provided
by a principal market maker. Securities issued in private placements are valued
at the mean between the bid and asked prices provided by primary market dealers.
Private placement securities for which no bid and asked prices are available and
other securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
investment adviser under procedures described above. 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 Trustees 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 provided by
an independent broker/dealer or pricing service. Options on securities that are
listed on an exchange and futures contracts and options thereon traded on a
commodities exchange or board of trade shall be valued at the last sale price at
the close of trading of the applicable exchange or board of trade or, if there
was no sale on the applicable exchange or board of trade, at the average of
quoted bid and asked prices as of the close of such exchange or board of trade.
Over-the-counter options are valued at the mean between bid and asked prices
provided by a dealer. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents at the current rate obtained by a
recognized bank or dealer. Forward currency exchange contracts are valued at the
current cost of covering or offsetting such contracts.

     Each Fund will compute its net asset value 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 securities holdings do not affect net
asset value. In the event the New York Stock Exchange closes early on any
business day, the net asset value of each 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.

                       TAXES, DIVIDENDS AND DISTRIBUTIONS

     Each Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves each Fund (but not its shareholders) from paying federal income
tax on income and capital gains which are distributed to
                                      B-62
<PAGE>   63

shareholders, and permits net capital gains of each Fund (i.e., the excess of
net long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long shareholders
have held their shares in each Fund. Net capital gains of each Fund which are
available for distribution to shareholders will be computed by taking into
account any capital loss carryforward of each Fund.

     Qualification of each Fund as a regulated investment company requires,
among other things, that (a) each 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) 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)
each Fund diversify its holdings so that, at the end of each quarter of the
taxable year, (1) at least 50% of the value of each 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 each Fund's
assets and 10% of the outstanding voting securities of such issuer, and (2) not
more than 25% of the value of each Fund's assets is invested in the securities
of any one issuer (other than the U.S. Government securities); and (c) each Fund
distribute to its shareholders at least 90% of its net investment income and net
short-term gains (that is the excess of net short-term capital gains over net
long-term capital losses) in each year.

     Gains or losses on sales of securities by each Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where each 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 each Fund on securities lapses
or is terminated through a closing transaction, such as a repurchase by each
Fund of the option from its holder, each Fund will generally realize short-term
capital gain or loss. If securities are sold by each Fund pursuant to the
exercise of a call option written by it, each Fund will include the premium
received in the sale proceeds of the securities delivered in determining the
amount of gain or loss on the sale. Certain of each Fund's transactions may be
subject to wash sale, short sale, constructive sale, anti-conversion and
straddle provisions of the Internal Revenue Code which may, among other things,
require each Fund to defer recognition of losses. In addition, debt securities
acquired by each Fund may be subject to original issue discount and market
discount rules which, respectively, may cause each Fund to accrue income in
advance of the receipt of cash with respect to interest or cause gains to be
treated as ordinary income.

     Special rules apply to most options on stock indices, future contracts and
options thereon, and foreign currency forward contracts in which each Fund may
invest. These investments will generally constitute Section 1256 contracts and
will be required to be "marked to market" for federal income tax purposes at the
end of each Fund's taxable year; that is, treated as having been sold at market
value. Except with respect to certain foreign currency forward contracts, sixty
percent of any gain or loss recognized on such deemed sales and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss.

     Gain or loss on the sale, lapse or other termination of options on stock
and on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending on the holding period of the option. In
addition, positions which are part of a "straddle" will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a straddle, each Fund may be required to defer the
recognition of losses on positions it holds to the extent of any unrecognized
gain on offsetting positions held by each Fund.

     Gains or losses attributable to fluctuations in exchange rates which occur
between the time each Fund accrues interest or other receivables or accrues
expenses or other liabilities denomi-

                                      B-63
<PAGE>   64

nated in a foreign currency and the time each Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or ordinary
loss. Similarly, gains or losses on foreign currency forward contracts or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Internal
Revenue Code as "Section 988" gains or losses, increase or decrease the amount
of each Fund's investment company taxable income available to be distributed to
its shareholders as ordinary income, rather than increasing or decreasing the
amount of each Fund's net capital gain. If Section 988 losses exceed other
investment company taxable income during a taxable year, each 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.

     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 (or net asset value) of a share of each 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 each
Fund, the investor should carefully consider the impact of dividends or capital
gains distributions which are expected to be or have been announced.

     Any loss realized on a sale, redemption or exchange of shares of each Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.

     A shareholder who acquires shares of each 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 each
Fund.

     Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain distributions paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividends and capital
gain distributions which are effectively connected with a U.S. trade or business
of the foreign shareholder.

     Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent each Fund's income is derived
from qualified dividends received by each 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 eligible for the dividends-received deduction.

     Each Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. Each Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
twelve months ending on October 31 of such calendar year. In addition, each Fund
must distribute during the calendar year all undistributed ordinary

                                      B-64
<PAGE>   65

income and undistributed capital gain net income from the prior year or the
twelve-month period ending on October 31 of such prior calendar year,
respectively. To the extent it does not meet these distribution requirements,
each Fund will be subject to a non-deductible 4% excise tax on the undistributed
amount. For purposes of this excise tax, income on which each Fund pays income
tax is treated as distributed.

     Each Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If a 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. Each
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 a 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 extend of gains recognized in prior years. Alternatively, a Fund, if it
meets certain requirements, may elect to treat any PFIC in which it invests as a
"qualified electing fund," in which case, in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the qualified electing Fund's annual ordinary earnings and
net capital gain, even if they are not distributed to the Fund; those amounts
would be subject to the distribution requirements applicable to the Fund
described above.

     Income received by a 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 a Fund will be subject, since the amount of each Fund's
assets to be invested in various countries will vary. Except in the case of the
International Equity Fund, the Funds do not expect to meet the requirements of
the Internal Revenue Code for "passing-through" to its shareholders any foreign
income taxes paid.

     Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Funds.

     Dividends and distributions may also be subject to state and local taxes.

                            PERFORMANCE INFORMATION

     YIELD

     The Trust may from time to time advertise the yield of the Total Return
Bond Fund as calculated over a 30-day period. This yield will be computed by
dividing the Fund's net investment income per share earned during this 30-day
period by the maximum offering price per share on the last day of this period.
The average number of shares used in determining the net investment income per
share will be the average daily number of shares outstanding during the 30-day
period that were eligible to receive dividends. In accordance with regulations
of the Securities and Exchange Commission, income will be computed by totaling
the interest earned on all debt obligations during the 30-day period and
subtracting from that amount the total of all expenses incurred during the
period, which include management fees. The 30-day yield is then annualized on a
bond-equivalent basis assuming

                                      B-65
<PAGE>   66

semi-annual reinvestment and compounding of net investment income. Yield is
calculated according to the following formula:
                                      a-b
                         YIELD = 2[(-------+1)(6) - 1]
                                       cd

<TABLE>
<S>    <C>  <C>  <C>
Where: a    =    dividends and interest earned during the period.
       b    =    expenses accrued for the period (net of reimbursements).
       c    =    the average daily number of shares outstanding during the
                 period that were entitled to receive dividends.
       d    =    the maximum offering price per share on the last day of the
                 period.
</TABLE>

     The Fund's yield will fluctuate, and an annualized yield quotation is not a
representation by the Fund as to what an investment in the Fund will actually
yield for any given period. Yields for the Fund will vary based on a number of
factors including changes in net asset value, market conditions, the level of
interest rates and the level of income and expenses.

     AVERAGE ANNUAL TOTAL RETURN

     The Trust may from time to time advertise the average annual total return
of a Fund. Average annual total return is computed by finding the average annual
compounded rates of return over the 1, 5 and 10 year periods that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:

                                P(1+T)(n) = ERV

<TABLE>
<S>     <C>  <C>  <C>
Where:  P    =    a hypothetical initial payment of $1,000.
        T    =    average annual total return.
        n    =    number of years.
        ERV  =    ending redeemable value of a hypothetical $1,000 payment made
                  at the beginning of the 1, 5 or 10 year periods at the end of
                  the 1, 5 or 10 year periods (or fractional portion thereof).

</TABLE>

     AGGREGATE TOTAL RETURN

     The Trust may from time to time advertise the aggregate total return of a
Fund. A Fund's aggregate total return figures represent the cumulative change in
the value of an investment in the Fund for the specified period and are computed
by the following formula:

                                     ERV-P
                                  -----------
                                       P

<TABLE>
<S>     <C>  <C>  <C>
Where:  P    =    a hypothetical initial payment of $1,000.
        ERV  =    ending redeemable value at the end of the 1, 5 or 10 year
                  periods (or fractional portion thereof) of a hypothetical
                  $1,000 payment made at the beginning of the 1, 5 or 10 year
                  periods.
</TABLE>


     Comparative performance information may be used from time to time in
advertising or marketing the Fund shares, including data from Lipper, Inc.,
Morningstar Publications, Inc., Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.

                                      B-66
<PAGE>   67

REPORT OF INDEPENDENT ACCOUNTANTS          TARGET FUNDS

- --------------------------------------------------------------------------------

To the Shareholders and Board of Trustees of
Target Funds:

     In our opinion, the accompanying statements of assets and liabilities
present fairly, in all material respects, the financial positions of Large
Capitalization Growth Fund, Large Capitalization Value Fund, Small
Capitalization Growth Fund, Small Capitalization Value Fund, International
Equity Fund and Total Return Bond Fund (the six funds constituting Target Funds,
collectively referred to hereafter as the "Trust") at September 2, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Trust's management; our responsibility
is to express an opinion on the these financial statements based on our audits.
We conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 7, 1999

                                      B-67
<PAGE>   68

<TABLE>
<S>                                                      <C>
                                                         TARGET FUNDS LARGE CAPITALIZATION
STATEMENT OF ASSETS AND LIABILITIES                      GROWTH FUND
</TABLE>

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                SEPTEMBER 2, 1999
                                                                -----------------
<S>                                                             <C>
ASSETS
Cash........................................................        $ 18,000
Deferred offering costs.....................................         102,000
                                                                    --------
     Total assets...........................................         120,000
                                                                    --------
LIABILITIES
Offering costs payable......................................         102,000
NET ASSETS (NOTE 1)
     Applicable to 1,800 shares of beneficial interest......        $ 18,000
                                                                    ========
Calculation of Offering Price
Class A:
     Net asset value and redemption price per Class A share
       ($6,000 / 600 shares of beneficial interest issued
      and outstanding)......................................            $10.00
     Maximum sales charge (5% of offering price)............             .53
                                                                ------------
     Offering price to public...............................          $10.53
                                                                ============
Class B:
     Net asset value, offering price and redemption price
      per Class B share ($6,000 / 600 shares of beneficial
      interest issued and outstanding)......................          $10.00
                                                                ============
Class C:
     Net asset value and redemption price per Class C share
       ($6,000 / 600 shares of beneficial interest issued
      and outstanding)......................................          $10.00
     Sales charge (1% of offering price)....................             .10
                                                                ------------
     Offering price to public...............................          $10.10
                                                                ============
</TABLE>

See Notes to Financial Statements.
                                      B-68
<PAGE>   69

<TABLE>
<S>                                                      <C>
                                                         TARGET FUNDS LARGE CAPITALIZATION
STATEMENT OF ASSETS AND LIABILITIES                      VALUE FUND
</TABLE>

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                SEPTEMBER 2, 1999
                                                                -----------------
<S>                                                             <C>
ASSETS
Cash........................................................        $ 18,000
Deferred offering costs.....................................         102,000
                                                                    --------
     Total assets...........................................         120,000
                                                                    --------
LIABILITIES
Offering costs payable......................................         102,000
NET ASSETS (NOTE 1)
     Applicable to 1,800 shares of beneficial interest......        $ 18,000
                                                                    ========
Calculation of Offering Price
Class A:
     Net asset value and redemption price per Class A share
       ($6,000 / 600 shares of beneficial interest issued
       and outstanding)...................................            $10.00
     Maximum sales charge (5% of offering price)............             .53
                                                                ------------
     Offering price to public...............................          $10.53
                                                                ============
Class B:
     Net asset value, offering price and redemption price
      per Class B share ($6,000 / 600 shares of beneficial
      interest issued and outstanding)......................          $10.00
                                                                ============
Class C:
     Net asset value and redemption price per Class C share
       ($6,000 / 600 shares of beneficial interest issued
       and outstanding).....................................          $10.00
     Sales charge (1% of offering price)....................             .10
                                                                ------------
     Offering price to public...............................          $10.10
                                                                ============
</TABLE>

See Notes to Financial Statements.
                                      B-69
<PAGE>   70

<TABLE>
<S>                                                      <C>
                                                         TARGET FUNDS SMALL CAPITALIZATION
STATEMENT OF ASSETS AND LIABILITIES                      GROWTH FUND
</TABLE>

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                SEPTEMBER 2, 1999
                                                                -----------------
<S>                                                             <C>
ASSETS
Cash........................................................        $ 18,000
Deferred offering costs.....................................         102,000
                                                                    --------
     Total assets...........................................         120,000
                                                                    --------
LIABILITIES
Offering costs payable......................................         102,000
NET ASSETS (NOTE 1)
     Applicable to 1,800 shares of beneficial interest......        $ 18,000
                                                                    ========
Calculation of Offering Price
Class A:
     Net asset value and redemption price per Class A share
       ($6,000 / 600 shares of beneficial interest issued
       and outstanding).. ................................            $10.00
     Maximum sales charge (5% of offering price)............             .53
                                                                ------------
     Offering price to public...............................          $10.53
                                                                ============
Class B:
     Net asset value, offering price and redemption price
      per Class B share ($6,000 / 600 shares of beneficial
      interest issued and outstanding)......................          $10.00
                                                                ============
Class C:
     Net asset value and redemption price per Class C share
       ($6,000 / 600 shares of beneficial interest issued
       and outstanding).....................................          $10.00
     Sales charge (1% of offering price)....................             .10
                                                                ------------
     Offering price to public...............................          $10.10
                                                                ============
</TABLE>

See Notes to Financial Statements.
                                      B-70
<PAGE>   71

<TABLE>
<S>                                                      <C>
                                                         TARGET FUNDS SMALL CAPITALIZATION
STATEMENT OF ASSETS AND LIABILITIES                      VALUE FUND
</TABLE>

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                SEPTEMBER 2, 1999
                                                                -----------------
<S>                                                             <C>
ASSETS
Cash........................................................        $ 18,000
Deferred offering costs.....................................         102,000
                                                                    --------
     Total assets...........................................         120,000
                                                                    --------
LIABILITIES
Offering costs payable......................................         102,000
                                                                    --------
NET ASSETS (NOTE 1)
     Applicable to 1,800 shares of beneficial interest......        $ 18,000
                                                                    ========
Calculation of Offering Price
Class A:
     Net asset value and redemption price per Class A share
       ($6,000 / 600 shares of beneficial interest issued
       and outstanding)...................................            $10.00
     Maximum sales charge (5% of offering price)............             .53
                                                                ------------
     Offering price to public...............................          $10.53
                                                                ============
Class B:
     Net asset value, offering price and redemption price
      per Class B share ($6,000 / 600 shares of beneficial
      interest issued and outstanding)......................          $10.00
                                                                ============
Class C:
     Net asset value and redemption price per Class C share
       ($6,000 / 600 shares of beneficial interest issued
       and outstanding).....................................          $10.00
     Sales charge (1% of offering price)....................             .10
                                                                ------------
     Offering price to public...............................          $10.10
                                                                ============
</TABLE>

See Notes to Financial Statements.
                                      B-71
<PAGE>   72

<TABLE>
<S>                                                      <C>
                                                         TARGET FUNDS INTERNATIONAL
STATEMENT OF ASSETS AND LIABILITIES                      EQUITY FUND
</TABLE>

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                SEPTEMBER 2, 1999
                                                                -----------------
<S>                                                             <C>
ASSETS
Cash........................................................        $ 18,000
Deferred offering costs.....................................         102,000
                                                                    --------
     Total assets...........................................         120,000
                                                                    --------
LIABILITIES
Offering costs payable......................................         102,000
                                                                    --------
NET ASSETS (NOTE 1)
     Applicable to 1,800 shares of beneficial interest......        $ 18,000
                                                                    ========
Calculation of Offering Price
Class A:
     Net asset value and redemption price per Class A share
       ($6,000 / 600 shares of beneficial interest issued
       and outstanding)...................................            $10.00
     Maximum sales charge (5% of offering price)............             .53
                                                                ------------
     Offering price to public...............................          $10.53
                                                                ============
Class B:
     Net asset value, offering price and redemption price
      per Class B share ($6,000 / 600 shares of beneficial
      interest issued and outstanding)......................          $10.00
                                                                ============
Class C:
     Net asset value and redemption price per Class C share
       ($6,000 / 600 shares of beneficial interest issued
       and outstanding).....................................          $10.00
     Sales charge (1% of offering price)....................             .10
                                                                ------------
     Offering price to public...............................          $10.10
                                                                ============
</TABLE>

See Notes to Financial Statements.
                                      B-72
<PAGE>   73

<TABLE>
<S>                                                      <C>
                                                         TARGET FUNDS TOTAL RETURN
STATEMENT OF ASSETS AND LIABILITIES                      BOND FUND
</TABLE>

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                SEPTEMBER 2, 1999
                                                                -----------------
<S>                                                             <C>
ASSETS
Cash........................................................        $ 10,000
Deferred offering costs.....................................         102,000
                                                                    --------
     Total assets...........................................         112,000
                                                                    --------
LIABILITIES
Offering costs payable......................................         102,000
                                                                    --------
NET ASSETS (NOTE 1)
     Applicable to 1,000 shares of beneficial interest......        $ 10,000
                                                                    ========
Calculation of Offering Price
Class A:
     Net asset value and redemption price per Class A share
       ($3,340 / 334 shares of beneficial interest issued
       and outstanding)...................................            $10.00
     Maximum sales charge (4% of offering price)............             .42
                                                                ------------
     Offering price to public...............................          $10.42
                                                                ============
Class B:
     Net asset value, offering price and redemption price
      per Class B share ($3,300 / 333 shares of beneficial
      interest issued and outstanding)......................          $10.00
                                                                ============
Class C:
     Net asset value and redemption price per Class C share
       ($3,300 / 333 shares of beneficial interest issued
       and outstanding).....................................          $10.00
     Sales charge (1% of offering price)....................             .10
                                                                ------------
     Offering price to public...............................          $10.10
                                                                ============
</TABLE>

See Notes to Financial Statements.
                                      B-73
<PAGE>   74

NOTES TO FINANCIAL STATEMENTS                 TARGET FUNDS

- --------------------------------------------------------------------------------

NOTE 1.

Target Funds (the Trust), consisting of six separate Funds: Large Capitalization
Growth Fund, Large Capitalization Value Fund, Small Capitalization Growth Fund,
Small Capitalization Value Fund, International Equity Fund and Total Return Bond
Fund, which was organized as a business trust in Delaware on July 8, 1999, is an
open-end, diversified management investment company. The Fund had no significant
operations other than the issuance of 600 shares each of Class A, Class B and
Class C of Large Capitalization Growth Fund, Large Capitalization Value Fund,
Small Capitalization Growth Fund, Small Capitalization Value Fund and
International Equity Fund and 334 shares of Class A and 333 shares of Class B
and Class C of Total Return Bond Fund of beneficial interest for $100,000 on
September 2, 1999 to Prudential Investments Fund Management LLC (PIFM or
Manager).

Certain costs incurred and to be incurred in connection with the initial
offering of shares of the Trust, estimated at $612,000, will be deferred and
amortized over the period of benefit, not to exceed 12 months from the date the
funds commence operations. Estimated organizational expenses of the Trust in the
amount of approximately $26,400 incurred prior to the offering of the Trust's
shares will be absorbed by the Manager.

- --------------------------------------------------------------------------------

NOTE 2.  AGREEMENTS

The Trust has entered into a management agreement with PIFM.

The management fee paid PIFM will be computed daily and payable monthly, at an
annual rate of .70 of 1% of the average daily net assets of the Large
Capitalization Growth Fund, Large Capitalization Value Fund, Small
Capitalization Growth Fund and Small Capitalization Value Fund, .80 of 1% of the
average daily net assets of the International Equity Fund and .50 of 1% of the
average daily net assets of the Total Return Bond Fund.

The Trust has entered into a distribution agreement with Prudential Investment
Management Services LLC (the Distributor or PIMS) for distribution of the Fund's
shares.

Pursuant to separate Plans of Distribution (the Class A Plan, the Class B Plan
and the Class C Plan, collectively the Plans) adopted by the Trust under Rule
12b-1 of the Investment Company Act of 1940, the Distributor incurs the expenses
of distributing the Fund's Class A, Class B and Class C shares. These expenses
include commissions and account servicing fees paid to, or on account of
financial advisers of Prudential Securities and Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions paid to, or on account of,
other broker-dealers or certain 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
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.

Pursuant to the Class A Plan, each Fund will compensate the Distributor for its
expenses with respect to Class A shares at an annual rate of up to .30 of 1% of
the average daily net asset value of the Class A shares. The Distributor has
agreed to limit its distribution-related fees payable under the Class A Plan to
 .25 of 1% of the average daily net asset value of the Class A shares for the
fiscal period ending July 31, 2000.

                                      B-74
<PAGE>   75

Pursuant to the Class B and Class C Plans, each Fund will compensate 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 Class
B and Class C shares. With respect to the Total Return Bond Fund, the
Distributor has agreed to limit its distribution-related fees payable under the
Class B and Class C Plans to .75 of 1% of the average daily net assets of the
Total Return Bond Fund's Class B and Class C shares for the fiscal period ending
July 31, 2000.

Prudential Mutual Fund Services LLC, a wholly owned subsidiary of PIFM, serves
as the Trust's transfer agent.

PIFM, PIMS and Prudential Securities are indirect wholly owned subsidiaries of
The Prudential Insurance Company of America.

                                      B-75
<PAGE>   76

                      (This Page Intentionally Left Blank)

                                      B-76
<PAGE>   77

                   APPENDIX I -- 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 illustrates that large pension plans use the methods listed in
the percentages indicated for the period December 1977 through December 1987.

                          HOW YOU ALLOCATE YOUR ASSETS
                         MAINLY DETERMINES YOUR RETURN

                   (BASED ON A STUDY OF LARGE PENSION PLANS)

                                  [PIE CHART]

          SECURITY SELECTION/OTHER.............................. 6.7%
          ASSET ALLOCATION......................................91.5%
          MARKET TIMING......................................... 1.8%

     Source:  Financial Analysts Journal, May/June 1991: "Deteminants of
Portfolio Performance II: An Update," by Gary Brinson, Brian Singer and Gilbert
Beebower. Results are based on the 10-year performance records of 82 pension
funds. The study updates and supports a similar study done in 1986. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any TARGET Portfolio.

                                       I-1
<PAGE>   78

     This chart shows the long-term performance of various asset classes and the
rate of inflation.

                EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY

              (VALUE OF $1 INVESTED ON 12/31/25 THROUGH 12/31/98)

                                  [BAR GRAPH]

<TABLE>
<C>      <S>
$   9    Inflation
$  15    T-bills
$  44    Bonds
$2,351   Common Stock
$5,117   Small Stock
</TABLE>

     Source:  Ibbotson Associates. Used with permission. This chart is for
illustrative purposes only and is not indicative of the past, present, or future
performance of any TARGET Portfolio.

     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. For 1981 through 1998, returns are
those of the Dimensional Fund Advisors (DFA) Small Company Fund, which is a
market-value-weighted index of the ninth and tenth deciles of the New York Stock
Exchange (NYSE), plus stocks listed on the American Stock Exchange and over-the-
counter with the same or less capitalization as the upper bound of the NYSE
decile.

     COMMON STOCK returns are based on the S&P 500 Composite Index, a
market-weighted, unmanaged index of 500 stocks (currently) in a variety of
industries. It is often used as a broad measure of stock market performance.

     LONG-TERM GOVERNMENT BOND returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years.

     TREASURY BILL returns are for a one-month bill. Treasuries are guaranteed
by the government as to the timely payment of principal and interest; equities
are not.

     INFLATION is measured by the consumer price index (CPI).

                                       I-2
<PAGE>   79

     The following chart shows the performance of a hypothetical investment in
the following stock indices for the period indicated.

                  DIFFERENT TYPES OF STOCKS, DIFFERENT RETURNS

                        VALUE OF $1 INVESTED ON 12/31/69
                                  [BAR GRAPH]

<TABLE>
<C>      <S>
$39.17   Common Stocks
$40.53   Small Stocks
$32.43   Foreign Stock
</TABLE>

     COMMON STOCK returns are based on the S&P 500 Composite Index, a
market-weighted, unmanaged index of 500 stocks (currently) in a variety of
industries. It is often used as a broad measure of stock market performance.
Source: Lipper, Inc.

     SMALL STOCK performance for the beginning of the period through 1980 is
based on the returns of stocks making up the 5th quintile of the New York Stock
Exchange (NYSE) and, for 1981-1998, is based on the returns of the DFA Small
Company Fund, which is a market-value-weighted index of the ninth and tenth
deciles of the NYSE, plus stocks listed on the American Stock Exchange and
over-the-counter with the same or less capitalization as the upper bound of the
NYSE decile. Source: Ibbotson Associates.

     FOREIGN STOCK returns are represented by the Morgan Stanley Capital
International Europe Australia Far East (EAFE) index, a common measure of
foreign stock performance. It is a market-weighted index of 20 countries.
Source: Lipper, Inc.

     Geometric Returns are through 1998. Generally, returns of foreign stocks
are more volatile than those of common or small stocks.

     This chart is for illustrative purposes only and is not indicative of the
past, present, or future performance of any TARGET Portfolio.

                                       I-3
<PAGE>   80

     This chart shows the performance of a hypothetical investment in short-term
U.S. Government securities adjusted for inflation for the period from January 1,
1998 through December 31, 1998.

                         TOO MANY SHORT-TERM SECURITIES
                               MAY NOT MAKE SENSE

INFLATION AND TAXES CAN ERODE YOUR INVESTMENT

<TABLE>
<S>                                                             <C>
Initial investment..........................................    $      10,000
Interest income: 4.86%......................................              486
Tax paid on interest (assumes 31% tax rate).................             -151
                                                                -------------
Net interest income.........................................              335
Adjust for 1.8% inflation...................................              180
                                                                -------------
Net investment..............................................    $      10,155
</TABLE>

                   THE INVESTOR'S NET RETURN WAS ONLY 1.55%!

     1998 Salomon Smith Barney Brothers 30-day T-bill return used for short-term
interest rate. Federal tax rate of 31% and 1998 inflation rate (CPI) were used.
Short-term rates can fluctuate.

     Past performance is no guarantee of future results. This hypothetical
example is provided for informational purposes only. It is not intended to
represent any specific investment and is not indicative of past, present, or
future performance of any Fund.

                                       I-4
<PAGE>   81

     Each bar shows the best
and worst annualized return for
the specified holding periods
through 1998. For example, the
best one-year return occurred
in 1933 and the worst 10-year
annualized return occurred from
1929-1938. The first holding
period started on 12/31/25 and
the first 20-year period ended
on 12/31/45.

     Common stock returns are
based on the S&P 500 Composite
Index, a market-weighted,
unmanaged index of 500 stocks
(currently) in a variety of
industries. It is often used as
a broad measure of stock market
performance.

     This chart is for
illustrative purposes only and
is not indicative of the past,
present, or future performance
of any Fund.

     Source:  Ibbotson

Associates
                                            TIME REDUCES YOUR RISK
                                 BEST AND WORST ANNUALIZED RETURNS OF THE S&P

                               1933       1994-98       1949-58       1979-98
                               1931       1928-32       1929-38       1929-48
                               1 year     5 years     10 years     20 years

                                       I-5
<PAGE>   82

                 APPENDIX II -- GENERAL INVESTMENT INFORMATION

     The following terms are used in mutual fund investing.

ASSET ALLOCATION

     Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.

DIVERSIFICATION

     Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.

DURATION

     Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.

     Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years -- the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).

MARKET TIMING

     Market timing -- buying securities when prices are low and selling them
when prices are relatively higher -- may not work for many investors because it
is impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.

POWER OF COMPOUNDING

     Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.

STANDARD DEVIATION

     Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.

                                      II-1
<PAGE>   83

                APPENDIX III--INFORMATION RELATING TO PRUDENTIAL

     Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Trust is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Trust.

INFORMATION ABOUT PRUDENTIAL

     The Manager, PIC(1) and Jennison Associates LLC are subsidiaries of
Prudential, which is one of the largest diversified financial services
institutions in the world and, based on total assets, the largest insurance
company in North America as of December 31, 1997. Principal products and
services include life and health insurance, other healthcare products, property
and casualty insurance, securities brokerage, asset management, investment
advisory services and real estate brokerage. Prudential (together with its
subsidiaries) employs almost 81,000 persons worldwide, and maintains a sales
force of approximately 10,100 agents and 6,500 domestic and international
financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the Rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.

     Insurance.  Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, the Prudential has
25 million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
approximately 1.5 million cars and insures approximately 1.2 million homes.

     Money Management.  The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in assets
under management. Prudential Investments, a business group of Prudential (of
which Prudential Mutual Funds is a key part), manages over $211 billion in
assets of institutions and individuals. In Institutional Investor, July 1998,
Prudential was ranked eighth in terms of total assets under management, as of
December 31, 1997.

     Real Estate.  The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents with over 1,400 offices
across the United States.(2)

     Financial Services.  The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves nearly
1.5 million customers across 50 states.

- ---------------

(1) PIC serves as the Subadviser to substantially all of the Prudential Mutual
    Funds. Wellington Management Company LLP serves as the subadviser to Global
    Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
    to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
    subadvisers to The Prudential Investment Portfolios, Inc., Prudential 20/20
    Focus Fund and Prudential Diversified Funds and Mercator Asset Management LP
    as the subadviser to The International Stock Series, a portfolio of
    Prudential World Fund, Inc. There are multiple subadvisers for The Target
    Portfolio Trust.

(2) As of December 31, 1997. III-1
<PAGE>   84

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

     As of November 30, 1998, Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.

     The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.

     From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the subadvisers
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.

     Equity Funds.  Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth Fund, a growth-style equity fund managed by Jennison Associates LLC, a
premier institutional equity manager and a subsidiary of Prudential.

     High Yield Funds.  Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitors
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(4) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.

     Prudential's portfolio managers are supported by a large and sophisticated
research organization. Investment grade bond analysts monitor the financial
viability of different bond issuers in the investment grade corporate and
municipal bond markets--from IBM to small municipalities, such as Rockaway
Township, New Jersey. These analysts consider among other things sinking fund
provisions and interest coverage ratios.

     Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.

     Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.

     Prudential Mutual Funds trade billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers met with several senior U.S. and foreign
government officials, on issues ranging from economic conditions in foreign
countries to the viability of index-linked securities in the United States.

INFORMATION ABOUT PRUDENTIAL SECURITIES

     Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1998, assets held by Prudential

- ---------------

(4) As of December 31, 1997. The number of bonds and the size of the Fund are
    subject to change.

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<PAGE>   85

Securities for its clients approximated $268 billion. During 1998, over 31,000
new customer accounts were opened each month at Prudential Securities.(5)

     Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment and financial
planning areas.

     In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect(SM), a state-of-the-art asset allocation software program
which helps financial advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.

     For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.

- ---------------

(5) As of December 31, 1998.
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                                  APPENDIX IV

                              GLOSSARY OF INDICES

U.S. LARGE CAP STOCKS (S&P 500) -- The S&P 500 is a capital-weighted index
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The S&P 500 is an unmanaged
index.

U.S. SMALL CAP STOCKS (RUSSELL 2000) -- The Russell 2000 Index is a stock market
index comprised of the 2000 smallest U.S. domiciled publicly traded common
stocks that are included in the Russell 3000 Index. These common stocks
represent 10% of the total market capitalization of the Russell 3000 Index
which, in turn, represents approximately 98% of the publicly traded U.S. equity
market.

INTERNATIONAL STOCKS (MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA,
FAR EAST (EAFE) INDEX) -- The MSCI EAFE Index is an arithmetical average
weighted by market value of the performance of over 1000 non-U.S. companies
representing 20 stock markets in Europe, Australia, New Zealand and the Far
East. The EAFE Index is an unmanaged index.

U.S. BONDS (LEHMAN BROTHERS AGGREGATE BOND INDEX) -- The index is composed of
securities from the Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and Asset Backed Securities Index. Total
return comprises price appreciation/depreciation and income as a percentage of
the original investment.

INTERNATIONAL BONDS (WB INDEX) -- The Salomon Smith Barney Non-U.S. World
Government WB Index (WB Index) measures the total return performance of high
quality securities in major sectors of the international bond market. The Index
covers approximately 600 bonds from 17 currencies. Only high quality, straight
issues are included. The WB Index is calculated on both a weighted and an
unweighted basis. Generally, index samples for each market are restricted to
bonds with at least one year of remaining life. The WB Index is an unmanaged
index.

U.S. TREASURY BILLS (SALOMON BROTHERS 90 DAY INDEX) -- This index is constructed
by purchasing equal dollar amounts of three-month Treasury bills at the
beginning of three consecutive months. As each bill matures, all proceeds are
rolled over or reinvested in a new three-month bill. The income used to
calculate the monthly return is derived by subtracting the original amount
invested from the maturity value.

SALOMON SMITH BARNEY MORTGAGE-BASED SECURITIES INDEX (MBS INDEX) -- The MBS
Index is comprised of 30- and 15-year GNMA, FNMA and FHLMC pass-through, and
FNMA and FHLMC balloon mortgages. The MBS Index is an unmanaged index.

INFLATION (CPI) -- The Consumer Price Index for all urban consumers, not
seasonally adjusted, is used to measure the rate of change of consumer prices.
This measures inflation and is constructed by the U.S. Department of Labor,
Bureau of Labor Statistics, Washington D.C.

LARGE CAP GROWTH INDEX (RUSSELL 1000 GROWTH) -- Contains those Russell 1000
securities with a "growth" orientation. Securities in this index tend to exhibit
higher price-to-book and price-to-earnings ratios, lower dividend yields, and
higher forecasted growth rates than those in the Value universe.

LARGE CAP VALUE INDEX (RUSSELL 1000 VALUE) -- Contains those Russell 1000
securities with a "value" orientation. Securities in this index tend to exhibit
lower price-to-book and price-to-earnings ratios, higher dividend yields, and
lower forecasted growth rates than those in the Growth universe.

SMALL CAP GROWTH INDEX (PSI SMALL CAP GROWTH INDEX) -- This index is created by
screening the twentieth through forty-fifth percentiles of market value in the
Compustat universe for companies with growth characteristics. Growth stocks have
historical sales growth rates that are greater than 10%, rank in the top half of
the Institutional Brokers Estimate System (I/B/E/S) universe based on forecasted
growth rate, and have low payouts and debt/capital ratios.

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SMALL CAP VALUE INDEX (PSI SMALL CAP VALUE) -- This index is created by
screening the twentieth through forty-fifth percentiles of market value in the
Compustat universe for companies with value characteristics. Value stocks rank
in the bottom 50% of the universe based on a normalized P/E ratio. Companies
must have sustainable dividend rates.

LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX -- The Lehman Brothers
Government/ Corporate Bond Index (LGCI) is a weighted index comprised of
publicly traded intermediate and long-term government and corporate debt with an
average maturity of 10 years. The LGCI is an unmanaged index.

LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX -- The Lehman
Brothers Intermediate Government/Corporate Bond Index (Lehman Int. Gov't Corp.
Index) is a weighted index comprised of securities issued or backed by the U.S.
government and its agencies and securities publicly issued by corporations with
one to ten years remaining to maturity, rated investment grade and having $50
million or more outstanding. The Lehman Int. Gov't Corp. Index is an unmanaged
index.

LIPPER INTERNATIONAL EQUITY FUND AVERAGE -- Contains international equity funds
that report to Lipper Analytical Services. The funds are given equal weight in
constructing performance which prevents any one fund from having a greater
impact on the overall calculation. Each fund contained in the average has stated
that their objective matches that of the group. Single country funds are not
included in this group.

LIPPER CORPORATE BOND FUND AVERAGE -- Contains corporate bond funds that report
to Lipper Analytical Services. The funds have an average credit quality rating
of least an "A". The average maturity is greater than 10 years. The funds are
equally weighted to assure that no one fund has more of an impact on the
performance calculation than any other fund.

LIPPER INTERMEDIATE TERM BOND FUND AVERAGE -- Contains intermediate-term bond
funds that report to Lipper Analytical Services. The funds invest mainly in
investment grade debt instruments and have an average credit rating of "A". The
average maturity is between 5 to 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.

LIPPER MORTGAGE FUND AVERAGE -- Contains mortgage funds that report to Lipper
Analytical Services. The funds contain primarily U.S. mortgage obligations. The
average maturity is greater than 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.

LIPPER GOVERNMENT MONEY MARKET AVERAGE -- Contains Government money market funds
that report to Lipper Analytical Services. The funds invest in short-term U.S.
Government obligations. The funds are equally weighted to assure that no one
fund has more of an impact on the performance calculation than any other fund.

LIPPER WORLD INCOME FUND AVERAGE -- Contains world income funds that report to
Lipper Analytical Services. The funds are able to invest in debt instruments in
any country. The funds are equally weighted to assure that no one fund has more
of an impact on the performance calculation than any other fund.

MORNINGSTAR LARGE CAP GROWTH AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.

MORNINGSTAR LARGE CAP VALUE AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.

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MORNINGSTAR SMALL CAP GROWTH AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.

MORNINGSTAR SMALL CAP VALUE AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.

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