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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1999
SECURITIES ACT REGISTRATION NOS. 333-82621
INVESTMENT COMPANY ACT REGISTRATION NO. 811-09439
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
(CHECK APPROPRIATE BOX OR BOXES)
AMENDMENT NO. 1 [X]
------------------------
TARGET FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-1495
DAVID F. CONNOR, ESQ.
100 MULBERRY STREET
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
PAUL H. DYKSTRA, ESQ.
GARDNER, CARTON & DOUGLAS
321 N. CLARK STREET
CHICAGO, ILLINOIS 60610-4795
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the Registration Statement.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE
<TABLE>
<S> <C>
Title of Securities Being Registered.......... Shares of Beneficial Interest, $.001 par value
per share
</TABLE>
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[PRUDENTIAL ROCK GRAPHIC]
TARGET FUNDS
PROSPECTUS: SEPTEMBER 15, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Trust's shares, nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to state otherwise.
[Prudential Investments Logo]
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TABLE OF CONTENTS
1 RISK/RETURN SUMMARY
1 Investment Objectives and Principal Strategies
3 Principal Risks
6 Evaluating Performance
6 Fees and Expenses
12 HOW THE FUNDS INVEST
12 Investment Objectives and Policies
16 Other Investments and Strategies
18 Derivative Strategies
20 Additional Strategies
21 Investment Risks
27 HOW THE TRUST IS MANAGED
27 Board of Trustees
27 Manager
28 Advisers and Portfolio Managers
32 Distributor
33 Year 2000 Readiness Disclosure
34 FUND DISTRIBUTIONS AND TAX ISSUES
34 Distributions
35 Tax Issues
37 If You Sell or Exchange Your Shares
38 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
38 Initial Offering of Shares
39 How to Buy Shares
46 How to Sell Your Shares
49 How to Exchange Your Shares
52 APPENDIX I - DESCRIPTION OF SECURITY RATINGS
55 APPENDIX II - INFORMATION ON PERFORMANCE OF ADVISERS
FOR MORE INFORMATION (Back Cover)
TARGET FUNDS [Telephone Graphic] (800) 225-1852
<PAGE> 4
RISK/RETURN SUMMARY
This section highlights key information about the investment portfolios (the
Funds) of TARGET FUNDS (the Trust). Additional information follows this summary.
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
The following summarizes the investment objectives, principal strategies and
principal risks for each of the Funds. For more information on the risks
associated with the Funds, see "Principal Risks" below. While we make every
effort to achieve the investment objective for each Fund, we can't guarantee
success.
LARGE CAPITALIZATION GROWTH FUND
The Fund's investment objective is LONG-TERM CAPITAL APPRECIATION. This means
that we seek investments that will increase in value. To achieve our investment
objective, we purchase STOCKS OF LARGE COMPANIES we believe will experience
earnings growth at a rate faster than that of the Standard & Poor's 500(R) Stock
Index (S&P 500).
RISKS:
- market risk
- style risk
LARGE CAPITALIZATION VALUE FUND
The Fund's investment objective is TOTAL RETURN consisting of CAPITAL
APPRECIATION and DIVIDEND INCOME. This means that we seek investments that will
increase in value as well as pay the Fund dividends. To achieve our objective,
we invest in LARGE COMPANY STOCKS that we believe are undervalued, given the
company's sales, earnings, book value, cash flow and recent performance.
RISKS:
- market risk
- style risk
SMALL CAPITALIZATION GROWTH FUND
The Fund's investment objective is MAXIMUM CAPITAL APPRECIATION. This means that
we seek investments that will increase in value. To achieve our objective, we
invest in the STOCKS OF SMALL COMPANIES that we believe will experience earnings
growth at a rate faster than that of the U.S economy in general.
1
<PAGE> 5
RISK/RETURN SUMMARY
RISKS:
- market risk
- style risk
- small company risk
SMALL CAPITALIZATION VALUE FUND
The Fund's investment objective is ABOVE-AVERAGE CAPITAL APPRECIATION. This
means that we seek investments that will increase in value. To achieve our
objective, we invest in STOCKS OF SMALL COMPANIES that we believe are
undervalued, given the company's sales, earnings, book value, cash flow and
recent performance.
RISKS:
- market risk
- style risk
- small company risk
INTERNATIONAL EQUITY FUND
The Fund's investment objective is CAPITAL APPRECIATION. This means that we seek
investments that will increase in value. To achieve this objective, we purchase
STOCKS OF FOREIGN COMPANIES. These companies may be based in developed as well
as developing countries. We may also invest in American Depositary Receipts,
American Depositary Shares, Global Depositary Receipts and European Depositary
Receipts, which are certificates representing an equity investment in a foreign
company.
RISKS:
- market risk
- style risk
- foreign market risk
- currency risk
- political developments
TOTAL RETURN BOND FUND
The Fund's investment objective is TOTAL RETURN consisting of CURRENT
INCOME AND CAPITAL APPRECIATION. This means that we seek investments that will
pay income as well as increase in value. To achieve this objective, we invest in
DEBT OBLIGATIONS issued or guaranteed by the U.S. GOVERNMENT and its agencies,
as well as debt obligations issued by U.S. COMPANIES, FOREIGN COMPANIES AND
FOREIGN GOVERNMENTS and their agencies. The Fund
2 TARGET FUNDS [Telephone Graphic] (800) 225-1852
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RISK/RETURN SUMMARY
may invest in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S.
government entities, and up to 25% of its assets in privately issued
mortgage-related securities (not issued or guaranteed by the U.S. Government).
These investments may include collateralized mortgage obligations and stripped
mortgage-backed securities. We may also invest in ASSET-BACKED SECURITIES like
automobile loans and credit card receivables. We normally invest at least 90% of
the Fund's assets in "investment grade" debt obligations -- rated at least BBB
by Standard & Poor's Ratings Group (S&P), Baa by Moody's Investors Service
(Moody's), or the equivalent by another major rating service -- and unrated debt
obligations that we believe are comparable in quality. However, we may invest up
to 10% of the Fund's assets in HIGH YIELD DEBT OBLIGATIONS ("JUNK BONDS"). The
Fund may actively and frequently trade its portfolio securities. The
dollar-weighted average maturity of the Fund will be between four and fifteen
years.
RISKS:
- credit risk
- interest rate risk
- market risk
- prepayment risk
- active trading risk
- foreign market risk
- currency risk
- political developments
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Like any mutual
fund, an investment in a Fund could lose value, and you could lose money. The
following summarizes the principal risks of investing in the Funds.
LARGE CAPITALIZATION GROWTH, LARGE CAPITALIZATION VALUE, SMALL CAPITALIZATION
GROWTH, SMALL CAPITALIZATION VALUE AND INTERNATIONAL EQUITY FUNDS
MARKET RISK. Since these Funds invest primarily in common stocks, there is the
risk that the price of a particular stock owned by a Fund could go down.
Generally, the stock price of large companies is more stable than the stock
price of smaller companies, but this is not always the case. In addition to an
individual stock losing value, the value of a market sector or of the equity
3
<PAGE> 7
RISK/RETURN SUMMARY
markets as a whole could go down. In addition, different parts of a market can
react differently to adverse issuer, market, regulatory, political and economic
developments.
STYLE RISK. Since some of the Funds focus on either a growth or value
style, there is the risk that a particular style may be out of favor for a
period of time.
SMALL COMPANY RISK. The SMALL CAPITALIZATION GROWTH and SMALL
CAPITALIZATION VALUE FUNDS invest primarily in stocks of smaller companies with
a market capitalization of under $1.5 billion. These companies usually offer a
smaller range of products and services than larger companies. They may also have
limited financial resources and may lack management depth. As a result, stocks
issued by smaller companies tend to fluctuate in value more than the stocks of
larger, more established companies.
INVESTMENTS IN FOREIGN SECURITIES. The INTERNATIONAL EQUITY FUND invests
primarily in stocks of foreign companies. Investing in foreign securities
presents additional risks. See "Investments in Foreign Securities" below.
TOTAL RETURN BOND FUND
CREDIT RISK. The debt obligations in which the Total Return Bond Fund invests
are generally subject to the risk that the issuer may be unable to make
principal and interest payments when they are due. There is also the risk that
the securities could lose value because of a loss of confidence in the ability
of the borrower to pay back debt. The Fund may invest in non-investment grade
securities -- also known as "junk bonds" -- which have a higher risk of default
and tend to be less liquid than higher-rated securities.
INTEREST RATE RISK. There is also the risk that the securities could lose
value because of interest rate changes. Debt obligations with longer maturities
typically offer higher yields, but are subject to greater price shifts as a
result of interest rate changes than debt obligations with shorter maturities.
The prices of debt obligations and the Fund's net asset value (or share price)
generally move in opposite directions.
MARKET RISK. Debt obligations are also subject to market risk, which is the
possibility that the market value of an investment may move up or down and that
its movement may occur quickly or unpredictably. Market risk may affect an
industry, a sector or the entire market.
PREPAYMENT RISK. The Fund may invest in mortgage-related securities and
asset-backed securities, which are subject to prepayment risk. If these
securities are prepaid, the Fund may have to replace them with lower-
4 TARGET FUNDS [Telephone Graphic] (800) 225-1852
<PAGE> 8
RISK/RETURN SUMMARY
yielding securities. Stripped mortgage-backed securities are generally more
sensitive to changes in prepayment and interest rates than other
mortgage-related securities. Unlike mortgage-related securities, asset-backed
securities are usually not collateralized. If the issuer of a non-collateralized
debt security defaults on the obligation, there is no collateral that the
security holder may sell to satisfy the debt.
ACTIVE TRADING RISK. The Fund may actively and frequently trade its
portfolio securities. High portfolio turnover results in higher transaction
costs and can affect the Fund's performance and have adverse tax consequences.
INVESTMENTS IN FOREIGN SECURITIES. The Fund may also invest in debt
obligations of foreign issuers. Investing in foreign securities presents
additional risks. See "Investments in Foreign Securities" below.
INVESTMENTS IN FOREIGN SECURITIES
The International Equity and Total Return Bond Funds may invest in foreign
securities. Investing in foreign securities involves more risk than investing in
securities of U.S. issuers.
FOREIGN MARKET RISK. Foreign markets, especially those in developing
countries, tend to be more volatile than U.S. markets and are generally not
subject to regulatory requirements comparable to those in the U.S. Because of
differences in accounting standards, custody and settlement practices, investing
in foreign securities generally involves more risk than investing in securities
of U.S. issuers.
CURRENCY RISK. Changes in currency exchange rates may affect the value of
foreign securities held by a Fund and the amount of income available for
distribution. If a foreign currency grows weaker relative to the U.S. dollar,
the value of securities denominated in that foreign currency generally decreases
in terms of U.S. dollars. If a Fund does not correctly anticipate changes in
exchange rates, certain hedging activities may also cause the Fund to lose money
and reduce the amount of income available for distribution. There are also
special risks that may arise with the introduction of the euro as the common
currency of the European Monetary Union. These risks include the possibility
that computing, accounting and trading systems will fail to recognize the euro,
as well as the possibility that the euro will cause markets to become more
volatile.
POLITICAL DEVELOPMENTS. Political developments may adversely affect the
value of a Fund's foreign securities.
* * *
5
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RISK/RETURN SUMMARY
For more information about the risks associated with the Funds, see "How
the Funds Invest -- Investment Risks."
An investment in a Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
EVALUATING PERFORMANCE
Because the Funds are new, they have no performance history as of the date of
this prospectus.
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of each Fund--Class A, B and C. Each
share class has different sales charges--known as loads--and expenses, but
represents an investment in the same fund. For more information about which
share class may be right for you, see "How to Buy, Sell and Exchange Shares of
the Funds."
SHAREHOLDER FEES (1) (paid directly from your investment)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Class A Class B Class C
---------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge Total Return Bond Fund -- 4% None 1%
(load) imposed on Other Funds -- 5%
purchases (as a percentage
of offering price)
Maximum deferred sales charge (load) None 5%(2) 1%(3)
(as a percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed None None None
on reinvested dividends and other
distributions
Redemption fees None None None
Exchange fee None None None
</TABLE>
(1) Your broker may charge you a separate or additional fee for purchases and
sales of shares.
(2) The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.
(3) The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
6 Target Funds [TELEPHONE GRAPHICS] (800) 225-1852
<PAGE> 10
RISK/RETURN SUMMARY
ANNUAL FUND OPERATING EXPENSES (deducted from Fund assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
LARGE CAPITALIZATION GROWTH FUND
Management fees .70% .70% .70%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses .28% .28% .28%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.28% 1.98% 1.98%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.23% 1.98% 1.98%
LARGE CAPITALIZATION VALUE FUND
Management fees .70% .70% .70%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses .34% .34% .34%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.34% 2.04% 2.04%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.29% 2.04% 2.04%
SMALL CAPITALIZATION GROWTH FUND
Management fees .70% .70% .70%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses .63% .63% .63%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.63% 2.33% 2.33%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.58% 2.33% 2.33%
</TABLE>
(1) For the fiscal year ending July 31, 2000, the Distributor of the Funds has
contractually agreed to reduce its distribution and service (12b-1) fees
for Class A shares to .25 of 1% of the average daily net assets of the
Class A shares, and to reduce its distribution and service fees for Class B
and Class C shares of the Total Return Bond Fund to .75 of 1% of the
average daily net assets of the Class B and Class C shares, respectively.
7
<PAGE> 11
RISK/RETURN SUMMARY
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
SMALL CAPITALIZATION VALUE FUND
Management fees .70% .70% .70%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses .71% .71% .71%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.71% 2.41% 2.41%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.66% 2.41% 2.41%
INTERNATIONAL EQUITY FUND
Management fees .80% .80% .80%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses .53% .53% .53%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.63% 2.33% 2.33%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.58% 2.33% 2.33%
TOTAL RETURN BOND FUND
Management fees .50% .50% .50%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses 1.13% 1.13% 1.13%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.93% 2.63% 2.63%
- Fee waiver(1) .05% .25% .25%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.88% 2.38% 2.38%
</TABLE>
(1) For the fiscal year ending July 31, 2000, the Distributor of the Funds has
contractually agreed to reduce its distribution and service (12b-1) fees
for Class A shares to .25 of 1% of the average daily net assets of the
Class A shares, and to reduce its distribution and service fees for Class B
and Class C shares of the Total Return Bond Fund to .75 of 1% of the
average daily net assets of the Class B and Class C shares, respectively.
8 TARGET FUNDS [Telephone Graphic] (800) 225-1852
<PAGE> 12
RISK/RETURN SUMMARY
FEES AND EXPENSES EXAMPLE
This example will help you compare the fees and expenses of the Funds' different
share classes and the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in a Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares of the
Funds and for Class B and Class C shares of the Total Return Bond Fund during
the first year. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1 yr 3 yrs
----------------
<S> <C> <C>
LARGE CAPITALIZATION GROWTH FUND
Class A shares $619 $ 881
Class B shares $701 $ 921
Class C shares $399 $ 715
- ----------------------------------------------------------------------------------
LARGE CAPITALIZATION VALUE FUND
Class A shares $625 $ 899
Class B shares $707 $ 940
Class C shares $405 $ 733
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SMALL CAPITALIZATION GROWTH FUND
Class A shares $653 $ 984
Class B shares $736 $1,027
Class C shares $434 $ 820
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SMALL CAPITALIZATION VALUE FUND
Class A shares $660 $1,007
Class B shares $744 $1,051
Class C shares $442 $ 844
</TABLE>
9
<PAGE> 13
RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
1 YR 3 YRS
<S> <C> <C>
INTERNATIONAL EQUITY FUND
Class A shares $653 $984
Class B shares $736 $1,027
Class C shares $434 $820
TOTAL RETURN BOND FUND
Class A shares $583 $977
Class B shares $741 $1,094
Class C shares $439 $886
</TABLE>
You would pay the following expenses on the same investment if you did not
sell your shares:
<TABLE>
<CAPTION>
1 YR 3 YRS
<S> <C> <C>
LARGE CAPITALIZATION GROWTH FUND
Class A shares $619 $881
Class B shares $201 $621
Class C shares $299 $715
LARGE CAPITALIZATION VALUE FUND
Class A shares $625 $899
Class B shares $207 $640
Class C shares $305 $733
SMALL CAPITALIZATION GROWTH FUND
Class A shares $653 $984
Class B shares $236 $727
Class C shares $334 $820
SMALL CAPITALIZATION VALUE FUND
Class A shares $660 $1,007
Class B shares $244 $751
Class C shares $342 $844
</TABLE>
10 Target Funds [Telephone Graphic] (800) 225-1852
<PAGE> 14
RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
1 YR 3 YRS
<S> <C> <C>
INTERNATIONAL EQUITY FUND
Class A shares $653 $984
Class B shares $236 $727
Class C shares $334 $820
TOTAL RETURN BOND FUND
Class A shares $583 $977
Class B shares $241 $794
Class C shares $339 $886
</TABLE>
11
<PAGE> 15
HOW THE FUNDS INVEST
INVESTMENT OBJECTIVES AND POLICIES
Large Capitalization Growth Fund
The Fund's investment objective is LONG-TERM CAPITAL APPRECIATION. This means
that we seek investments that we think will increase in value.
In pursuing our objective, we invest in STOCKS OF LARGE COMPANIES we
believe will experience earnings growth at a rate faster than that of the S&P
500. When we consider investing in a company's stock, we look at several factors
to evaluate the stock's growth potential, including the company's historical
profitability, the economic outlook for the company's industry, the company's
position in that industry, and the qualifications of company management. For
example, we may select a company's stock based on new products or services the
company is introducing. Dividend income is only an incidental consideration.
Generally, we will consider selling a security when we think it has achieved its
growth potential, or when we think we can find better growth opportunities. We
normally invest at least 80% of the Fund's total assets in common stocks, and at
least 65% of its total assets in common stocks of companies with a total market
capitalization of $5 billion or more (measured at the time of purchase).
LARGE CAPITALIZATION VALUE FUND
The Fund's investment objective is TOTAL RETURN consisting of CAPITAL
APPRECIATION and DIVIDEND INCOME. This means that we seek investments that we
think will increase in value as well as pay the Fund dividends.
In pursuing our objective, we invest in STOCKS OF LARGE COMPANIES using a
VALUE INVESTMENT STYLE. That is, we invest in stocks that we believe are
undervalued and have an above-average potential to increase in price. We
consider a number of factors in choosing stocks, like a company's sales,
earnings, book value, cash flow, recent performance and the industry it's in. We
consider selling a stock if it has increased in value to the point where we no
longer consider it to be undervalued. We normally invest at least 80% of the
Fund's total assets in common stocks and securities convertible into common
stocks, and at least 65% of its total assets in common stocks of companies with
a total market capitalization of $5 billion or more (measured at the time of
purchase) that we think will pay regular dividends.
SMALL CAPITALIZATION GROWTH FUND
The Fund's investment objective is MAXIMUM CAPITAL APPRECIATION. This means that
we seek investments that we think will increase in value.
12 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 16
HOW THE FUNDS INVEST
In pursuing our objective, we invest in STOCKS OF SMALL COMPANIES we
believe will experience earnings growth at a rate faster than that of the U.S.
economy in general. When we consider investing in a company's stock, we look at
several factors to evaluate the stock's growth potential, including the
company's historical profitability, return on capital, the economic outlook for
the company's industry, the company's position in that industry, and the
qualifications of company management. For example, we may select a company's
stock based on new products or services the company is introducing. We do not
consider dividend income in selecting stocks for the Fund. Generally, we will
consider selling a security when we think it has achieved its growth potential,
or when we think we can find better growth opportunities. We normally invest at
least 65% of its total assets in common stocks of companies with a total market
capitalization of less than $1.5 billion (measured at the time of purchase).
SMALL CAPITALIZATION VALUE FUND
The Fund's investment objective is ABOVE-AVERAGE CAPITAL APPRECIATION. This
means that we seek investments that we think will increase in value.
In pursuing our objective, we invest in STOCKS OF SMALL COMPANIES using a
VALUE INVESTMENT STYLE. That is, we invest in stocks that we believe are
undervalued and have an above average potential to increase in price. We
consider a number of factors in choosing stocks, like a company's sales,
earnings, book value, cash flow and recent performance. We also consider
dividend growth prospects in selecting stocks for the Fund. We consider selling
a stock if it has increased in value to the point where we no longer consider it
to be undervalued. We normally invest at least 80% of the Fund's total assets in
common stocks, and at least 65% of its total assets in common stocks of
companies with a total market capitalization of less than $1.5 billion (measured
at the time of purchase).
INTERNATIONAL EQUITY FUND
The Fund's investment objective is CAPITAL APPRECIATION. This means that we seek
investments that we think will increase in value.
In pursuing our objective, we invest in STOCKS of companies located in
FOREIGN COUNTRIES. We look for stocks that we believe are undervalued based on
their earnings, cash flow or asset values. We consider selling a stock if it has
increased in value to the point where we no longer consider it to be
undervalued. We may invest in stocks of companies in both developed and
developing countries. We normally invest at least 65% of the Fund's total assets
in stocks of companies in at least three foreign countries. For purposes of this
policy, the Fund will invest in stocks of companies that are organized under the
laws of a foreign country, companies which derive more than 50%
13
<PAGE> 17
HOW THE FUNDS INVEST
of their revenues from activities in foreign countries, and companies which have
at least 50% of their assets located abroad. The foreign securities held by the
Fund normally will be denominated in foreign currencies, including the euro -- a
multinational currency unit.
The Fund may also invest in AMERICAN DEPOSITARY RECEIPTS (ADRs), AMERICAN
DEPOSITARY SHARES (ADSs), GLOBAL DEPOSITARY RECEIPTS (GDRs) and EUROPEAN
DEPOSITARY RECEIPTS (EDRs). ADRs, ADSs, GDRs and EDRs are certificates --usually
issued by a bank or trust company -- that represent an equity investment in a
foreign company. ADRs and ADSs are issued by U.S. banks and trust companies and
are valued in U.S. dollars. EDRs and GDRs are issued by foreign banks and trust
companies and are usually valued in foreign currencies.
TOTAL RETURN BOND FUND
The Fund's investment objective is TOTAL RETURN consisting of CURRENT INCOME and
CAPITAL APPRECIATION. This means that we seek investments that we think will pay
income as well as increase in value.
In pursuing our objective, we invest primarily in DEBT OBLIGATIONS issued
or guaranteed by the U.S. GOVERNMENT and its agencies, as well as debt
obligations issued by U.S. COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS
and their agencies. The Fund can invest up to 20% of its assets in foreign debt
obligations.
The Fund invests in MORTGAGE-RELATED SECURITIES issued or guaranteed by
U.S. Government entities including securities issued by the Federal National
Mortgage Association (FNMA or "Fannie Mae") or the Federal Home Loan Mortgage
Corporation (FHLMC or "Freddie Mac") or guaranteed by the Government National
Mortgage Association (GNMA or "Ginnie Mae"). However, we may invest up to 25% of
the Fund's assets in privately issued mortgage-related securities (those not
issued or guaranteed by the U.S. Government). The mortgage-related securities in
which the Fund may invest may include COLLATERALIZED MORTGAGE OBLIGATIONS and
STRIPPED MORTGAGE-BACKED SECURITIES.
Mortgage-related securities are usually pass-through instruments that pay
investors a share of all interest and principal payments from an underlying pool
of fixed or adjustable rate mortgages. Mortgage-related securities issued by the
U.S. Government or its agencies include FNMAs, GNMAs and debt securities issued
by the FHLMC. The U.S. Government or the issuing agency directly or indirectly
guarantees the payment of interest and principal on these securities, but not
their value. Private mortgage-related securities that are not guaranteed by U.S.
governmental entities
14 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 18
HOW THE FUNDS INVEST
generally have one or more types of credit enhancement to ensure timely receipt
of payments and to protect against default.
Mortgage pass-through securities include collateralized mortgage
obligations, multi-class pass-through securities and stripped mortgage-backed
securities. A COLLATERALIZED MORTGAGE OBLIGATION (CMO) is a security backed by
an underlying portfolio of mortgages or mortgage-backed securities that may be
issued or guaranteed by a bank or by U.S. governmental entities. A MULTI-CLASS
PASS-THROUGH SECURITY is an equity interest in a trust composed of underlying
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 CMO
or to make scheduled distributions on the multi-class pass-through security. A
STRIPPED MORTGAGE-BACKED SECURITY (MBS STRIP) may be issued by U.S. governmental
entities or by private institutions. MBS strips take the pieces of a debt
security (principal and interest) and break them apart. The resulting securities
may be sold separately and may perform differently.
The values of mortgage-backed securities vary with changes in market
interest rates generally and in yields among various kinds of mortgage-related
securities. Such values are particularly sensitive to changes in prepayments of
the underlying mortgages. For example, during periods of falling interest rates,
prepayments tend to increase as homeowners and others refinance their
higher-rate mortgages; these prepayments reduce the anticipated duration of the
mortgage-related securities. Conversely, during periods of rising interest
rates, prepayments can be expected to decline, which has the effect of extending
the anticipated duration at the same time that the value of the securities
declines. MBS strips tend to be even more highly sensitive to changes in
prepayment and interest rates than mortgage-related securities and CMOs
generally.
The Fund may also invest in ASSET-BACKED DEBT SECURITIES. An asset-backed
security is another type of pass-through instrument that pays interest based
upon the cash flow of an underlying pool of assets, such as automobile loans and
credit card receivables. Unlike mortgage-related securities, asset-backed
securities are usually not collateralized.
We normally invest at least 65% of the Fund's total assets in bonds, and at
least 90% of its total assets in "investment grade" debt obligations -- debt
obligations rated at least BBB by S&P, Baa by Moody's, or the equivalent by
another major rating service, and unrated debt obligations that we believe are
comparable in quality. However, we may invest up to 10% of the Fund's assets in
HIGH YIELD DEBT OBLIGATIONS -- also known as "JUNK BONDS" -- which are rated at
least B by S&P, Moody's or another major rating service, and unrated debt
obligations that we believe are comparable
15
<PAGE> 19
HOW THE FUNDS INVEST
in quality. The Fund may continue to hold an obligation even if it is later
downgraded or no longer rated.
When purchasing or selling portfolio securities, the factors that the
investment adviser to the Fund may consider are economic conditions and interest
rate fundamentals and, for foreign debt securities, country and currency
selection. The investment adviser also evaluates individual debt securities
within each fixed-income sector based upon their relative investment merit and
considers factors such as yield, duration and potential for price or currency
appreciation as well as credit quality, maturity and risk.
The Fund's dollar-weighted average portfolio maturity will generally be
between four and fifteen years.
* * *
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Funds, Their Investments and Risks."
The Statement of Additional Information -- which we refer to as the SAI --
contains additional information about the Funds. To obtain a copy, see the back
cover page of this prospectus.
Although we make every effort to achieve each Fund's objective, we can't
guarantee success. Each Fund's investment objective is a fundamental policy that
cannot be changed without shareholder approval. The Board of the Trust can
change investment policies that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to their principal strategies, we may also use the following
investment strategies to increase the Funds' returns or protect their assets if
market conditions warrant.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of a Fund's assets in money market instruments or
U.S. Government securities. Investing heavily in these securities limits our
ability to achieve capital appreciation, but can help to preserve a Fund's
assets when the markets are unstable.
MONEY MARKET INSTRUMENTS. Each Fund may invest in high quality MONEY MARKET
INSTRUMENTS. Money market instruments include the commercial paper of U.S. and
foreign corporations, obligations of U.S. and foreign banks, certificates of
deposit and obligations issued or guaranteed by the U.S. Government or its
agencies or a foreign government. The Funds will generally purchase money market
instruments in one of the two
16 Target Funds [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 20
HOW THE FUNDS INVEST
highest short-term quality ratings of a major rating service. The Funds may also
invest in money market instruments that are not rated, but which we believe are
of comparable quality to the instruments described above.
U.S. GOVERNMENT SECURITIES. The Funds may invest in DEBT OBLIGATIONS ISSUED
BY THE U.S. TREASURY. Treasury securities have varying interest rates and
maturities, but they are all backed by the full faith and credit of the U.S.
Government.
The Funds may also invest in other DEBT OBLIGATIONS ISSUED OR GUARANTEED BY
THE U.S. GOVERNMENT and government-related entities. Some of these debt
securities are backed by the full faith and credit of the U.S. Government, like
GNMA obligations. Debt securities issued by other government entities, like
obligations of FNMA and SLMA, are not backed by the full faith and credit of the
U.S. Government. However, these issuers have the right to borrow from the U.S.
Treasury to meet their obligations. In contrast, the debt securities of other
issuers, like the Farm Credit System, depend entirely upon their own resources
to repay their debt.
The U.S. Government sometimes "strips" its debt obligations into their
component parts: the U.S. Government's obligation to make interest payments and
its obligation to repay the amount borrowed. These STRIPPED SECURITIES are sold
to investors separately. Stripped securities do not make periodic interest
payments. They are usually sold at a discount and then redeemed for their face
value on their maturity dates. These securities increase in value when interest
rates fall and lose value when interest rates rise. However, the value of
stripped securities generally fluctuates more in response to interest rate
movements than the value of traditional debt obligations. A Fund may try to earn
money by buying stripped securities at a discount and either selling them after
they increase in value or holding them until they mature.
DEBT OBLIGATIONS
In addition to their principal investments, the Large Capitalization Value,
Small Capitalization Value and International Equity Funds may invest in debt
obligations for their appreciation potential. The Large Capitalization Value,
Small Capitalization Value and International Equity Portfolios may invest in
debt obligations issued by U.S. and foreign companies that are rated at least A
by S&P or by Moody's or the equivalent by another major rating service. The
Large Capitalization Value and Small Capitalization Value Portfolios may also
invest in asset-backed securities from time to time. An asset-backed security is
another type of pass-through instrument that pays interest based upon the cash
flow of an underlying pool of assets, such as
17
<PAGE> 21
HOW THE FUNDS INVEST
automobile loans and credit card receivables. Unlike mortgage-related
securities, asset-backed securities are not usually collateralized.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The TOTAL RETURN BOND FUND, may enter into REVERSE REPURCHASE AGREEMENTS and
DOLLAR ROLLS. When the Fund enters into a reverse repurchase agreement, the Fund
borrows money on a temporary basis by selling a security with an obligation to
repurchase it at an agreed-upon price and time.
When the Fund enters into a dollar roll, the Fund sells securities to be
delivered in the current month and repurchases substantially similar (same type
and coupon) securities to be delivered on a specified future date by the same
party. The Fund is paid the difference between the current sales price and the
forward price for the future purchase as well as the interest earned on the cash
proceeds of the initial sale.
LEVERAGE
The Total Return Bond Fund may borrow from banks or through reverse repurchase
agreements and dollar rolls to take advantage of investment opportunities. This
is known as using "leverage." If the Fund borrows money to purchase securities
and those securities decline in value, then the value of the Fund's shares will
decline faster than if the Fund were not leveraged.
REPURCHASE AGREEMENTS
Each Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. A repurchase agreement is like a loan by a Fund to the other party that
creates a fixed return for the Fund.
CONVERTIBLE SECURITIES
Each Fund may also invest in CONVERTIBLE SECURITIES. These are securities --
like bonds, corporate notes and preferred stock -- that we can convert into the
company's common stock or some other equity security.
DERIVATIVE STRATEGIES
The INTERNATIONAL EQUITY and TOTAL RETURN BOND FUNDS may each use various
derivative strategies to try to improve the Fund's returns or protect its
assets, although we cannot guarantee that these strategies will work, that the
instruments necessary to implement these strategies will be available or that
the Fund will not lose money. The derivatives in which these Funds may invest
include FUTURES, OPTIONS AND OPTIONS ON FUTURES. In addition, these
18 Target Funds [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 22
HOW THE FUNDS INVEST
Funds may enter into FOREIGN CURRENCY EXCHANGE CONTRACTS and purchase COMMERCIAL
PAPER THAT IS INDEXED TO FOREIGN CURRENCY EXCHANGE RATES. Because the
International Equity Fund invests a large percentage of its assets in securities
denominated in foreign currencies, we may use "CURRENCY HEDGES" to help protect
the Fund's NAVs from declining if a particular foreign currency were to decrease
in value against the U.S. dollar.
Derivatives involve costs and can be volatile. With derivatives, the
investment adviser tries to predict whether the underlying investment -- a
security, market index, currency, interest rate or some other benchmark -- will
go up or down at some future date. We may use derivatives to try to reduce risk
or to increase return consistent with a Fund's overall investment objective. The
investment adviser will consider other factors (such as cost) in deciding
whether to employ any particular strategy or use any particular instrument. Any
derivatives we use may not fully offset a Fund's underlying positions and this
could result in losses to the Fund that would not otherwise have occurred. For
more information about these strategies, see the SAI, "Description of the Funds,
Their Investments and Risks -- Risk Management and Return Enhancement
Strategies."
OPTIONS
The International Equity and Total Return Bond Funds may purchase and sell
put and call options on securities and currencies traded on U.S. or foreign
securities exchanges or in the over-the-counter market. An option is the right
to buy or sell securities in exchange for a premium. The options may be on debt
securities, aggregates of debt securities, financial indexes and U.S. Government
securities. The Funds will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS;
FOREIGN CURRENCY FORWARD CONTRACTS
The International Equity and Total Return Bond Funds may purchase and sell
financial futures contracts and related options on debt securities, aggregates
of debt securities, currencies, financial indexes or U.S. Government securities.
A futures contract is an agreement to buy or sell a set quantity of underlying
product at a future date or to make or receive a cash payment based on the value
of a securities index. The International Equity and Total Return Bond Funds also
may enter into foreign currency forward contracts to protect the value of their
assets against future changes in the level of foreign currency exchange rates. A
foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
19
<PAGE> 23
HOW THE FUNDS INVEST
ADDITIONAL STRATEGIES
The Funds may also use other non-principal strategies, such as purchasing debt
securities on a WHEN-ISSUED or DELAYED-DELIVERY basis. When a Fund makes this
type of purchase, the price and interest rate are fixed at the time of purchase,
but delivery and payment for the debt obligations take place at a later time.
The Fund does not earn interest income until the date the debt obligations are
delivered.
The TOTAL RETURN BOND FUND may enter into INTEREST RATE SWAP TRANSACTIONS.
In a swap transaction, the Fund and another party "trade" income streams. The
swap is done to preserve a return or spread on a particular investment or
portion of the Fund or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date.
The Funds also follow certain policies when they BORROW MONEY (the Total
Return Bond Fund can borrow up to 331/3% of the value of its total assets, while
the other Funds may each borrow up to 20% of the value of its total assets); and
HOLD ILLIQUID SECURITIES (each Fund may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual
restrictions, those without a readily available market and repurchase agreements
with maturities longer than seven days).
Each Fund is subject to certain investment restrictions that are
fundamental policies, which means they cannot be changed without shareholder
approval. For more information about these restrictions, see the SAI.
PORTFOLIO TURNOVER
As a result of the strategies described above, the Total Return Bond Fund
may have an annual portfolio turnover rate of over 100%. Portfolio turnover is
generally the percentage found by dividing the lesser of portfolio purchases or
sales by the monthly average value of the portfolio. High portfolio turnover
(100% or more) results in higher brokerage commissions and other transaction
costs and can affect a Fund's performance. It can also result in a greater
amount of distributions as ordinary income rather than long-term capital gains.
20 Target Funds [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 24
HOW THE FUNDS INVEST
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Funds is no
exception. Since a Fund's holdings can vary significantly from broad market
indexes, performance of the Funds can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Funds' principal
investments and certain of the Fund's non-principal investments and strategies.
See, too, "Description of the Funds, Their Investments and Risks" in the SAI.
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------ ----- -----------------
<S> <C> <C>
COMMON STOCKS Individual stocks could lose value Historically, stocks have outperformed other
investments over the long term
Large Cap Growth, The equity markets could go down, resulting
Large Cap Value, in a decline in value of a Fund's Generally, economic growth means higher
Small Cap Growth and investments corporate profits, which leads to an
Small Cap Value Funds increase in stock prices, known as capital
appreciation
At least 80% Companies that pay dividends may not do so
if they don't have profits or adequate cash May be a source of dividend income
International Equity Fund flow
At least 65%
Changes in economic or political conditions,
both domestic and international, may result
in a decline in value of a Fund's
investments
SMALL CAPITALIZATION STOCKS Stocks of small companies are more volatile Highly successful smaller companies can
(market capitalization and may decline more than those in the S&P outperform larger ones
below $1.5 billion) 500 Index
Small companies are more likely to reinvest
Small Cap Growth and earnings and not pay dividends
Small Cap Value Funds
Changes in interest rates may affect the
At least 65% securities of small companies more than the
securities of larger companies
International Equity Fund
Percentage varies
</TABLE>
21
<PAGE> 25
HOW THE FUNDS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS - A Fund's share price, yield and total return - Bonds have generally outperformed money
will fluctuate in response to bond market market instruments over the long term with
Large Cap Value and movements less risk than stock
Small Cap Value Funds
Up to 20% - Credit risk -- the default of an issuer - Most bonds will rise in value when interest
would leave a Fund with unpaid interest or rates fall
International Equity Fund principal. The lower a bond's quality, the
Up to 35% higher its potential volatility - Regular interest income
Total Return Bond Fund - Market risk -- the risk that the market - Generally more secure than stock since
Up to 100% value of an investment may move up or down, companies must pay their debts before paying
sometimes rapidly or unpredictably. Market stockholders
risk may affect an industry, a sector, or
the market as a whole - Investment-grade bonds have a lower risk of
default than junk bonds
- Interest rate risk -- the value of most
bonds will fall when interest rates rise: - Bonds with longer maturity dates typically
the longer a bond's maturity and the lower have higher yields
its credit quality, the more its value
typically falls. It can lead to price - Intermediate-term securities may be less
volatility, particularly for junk bonds and susceptible to loss of principal than longer
stripped securities term securities
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES - Foreign markets, economies and political - Investors can participate in foreign markets
systems may not be as stable as in the U.S., and invest in companies operating in those
International Equity Fund particularly those in developing countries markets
Up to 100%
- Currency risk -- changing value of foreign - Changing value of foreign currencies
Total Return Bond Fund currencies
Up to 20% - Opportunities for diversification
- May be less liquid than U.S. stocks and
bonds - Principal and interest on foreign government
securities may be guaranteed
- Differences in foreign laws, accounting
standards, public information, custody and
settlement practices
- Year 2000 conversion may be more of a
problem for some foreign issuers
- Not all government securities are insured or
guaranteed by government, but only by the
issuing agency
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22 Target Funds [TELEPHONE GRAPHICS] (800) 225-1852
<PAGE> 26
HOW THE FUNDS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------ ----- -----------------
<S> <C> <C>
U.S. GOVERNMENT Not all are insured or guaranteed by the Regular interest income
SECURITIES U.S. Government, but only by the issuing
agency The U.S. Government guarantees interest and
All Funds principal payments on certain securities.
Percentage varies, and Limits potential for capital appreciation
up to 100% on
a temporary basis Market risk Generally more secure than lower quality
debt securities and equity securities
Interest rate risk
May preserve a Fund's assets
MONEY MARKET U.S. Government money market securities May preserve a Fund's assets
INSTRUMENTS offer a lower yield than lower-quality or
longer-term securities
All Funds
Up to 100% on Limits potential for capital appreciation
a temporary basis
Credit risk
Market risk
MORTGAGE-RELATED Prepayment risk -- the risk that the Regular interest income
SECURITIES underlying mortgage may be prepaid partially
or completely, generally during periods of
Total Return Bond Fund falling interest rates, which could The U.S. Government guarantees interest and
adversely affect yield to maturity and could principal payments on certain securities
Percentage varies require a Fund to reinvest in lower-yielding
securities. May benefit from security interest in real
estate collateral
Credit risk -- the risk that the underlying
mortgages will not be paid by debtors or by
credit insurers or guarantors of such Pass-through instruments provide greater
instruments. Some private mortgage diversification than direct ownership of
securities are unsecured or secured by loans
lower-rated insurers or guarantors and thus
may involve greater risk
Market risk
Interest rate risk
</TABLE>
23
<PAGE> 27
HOW THE FUNDS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------ ----- -----------------
<S> <C> <C>
HIGH YIELD DEBT Higher credit risk than higher-grade debt May offer higher interest income than
SECURITIES (JUNK BONDS) securities higher-grade debt securities and higher
potential gains
Total Return Bond Fund Higher market risk than higher-grade debt
securities
Up to 10%
More volatile than higher-grade debt
securities
May be more illiquid (harder to value and
sell), in which case valuation would depend
more on investment adviser's judgment than
is generally the case with higher-rated
securities
ASSET-BACKED Prepayment risks Regular interest income
SECURITIES
The security interest in the underlying Prepayment risk is generally lower than with
Large Cap Value, collateral may not be as great as with mortgage-related securities
Small Cap Value mortgage-related securities
and Total Return Bond Pass-through instruments provide greater
Funds Credit risk -- the risk that the underlying diversification than direct ownership of
receivables will not be paid by debtors or loans
Percentage varies by credit insurers or guarantors of such
instruments. Some asset-backed securities
are unsecured or secured by lower-rated
insurers or guarantors and thus may involve
greater risk
Market risk
Interest rate risk
DERIVATIVES Derivatives such as futures, options and A Fund could make money and protect against
foreign currency exchange contracts may not losses if the investment analysis proves
International Equity and fully offset the underlying positions and correct
Total Return Bond Funds this could result in losses to the Fund that
would not have otherwise occurred One way to manage a Fund's risk/return
Percentage varies balance by locking in the value of an
Derivatives used for risk management may not investment ahead of time
have the intended effects and may result in
losses or missed opportunities Derivatives that involve leverage could
generate substantial gains at low cost
The other party to a derivatives contract
could default May be used to hedge against changes in
currency exchange rates
Derivatives that involve leverage (borrowing
for investment) could magnify losses
Certain types of derivatives involve costs
to a Fund which can reduce returns
</TABLE>
24 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 28
HOW THE FUNDS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------ ----- -----------------
<S> <C> <C>
REVERSE REPURCHASE May magnify underlying investment losses May magnify underlying investment gains
AGREEMENTS AND
DOLLAR ROLLS
Investment costs may exceed potential
Total Return Bond Fund underlying investment gains
Up to 33 1/3%
WHEN-ISSUED AND
DELAYED-DELIVERY
SECURITIES
All Funds
Percentage varies
BORROWING Leverage borrowing for investments may Leverage may magnify investment gains
magnify losses
Total Return Bond Fund
Up to 33 1/3%
Interest costs and investment fees may
Other Funds exceed potential investment gains
Up to 20%
ADJUSTABLE/FLOATING RATE Value lags value of fixed rate securities Can take advantage of rising interest rates
SECURITIES when interest rates change
Large Cap Value and
Total Return Bond Funds
Percentage varies
STRIPPED SECURITIES More volatile than securities that have not Value rises faster when interest rates fall
separated principal and interest
Total Return Bond Fund
Percentage varies Mortgage-backed stripped securities have
more prepayment and interest rate risk than
other mortgage-related securities
</TABLE>
25
<PAGE> 29
HOW THE FUNDS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------ ----- -----------------
<S> <C> <C>
INTEREST RATE SWAPS Helps protect the return on an investment Speculative technique including risk of loss
of interest payment swapped
Total Return Bond Fund
Up to 5% of net assets
ILLIQUID SECURITIES May be difficult to value precisely May offer a more attractive yield or
potential for growth than more widely traded
All Funds May be difficult to sell at the time or securities
Up to 15% of net assets price desired
</TABLE>
26 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 30
How the Trust is Managed
BOARD OF TRUSTEES
The Board of Trustees oversees the actions of the Manager, the sub-advisers and
the Distributor and decides on general policies. The Board also oversees the
Trust's officers who conduct and supervise the daily business operations of the
Trust.
MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077
Under a management agreement with the Trust, PIFM manages the Trust's
investment operations, administers its business affairs and is responsible for
supervising the sub-adviser(s) (which we call an Adviser) for each of the Funds.
The table below sets forth the annual management fee received by PIFM from each
Fund, as well as the annual sub-advisory fee paid by PIFM to each Fund's
Adviser(s) (shown as a percentage of average net assets).
<TABLE>
<CAPTION>
ANNUAL ANNUAL
MANAGEMENT FEE PAID TO
FEE PAID TO ADVISER(S)
FUND PIFM BY PIFM
- -----------------------------------------------------------------------------------
<S> <C> <C>
Large Capitalization Growth Portfolio .70% .30%
Large Capitalization Value Portfolio .70% .30%
Small Capitalization Growth Portfolio .70% .40%
Small Capitalization Value Portfolio .70% .40%
International Equity Portfolio .80% .40%
Total Return Bond Portfolio .50% .25%
</TABLE>
Subject to the supervision of the Board of Trustees of the Trust, PIFM is
responsible for conducting the initial review of prospective Advisers for the
Trust. In evaluating a prospective Adviser, PIFM considers many factors,
including the firm's experience, investment philosophy and historical
performance. PIFM is also responsible for monitoring the performance of the
Trust's Advisers.
PIFM and the Trust operate under an exemptive order (the Order) from the
Securities and Exchange Commission that generally permits PIFM to enter into or
amend agreements with Advisers without obtaining shareholder approval each time.
This authority is subject to certain conditions, including the requirement that
the Board of Trustees approve any new or amended agreements with Advisers.
Shareholders of each Fund still have the right to terminate these agreements for
the Fund at any time by a vote of
27
<PAGE> 31
How the Trust is Managed
the majority of outstanding shares of the Fund. The Trust will notify
shareholders of any new Advisers or material amendments to advisory agreements
made pursuant to the Order. On September__,1999, the sole shareholder of the
Trust voted to allow the Trust and PIFM to operate under the Order.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of August 31, 1999, PIFM served as the
Manager to all 46 of the Prudential Mutual Funds, and as Manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $71.8 billion.
ADVISERS AND PORTFOLIO MANAGERS
Introduction
The Advisers are responsible for the day-to-day management of each Fund, or
portion thereof, that they manage, subject to the supervision of PIFM and the
Board of Trustees. The Advisers are paid by PIFM, not the Trust.
The LARGE CAPITALIZATION GROWTH, LARGE CAPITALIZATION VALUE, SMALL
CAPITALIZATION GROWTH and SMALL CAPITALIZATION VALUE FUNDS each have two
Advisers, each of whom manages approximately 50% of the Fund's assets. For each
of these Funds, PIFM hired two Advisers with different investment philosophies.
PIFM believes that at any given time, certain investment philosophies will be
more successful than others and that a combination of different investment
approaches may benefit these Funds and help reduce their volatility. PIFM
periodically rebalances these Funds to maintain the approximately equal
allocation of their assets between the two Advisers. Reallocations may result in
higher portfolio turnover and correspondingly higher transactional costs. In
addition, Funds with two Advisers may experience wash transactions -- where one
Adviser buys a security at the same time the other one sells it. When this
happens, the Fund's position in that security remains unchanged, but the Fund
has paid additional transaction costs.
Large Capitalization Growth Fund
COLUMBUS CIRCLE INVESTORS (CCI) and OAK ASSOCIATES, LTD. (Oak) are the Advisers
for the Large Capitalization Growth Fund. For their services as Advisers, CCI
and Oak each receive a fee from PIFM at the annual rate of .30% of the average
daily net assets of the portion of the Fund it manages.
28 Target Funds [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 32
How the Trust is Managed
CCI has specialized in large-cap equity investing since it was established
in 1975. As of June 30, 1999, CCI had approximately $4.5 billion in assets under
management for corporate, nonprofit, government, union and mutual fund clients.
The address of CCI is Metro Center, One Station Place, 8th Floor, Stanford, CT
06902.
ANTHONY RIZZA, a Managing Director of CCI, is primarily responsible for
managing CCI's part of the Fund. Mr. Rizza is a Chartered Financial Analyst and
a member of the Hartford Society of Security Analysts. He has been a portfolio
manager with CCI since 1991.
OAK has specialized in large-cap equity investing since it was founded in
1985. Oak provides investment management services to both individual and
institutional clients. As of June 30, 1999, Oak had more than $1.5 billion in
assets under management. The address of Oak is 3875 Embassy Parkway, Suite 250,
Akron, OH 44333.
JAMES D. OELSCHLAGER, President of Oak since 1985, manages the assets of
the Fund. DONNA BARTON, MARGARET BALLINGER and DOUGLAS MACKAY assist Mr.
Oelschlager in managing the Fund's assets. Ms. Barton and Ms. Ballinger have
been with Oak since 1985, and Mr. MacKay has been a research analyst with Oak
since 1990.
Large Capitalization Value Fund
INVESCO CAPITAL MANAGEMENT, INC. (INVESCO) and HOTCHKIS AND WILEY are the
Advisers for the Large Capitalization Value Fund. For their services as
Advisers, INVESCO and Hotchkis and Wiley each receive a fee from PIFM at the
annual rate of .30% of the average daily net assets of the portion of the Fund
it manages.
INVESCO has specialized in value-oriented equity investing since it was
organized in 1971. As of June 30, 1999, INVESCO had approximately $48 billion in
assets under management for clients located throughout the U.S., Europe and
Japan. The address of INVESCO is 1315 Peachtree Street, Suite 500, Atlanta, GA
30309.
NIELSON BROWN, a Vice President of INVESCO, manages the Fund. Mr. Brown is
a Chartered Financial Analyst and a member of the Atlanta Society of Financial
Analysts. He has been a portfolio manager with INVESCO since 1989.
HOTCHKIS AND WILEY has specialized in large-cap equity investing since it
was formed in 1980. As of June 30, 1999, Hotchkis and Wiley had approximately
$15 billion in assets under management for corporate, public,
29
<PAGE> 33
HOW THE TRUST IS MANAGED
endowment and foundation and mutual fund clients. The address of Hotchkis and
Wiley is 725 S. Figueroa St., Suite 4000, Fifth Floor, Los Angeles, CA 90017.
ROGER DEBARD, Managing Director of Hotchkis and Wiley, manages the assets
of the Fund. Mr. DeBard is a Chartered Financial Analyst and has been a
portfolio manager for Hotchkis and Wiley since 1985.
SMALL CAPITALIZATION GROWTH FUND
SAWGRASS ASSET MANAGEMENT, L.L.C. (SAWGRASS) and FLEMING ASSET MANAGEMENT
USA (FLEMING USA) are the Advisers for the Small Capitalization Growth Fund. For
their services as Advisers, Sawgrass and Fleming USA each receive a fee from
PIFM at the annual rate of .40% of the average daily net assets of the portion
of the Fund it manages.
SAWGRASS has specialized in small-cap equity investing since it was
organized in 1998. Sawgrass was formed by a core group of investment
professionals who had worked together for 15 years at Barnett Capital Advisors,
Inc. As of June 30, 1999, Sawgrass had approximately $425 million in assets
under management for corporate, municipal, public and state retirement plans and
mutual funds. The address of Sawgrass is 4337 Pablo Oaks Court, Building 200,
Jacksonville, FL 32224.
DEAN MCQUIDDY, a principal and Director of Equity Investments of Sawgrass,
manages the assets of the Fund. Mr. McQuiddy is a Chartered Financial Analyst
and has been with Sawgrass since January 1998. Prior to 1998, Mr. McQuiddy was
the head small-cap portfolio manager of Barnett Capital Advisors, Inc.
FLEMING USA is a division of Robert Fleming, Inc., the U.S. equity asset
management affiliate of Robert Fleming Holdings (Flemings Group). Founded in
1873, the Flemings Group manages over $115 billion of assets on behalf of
private investors, companies, institutions, governments and central banks
worldwide. Approximately half of its assets under management are pension funds
for institutions. The balance of its assets under management are in open- and
closed-end pooled investment vehicles. Fleming USA's address is 320 Park Avenue,
New York, NY 10022.
The assets of the Portfolio are managed by a team of portfolio managers.
Eytan M. Shapiro, a Director and portfolio manager of Fleming USA, is
responsible for the day-to-day management of the Portfolio's assets. Mr. Shapiro
has been with Fleming USA since 1992 and with the Flemings Group since 1985. The
other members of the team are Timothy R. V.
30 Target Funds [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 34
How the Trust is Managed
Parton, Christopher M. V. Jones and T. Gary Lieberman. Mr. Parton, a Director
and portfolio manager with Fleming USA, has been with Fleming USA since 1990 and
with the Flemings Group since 1986. Mr. Jones, a Director and portfolio manager
of Fleming USA, as well as Chief Investment Officer of its Small Cap Equity
Group, joined Fleming USA in 1986 and began his career with the Flemings Group
in 1982. Mr. Lieberman is a Vice President and analyst with Fleming USA and has
been with the firm since 1995. Prior to joining Fleming USA, Mr. Lieberman was
an analyst with Saloman Brothers Asset Management.
Small Capitalization Value Fund
LAZARD ASSET MANAGEMENT (LAZARD) and WOOD, STRUTHERS & WINTHROP MANAGEMENT CORP.
(WSW) are the Advisers for the Small Capitalization Value Fund. For their
services as Advisers, Lazard and WSW each receive a fee from PIFM at the annual
rate of .40% of the average daily net assets of the portion of the Fund it
manages.
LAZARD is a division of Lazard Freres & Co. LLC (Lazard Freres), a New York
limited liability company. Since it was formed in 1970, Lazard has provided
investment management services to both individual and institutional clients. As
of June 30, 1999, Lazard and its global affiliates had approximately $68 billion
in assets under management. The address of Lazard is 30 Rockefeller Plaza, New
York, NY 10112.
HERBERT W. GULLQUIST and EILEEN D. ALEXANDERSON manage the assets of the
Fund. Mr. Gullquist, a Managing Director and Vice Chairman of Lazard Freres and
Chief Investment Officer of Lazard, has been with Lazard since 1982. Ms.
Alexanderson, a Managing Director of Lazard Freres and a Certified Financial
Analyst, has been with Lazard since 1979.
WSW was founded in 1871 and has specialized in small-cap equity investing
since 1967. WSW provides investment management services to both individual and
institutional clients. As of June 30, 1999, WSW had approximately $12 billion in
assets under management. The address of WSW is 277 Park Avenue, New York, NY
10172.
JAMES A. ENGLE and ROGER W. VOGEL manage the assets of the Fund. Mr. Engle
has been the Chief Investment Officer of WSW since 1988. Mr. Vogel, who is
Senior Vice President for the Equities Division at WSW, has been the lead
small-cap equity portfolio manager of WSW since 1993.
31
<PAGE> 35
How the Trust is Managed
International Equity Fund
LAZARD is the Adviser to the International Equity Fund. For its services as
Adviser, Lazard receives a fee from PIFM at the annual rate of .40% of the
Fund's average daily net assets.
HERBERT W. GULLQUIST and JOHN R. REINSBERG manage the Fund. Mr. Gullquist,
a Managing Director and Vice Chairman of Lazard Freres and Chief Investment
Officer of Lazard, has been with Lazard since 1982. Mr. Reinsberg is a Managing
Director of Lazard Freres and has been with Lazard since 1992.
Total Return Bond Fund
PACIFIC INVESTMENT MANAGEMENT COMPANY (PIMCO) is the Adviser to the Total Return
Bond Fund. For its services as Adviser, PIMCO receives a fee from PIFM at the
annual rate of .25% of the average daily net assets of the Fund.
PIMCO has specialized in fixed income investing since the firm was
established in 1971. As of June 30, 1999, PIMCO had approximately $171 billion
of assets under management. The address of PIMCO is 840 Newport Center Drive,
Suite 300, Newport Beach, CA 92660.
JOHN L. HAGUE, a Managing Director of PIMCO, manages the Fund. Mr. Hague
has been a portfolio manager with PIMCO and its predecessor since 1989.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Trust's
shares under a Distribution Agreement with the Trust. The Trust has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing
each Fund's Class A, B and C shares and provides certain shareholder support
services. Each Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares. These fees -- known as 12b-1 fees -- are
shown in the "Fees and Expenses" tables.
32 Target Funds [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 36
How the Trust is Managed
Year 2000 Readiness Disclosure
The services provided to the Trust and the shareholders by the Manager, the
Advisers, the Distributor, the Transfer Agent and the Custodian depend on the
smooth functioning of their computer systems and those of outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such an event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although at this time there can be no assurance that there will be no adverse
impact on the Trust, the Manager, the Advisers, the Distributor, the Transfer
Agent and the Custodian have advised the Trust that they have been actively
working on necessary changes to their computer systems to prepare for the year
2000. The Trust and its Board have received satisfactory reports from the
principal service providers as to their preparations for Year 2000 readiness,
although there can be no assurance that the service providers (or other
securities market participants) will successfully complete the necessary changes
in a timely manner or that there will be no adverse impact on the Trust.
Moreover, the Trust at this time has not considered retaining alternative
service providers or directly undertaken efforts to achieve year 2000 readiness,
the latter of which would involve substantial expenses without an assurance of
success.
Additionally, issuers of securities generally as well as those purchased by
the Funds may confront Year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Funds.
33
<PAGE> 37
FUND DISTRIBUTIONS AND TAX ISSUES
Investors who buy shares of the Trust should be aware of some important tax
issues. For example, each Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA), or some other qualified tax-deferred plan or account.
Also, if you sell shares of a Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless your shares are
held in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues
you should be aware of, but is not meant to be tax advice. For tax advice,
please speak with your tax adviser.
DISTRIBUTIONS
Each Fund distributes DIVIDENDS of any net investment income to shareholders on
a regular basis as shown below.
<TABLE>
<CAPTION>
FUND DIVIDENDS
<S> <C>
Total Return Bond Fund Declared daily,
paid monthly
Large Capitalization Growth, Large
Capitalization Value, Small Capitalization Growth, Declared and
Small Capitalization Value and International Equity Funds paid annually
</TABLE>
For example, if a Fund owns ACME Corp. stock and the stock pays a dividend,
the Fund will pay out a portion of this dividend to its shareholders, assuming
the Fund's income is more than its costs and expenses. The dividends you receive
from each Fund will be taxed as ordinary income, whether or not they are
reinvested in the Fund.
For Funds that invest in foreign securities, the amount of income available
for distribution to shareholders will be affected by any foreign currency gains
or losses generated by the Fund and cannot be predicted. This fact, coupled with
the different tax and accounting treatment of certain currency gains and losses,
increases the possibility that distributions, in whole or in part, may be a
return of capital to shareholders.
Each Fund also distributes realized net CAPITAL GAINS to shareholders --
typically once a year -- which are generated when the Fund sells its assets
34 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 38
FUND DISTRIBUTIONS AND TAX ISSUES
Each Fund also distributes realized net CAPITAL GAINS to shareholders --
typically once a year --which are generated when the Fund sells its assets for a
profit. For example, if a Fund bought 100 shares of ACME Corp. stock for a total
of $1,000 and more than one year later sold the shares for a total of $1,500,
the Fund has net long-term capital gains of $500, which it will pass on to
shareholders (assuming the Fund's total gains are greater than any losses it may
have). Capital gains are taxed differently depending on how long the Fund holds
the security -- if a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at ordinary income
rates of up to 39.6%. Different rates apply to corporate shareholders.
For your convenience, a Fund's distributions of dividends and capital gains
are AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us
to pay the distributions in cash, we will send you a check if your account is
with the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Whether you receive these distributions in
additional shares or in cash, the distributions may be subject to taxes, unless
your shares are held in a qualified tax-deferred plan or account. For more
information about automatic reinvestment and other shareholder services, see
"Step 4: Additional Shareholder Services" in the next section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of a Fund as part of a qualified tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified tax-deferred plan or
account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter
35
<PAGE> 39
FUND DISTRIBUTIONS AND TAX ISSUES
and actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
Corporate shareholders are eligible for the 70% dividends-received deduction for
certain dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Trust with your tax
identification number and certifications as to your tax status, and you fail to
do this, we will withhold and pay to the U.S. Treasury 31% of your distributions
and sale proceeds. If you are subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions. Dividends of net
investment income and short-term capital gains paid to a nonresident foreign
shareholder generally will be subject to a U.S. withholding tax of 30%. This
rate may be lower, depending on any tax treaty the U.S. may have with the
shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of a Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day and
soon thereafter received a distribution. That is not so because when dividends
are paid out, the value of each share of the Fund decreases by the amount of the
dividend and the market changes (if any) to reflect the payout. The distribution
you receive makes up for the decrease in share value. However, the timing of
your purchase does mean that part of your investment came back to you as taxable
income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts -- available to certain taxpayers beginning in
1998 -- contributions are not tax deductible, but distributions from the plan
may be tax-free. Please contact your financial adviser for information on a
variety of retirement plans offered by Prudential.
36 Target Funds [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 40
FUND DISTRIBUTIONS AND TAX ISSUES
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of a Fund for a profit, you have realized a capital gain,
which is subject to tax, unless you hold shares in a qualified tax-deferred plan
or account. The amount of tax you pay depends on how long you owned your shares.
If you sell shares of a Fund for a loss, you may have a capital loss, which you
may use to offset certain capital gains you have.
[ARROW CHART]
Exchanging your shares of a Fund for the shares of another Fund of the
Trust is considered a sale for tax purposes. In other words, it's a "taxable
event." Therefore, if the shares you exchanged have increased in value since you
purchased them, you have capital gains, which are subject to the taxes described
above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell -- or exchange -- Fund shares,
as well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
Automatic Conversion of Class B Shares
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares - which happens automatically approximately seven years after
purchase - is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
<PAGE> 41
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
INITIAL OFFERING OF SHARES
PIMS will solicit subscriptions for Class A, Class B and Class C shares of each
Fund during a subscription period beginning September 22, 1999 and expected to
end October 29, 1999. Fund shares subscribed for during this time will be issued
at a net asset value of $10.00 per share on a closing date expected to occur on
November 3, 1999. An initial sales charge of 5% (5.26% of the net amount
invested) is imposed on each transaction in Class A shares. This initial sales
charge may be reduced depending on the amount of the purchase as shown in the
table under "Reducing or Waiving Class A's Initial Sales Charge." An initial
sales charge of 1% (1.01% of the net amount invested) is imposed on each
transaction in Class C shares. Your broker will notify you of the end of the
subscription period. Payment for Fund shares will be due within three days. If
you send an order during the subscription period along with payment, your money
will be returned unless you allow the money to be invested in Prudential
MoneyMart Assets, Inc. (MoneyMart Fund), a money market fund. If this is your
first investment in MoneyMart Fund, all amounts received and invested in
MoneyMart Fund, including any dividends received on these funds, will be
automatically invested in the Funds you choose on the closing date. If you
previously owned shares of MoneyMart Fund, dividends accrued on your shares will
not be exchanged for Fund shares. The minimum initial investment is $1,000 for
Class A and Class B shares and $2,500 for Class C shares. There are no minimum
investment requirements for Class Z shares and for certain retirement and
employee savings plans or custodial accounts for minors. You will not receive
share certificates.
If you subscribe for shares, you will not have any rights as a shareholder
of a Fund until your shares are paid for and their issuance has been reflected
in the Fund's books. We reserve the right to withdraw, modify or terminate the
initial offering without notice and to refuse any order in whole or in part.
The Funds will be closed for purchases and exchanges from on or about
November 1, 1999 to November 12, 1999, while the Advisers invest the proceeds of
the offering in accordance with each Fund's investment objective and policies
(the closing period). Beginning on or about November 15, 1999, each Fund will
commence a continuous offering of its shares. During the closing period,
shareholders may redeem existing positions or exchange out of a Fund, but the
Funds will be closed to new purchases and no exchanges into a Fund will be
accepted.
38 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 42
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Funds for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Funds, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into a Fund) or suspend or modify a Fund's sale of its
shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B and Class C shares of the
Funds.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge or CDSC), but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
- The amount of your investment
- The length of time you expect to hold the shares and the impact of the
varying distribution fees
- The different sales charges that apply to each share class -- Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
39
<PAGE> 43
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
- Whether you qualify for any reduction or waiver of sales charges
- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
Share Class Comparison. USE THIS CHART TO HELP YOU COMPARE THE FUNDS' DIFFERENT
SHARE CLASSES. THE DISCUSSION FOLLOWING THIS CHART WILL TELL YOU WHETHER YOU ARE
ENTITLED TO A REDUCTION OR WAIVER OF ANY SALES CHARGES.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Minimum purchase amount(1) $1,000 $1,000 $2,500
Minimum amount for $100 $100 $100
subsequent purchases(1)
Maximum initial sales charge Total Return Bond None 1% of the
Fund -- 4% of the public
public offering price offering price
Other Funds --
5% of the public
offering price
Contingent Deferred Sales None If Sold During: 1% on sales
Charge (CDSC)(2) Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase(2)
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1%; 1% 1%
service (12b-1) fees shown (.25 of 1% (currently .75 (currently .75
as a percentage of average currently) of 1% for the of 1% for the
net assets(3) Total Return Total Return
Bond Fund) Bond Fund)
</TABLE>
(1) The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum
initial and subsequent investment for purchases made through the Automatic
Investment Plan is $50. For more information, see "Additional Shareholder
Services -- Automatic Investment Plan."
(2) For more information about the CDSC and how it is calculated, see "How to
Sell Your Shares -- Contingent Deferred Sales Charge (CDSC)."
(3) These distribution fees are paid from each Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and
may cost you more than paying other types of sales charges. The service fee
for Class A, Class B and Class C shares is .25 of 1%. The distribution fee
for Class A shares is limited to .30 of 1% (including the .25 of 1% service
fee) and is .75 of 1% for Class B and Class C shares.
40 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 44
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales charge by
increasing the amount of your investment. These tables show you how the sales
charge decreases as the amount of your investment increases.
LARGE CAPITALIZATION VALUE, LARGE CAPITALIZATION GROWTH, SMALL CAPITALIZATION
VALUE, SMALL CAPITALIZATION GROWTH AND INTERNATIONAL EQUITY FUNDS
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AMOUNT OF PURCHASE AS % OF AS % OF DEALER
OFFERING PRICE AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above* None None None
TOTAL RETURN BOND FUND
SALES CHARGE SALES CHARGE
AMOUNT OF PURCHASE AS % OF AS % OF DEALER
OFFERING PRICE AMOUNT INVESTED REALLOWANCE
Less than $50,000 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50% 3.63% 3.25%
$100,000 to $249,999 2.75% 2.83% 2.50%
$250,000 to $499,999 2.00% 2.04% 1.90%
$500,000 to $999,999 1.50% 1.52% 1.40%
$1 million and above* None None None
</TABLE>
* If you invest $1 million or more, you can buy only Class A shares.
To satisfy the purchase amounts above, you can:
- invest with an eligible group of related investors;
- buy the Class A shares of two or more Prudential mutual funds at the
same time;
41
<PAGE> 45
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
- use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of the
shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify
for Rights of Accumulation); or
- sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares in
the Fund and other Prudential mutual funds within 13 months.
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:
- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades and charges its clients a management, consulting or
other fee for its services; or
- Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in a
Fund in connection with different pricing options for their programs. Investors
should consider carefully any separate transaction and other fees charged by
these programs in connection with investing in each available share class before
selecting a share class.
OTHER TYPES OF INVESTORS. Other investors pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates, the
Prudential mutual funds, the subadvisers of the Prudential mutual funds and
clients of brokers that have entered into a selected dealer agreement with the
Distributor. To qualify for a reduction or waiver of the sales charge, you must
notify the Transfer Agent or your broker at the time of purchase. For
42 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 46
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares
- -- Reduction and Waiver of Initial Sales Charge --Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one of
the following:
- purchase your shares through an account at Prudential Securities;
- purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation; or
- purchase your shares through another broker
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the
number of converted Class B shares if the price of the Class A shares is higher
than the price of Class B shares. The total dollar value will be the same, so
you will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Trust Shares --
Conversion Feature -- Class B Shares."
43
<PAGE> 47
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. stock in
its portfolio and the price of ACME stock goes up while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of Fund XYZ
will increase.
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of a Fund is based on the share value. The
share value of a mutual fund -- known as the NET ASSET VALUE or NAV -- is
determined by a simple calculation -- it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its expenses)
is $1,000 and there are 100 shares of Fund XYZ owned by shareholders, the price
of one share of the fund -- or the NAV -- is $10 ($1,000 divided by 100).
Portfolio securities are valued based upon market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trust's Board. Most national newspapers report the NAVs of
most mutual funds, which allows investors to check the price of mutual funds
daily.
We determine the NAV of each Fund's share once each business day at 4:15
p.m. New York Time on days that the New York Stock Exchange is open for trading.
Because the International Equity and Total Return Bond Funds invest in foreign
securities, their NAV can change on days when you cannot buy or sell shares. We
do not determine NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of a Fund's portfolio
do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B shares, you will
pay the NAV next determined after we receive your order to purchase (remember,
there are no up-front sales charges for this share class). Your broker may
charge you a separate or additional fee for purchases of shares.
44 TARGET FUNDS [TELEPHONE GRAPHIC] (800)-225-1852
<PAGE> 48
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, each Fund pays out -- or distributes -- its net investment
income and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in a Fund at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of a Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial adviser will help you
determine which retirement plan best meets your needs. Complete instructions
about how to establish and maintain your plan and how to open accounts for you
and your employees will be included in the retirement plan kit you receive in
the mail.
THE PRUTECTOR PROGRAM. Optional group term life insurance -- which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines -- is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
45
<PAGE> 49
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about each Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of a Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of a Fund -- also known as redeeming your shares --
the price you will receive will be the NAV next determined after the Transfer
Agent, the Distributor or your broker receives your order to sell. If your
broker holds your shares, your broker must receive your order to sell by 4:15
p.m. New York Time to process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of a Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when a Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares -- Sale of Shares."
46 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 50
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records, or you are a business or a
trust and you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order guaranteed by a financial institution.
For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares -- Sale of Shares -- Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase, you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
- Amounts representing shares you purchased with reinvested dividends
and distributions
- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares
- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid -- or at least
minimize -- the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted before in the "Share Class Comparison" chart the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares -- which is applied
to shares sold within 18 months of purchase. For both Class B and Class C
shares, the CDSC is calculated based on the lesser of the original purchase
price or the redemption proceeds. For purposes of determining how long you've
held your shares, all purchases during the month are grouped together and
considered to have been made on the last day of the month.
47
<PAGE> 51
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC -- CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
- After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies
to individual shareholders, as well as shares owned in joint tenancy
(with rights of survivorship), provided the shares were purchased
before the death or disability
- To provide for certain distributions -- made without IRS penalty --
from a tax-deferred retirement plan, IRA or Section 403(b) custodial
account
- On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares -- Waiver of Contingent
Deferred Sales Charge -- Class B Shares."
WAIVER OF THE CDSC -- CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC 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.
REDEMPTION IN KIND
If the sales of Portfolio shares you make during any 90-day period reach the
lesser of $250,000 or 1% of the value of a Fund's net assets, we can then give
you securities from the Fund's portfolio instead of cash. If you want to sell
the securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize Fund expenses paid by other shareholders. We will
give you 60 days' notice, during which time you can
48 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 52
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
purchase additional shares to avoid this action. This involuntary sale does not
apply to shareholders who own their shares as part of a 401(k) plan, an IRA or
some other tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares to
reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares -- Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of a Fund for shares of the same class in certain
other Prudential mutual funds -- including certain money market funds -- if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
49
<PAGE> 53
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange --
and then sell -- Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Fund shares into Prudential
Special Money Market Fund, Inc., the time you hold the shares in that money
market account will not be counted in calculating the required holding period
for CDSC liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues - - If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account -- Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market - - also known as "market timing" - - may make it very difficult to
manage a Fund's investments. When market timing occurs, a Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much
50 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 54
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
cash the Fund will have to invest. When, in our opinion, such activity would
have a disruptive effect on portfolio management, each Fund reserves the right
to refuse purchase orders and exchanges into the Fund by any person, group or
commonly controlled account. The Trust may notify a market timer of rejection of
an exchange or purchase order after the day the order is placed. If the Trust
allows a market timer to trade Fund shares, it may require the market timer to
enter into a written agreement to follow certain procedures and limitations.
51
<PAGE> 55
APPENDIX I
DESCRIPTION OF SECURITY RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA -- Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB and B -- Debt rated BB and B are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation. While
such obligations will likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major exposure to adverse
business, financial or economic conditions which could lead to the debtor's
inadequate capacity to meet its financial commitment on the debt.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa -- Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
52 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 56
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
An S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as
high as for issues designated A-1.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or supporting institutions) are considered to
have a superior capacity for repayment of senior short-term debt obligations.
53
<PAGE> 57
Prime-1 repayment ability will often be evidenced by any of the following
characteristics:
- leading market positions in well-established industries
- high rate of return on funds employed
- conservative capitalization structure with moderate reliance on debt
and ample asset protection
- broad margins in earnings coverage of fixed financial charges and high
internal cash generation
- well-established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or supporting institutions) are considered to have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics of issuers rated Prime-1
but to a lesser degree. Earnings trends and coverage ratios, while sound, be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
54 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 58
APPENDIX II
INFORMATION ON PERFORMANCE OF ADVISERS
Each Adviser serves as adviser to a portfolio of The Target Portfolio Trust
(Target I) with investment objectives, policies and strategies identical to
those of the Fund(s) it manages for the Trust. The table below shows the
performance of the Large Capitalization Growth, Large Capitalization Value,
Small Capitalization Value, International Equity and Total Return Bond
Portfolios of Target I for the periods shown. With respect to each Adviser, the
same portfolio manager(s) has managed the Target I portfolio since the firm
became an adviser to the portfolio, and the same portfolio manager(s) manages
the corresponding Fund of the Trust. With respect to each of the Large
Capitalization Growth, Large Capitalization Value and Small Capitalization Value
Portfolios of Target I, performance is shown only from the date that both
Advisers have been managing the Portfolio's assets. The actual inception date of
these Portfolios was January 5, 1993. The performance information shown below
reflects the actual expense ratio of each Target I portfolio. The expense ratios
for the portfolios of Target I are lower than those of the corresponding Funds
of the Trust. In addition, the portfolios of Target I are not subject to sales
loads or distribution fees. If the expense ratios for the portfolios of Target I
had been as high as those for the corresponding Funds of the Trust, their
performance would have been lower. See "Risk/Return Summary -- Fees and
Expenses" above and "Expense Ratios" below.
55
<PAGE> 59
The performance information below should not be viewed as a substitute for
the Funds' own performance. The performance of the Funds will differ from the
performance of the portfolios shown below. Past performance of the Target I
portfolios should not be considered a prediction of future performance of the
Funds.
ANNUALIZED TOTAL RETURNS AS OF 6/30/99
<TABLE>
<CAPTION>
SINCE
TARGET I PORTFOLIO ADVISER(S) 1 YEAR 5 YEARS INCEPTION(1)
<S> <C> <C> <C> <C>
Large Capitalization Growth CCI % % %
Oak
Large Capitalization Value INVESCO % % %
Hotchkis &
Wiley
Small Capitalization Value Lazard % % %
WSW
International Equity Lazard % % %
Total Return Bond PIMCO % % %
</TABLE>
(1) Inception date for the International Equity and Total Return Bond
Portfolios is 1/5/93. Since inception performance for the other Portfolios
was calculated from the following dates: Large Capitalization Growth
Portfolio, 1/__/95; Large Capitalization Value Portfolio, 1/__/95; and
Small Capitalization Value Portfolio, 4/__/95.
Sawgrass and Fleming USA have served as Advisers to the Small
Capitalization Growth Portfolio of Target I since 5/26/99 and 8/26/99,
respectively. Sawgrass and Fleming USA also serve as the investment adviser of
other funds. The performance information shown below relates to the only other
registered investment company portfolios with investment objectives, policies
and strategies that are substantially similar to those of the Small
Capitalization Growth Portfolio and that are managed by the same portfolio
manager(s) that manages the Small Capitalization Growth Fund for Sawgrass and
Fleming USA. As described in this prospectus, Sawgrass and Fleming USA each have
responsibility for a portion of the Small Capitalization Growth Fund. By
contrast, Sawgrass and Fleming USA have sole responsibility for the funds whose
performance is shown below. The performance information below reflects the
actual expense ratio of each fund presented. With respect to funds with multiple
share classes, performance information is included for the share class with the
highest total
56 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 60
expense ratio and for a class with a lower total expense ratio. The expense
ratios for certain of these funds are generally lower than the expense ratios
for certain classes of the Small Capitalization Growth Fund. If the expense
ratios for those funds had been as high as those for certain classes of the
Fund, their performance would have been lower. See "Risk/Return Summary -- Fees
and Expenses" above and "Expense Ratios" below.
The performance information below should not be viewed as a substitute for
the Small Capitalization Growth Fund's own performance. The performance of the
Fund will differ from the performance of the funds shown below. Past performance
of the funds should not be considered a prediction of future performance of the
Fund. The performance data below reflects the imposition of applicable sales
loads.
Annualized Total Returns as of 6/30/99
<TABLE>
<CAPTION>
SINCE INCEPTION
FUND NAME 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
<S> <C> <C> <C> <C> <C>
Adviser: Sawgrass Asset Management, L.L.C.
ABC Fund
Adviser: Fleming Asset Management USA
XYZ Fund
</TABLE>
EXPENSE RATIOS. According to Lipper Analytical Services, the expense ratio
for each of the funds listed above as of September ___, 1999 was as follows:
<TABLE>
<CAPTION>
FUND EXPENSE RATIO
<S> <C>
Target I Large Capitalization Growth Portfolio %
Target I Large Capitalization Value Portfolio %
Target I Small Capitalization Value Portfolio %
Target I International Equity Portfolio %
Target I Total Return Bond Portfolio %
ABC Fund %
XYZ Fund %
</TABLE>
57
<PAGE> 61
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial advisor or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES
FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT
PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Growth &
Income Fund
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
PRUDENTIAL SMALL-CAP QUANTUM
FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE
FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth
Equity Fund
TARGET FUNDS
Large Capitalization Growth Fund
Large Capitalization Value Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Active Balanced Fund
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
Prudential Developing Markets
Equity Fund
Prudential Latin America Equity Fund
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Europe Index Fund
Prudential Pacific Index Fund
PRUDENTIAL NATURAL RESOURCES
FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Global Series
International Stock Series
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
International Equity Fund
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY
FUND, INC.
Limited Maturity Portfolio
58 TARGET FUNDS [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 62
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND
FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME
FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Short-Intermediate Term Series
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN
FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Bond Market Index Fund
PRUDENTIAL STRUCTURED MATURITY
FUND, INC.
Income Portfolio
TARGET FUNDS
Total Return Bond Fund
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Series
California Income Series
PRUDENTIAL MUNICIPAL BOND FUND
High Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS
FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL SPECIAL MONEY MARKET
FUND, INC.
Money Market Series
Prudential MoneyMart Assets, Inc.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Money Market Series
PRUDENTIAL MUNICIPAL SERIES FUND
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY
PORTFOLIO, INC.
Institutional Money Market Series
59
<PAGE> 63
FOR MORE INFORMATION
Please read this prospectus before you invest in the Funds and keep it for
future reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
Visit Prudential's Web Site At:
HTTP://WWW.PRUDENTIAL.COM
Additional information about the Trust can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into
this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Funds' performance)
SEMI-ANNUAL REPORT
MF189A
You can also obtain copies of Trust documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009 (The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in Washington, DC
(For hours of operation, call
1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
CUSIP Numbers:
Large Capitalization Growth Fund
Class A: 87612T-10-3
Class B: 87612T-20-2
Class C: 87612T-30-1
Large Capitalization Value Fund
Class A: 87612T-40-0
Class B: 87612T-50-9
Class C: 87612T-60-8
Small Capitalization Growth Fund
Class A: 87612T-70-7
Class B: 87612T-80-6
Class C: 87612T-81-4
Small Capitalization Value Fund
Class A: 87612T-82-2
Class B: 87612T-83-0
Class C: 87612T-84-8
International Equity Fund
Class A: 87612T-85-5
Class B: 87612T-86-3
Class C: 87612T-87-1
Total Return Bond Fund
Class A: 87612T-88-9
Class B: 87612T-78-0
Class C: 87612T-79-8
Investment Company Act File No: 811-09439
[Logo] Printed on Recycled Paper
<PAGE> 64
TARGET FUNDS
Statement of Additional Information
September 15, 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 15, 1999, a copy
of which may be obtained from the Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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-56
Net Asset Value............................................. B-61
Taxes, Dividends and Distributions.......................... B-61
Performance Information..................................... B-64
Report of Independent Accountants........................... B-66
Financial Statements........................................ B-67
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
- -------------------------------------------------------------------
</TABLE>
[MF189B]
<PAGE> 65
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 PORTFOLIOS, 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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<PAGE> 66
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
B-3
<PAGE> 67
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.
B-4
<PAGE> 68
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
B-5
<PAGE> 69
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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<PAGE> 70
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
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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.
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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.
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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
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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
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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
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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.
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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.
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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
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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.
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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
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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,
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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
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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
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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.
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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> 95
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> 96
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 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.
5. 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.
6. 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.
7. Make investments for the purpose of exercising control or management.
8. 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.
9. 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> 97
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 (--) 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.
Douglas H. McCorkindale (--) 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.
Thomas T. Mooney (--) 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.
*John R. Strangfeld, Jr. Trustee and Chief Executive Officer, Chairman, President
(--) 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)
</TABLE>
B-34
<PAGE> 98
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(**) THE TRUST DURING PAST FIVE YEARS
---------------- ------------- ----------------------
<S> <C> <C>
Robert F. Gunia (--) Vice Vice President (since September 1997) of
President Prudential Investments; 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.
David F. Connor (35) Secretary Assistant General Counsel (since March 1998) of
PIFM; Associate Attorney, Drinker Biddle &
Reath LLP prior thereto.
Grace C. Torres (--) 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 (--) 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.
** Unless otherwise stated, the address of the directors 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
72, except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. [Mr. Dorsey is scheduled to retire on December
31, 1999.]
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 Portfolio'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.
B-35
<PAGE> 99
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.
B-36
<PAGE> 100
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
PORTFOLIO MANAGEMENT FEE BY MANAGER
--------- -------------- ---------------
<S> <C> <C>
Large Capitalization Growth Portfolio................ 0.70% 0.40%
Large Capitalization Value Portfolio................. 0.70% 0.40%
Small Capitalization Growth Portfolio................ 0.70% 0.30%
Small Capitalization Value Portfolio................. 0.70% 0.30%
International Equity Portfolio....................... 0.80% 0.40%
Total Return Bond Portfolio.......................... 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> 101
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> 102
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 , 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 Portfolio. CCI has been an Adviser to the Portfolio since
January 2, 1995. 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 December 31, 1998, 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.
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<PAGE> 103
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. INVESCO has served as an Adviser to the
Fund since its inception. INVESCO, a Delaware corporation, is an indirect,
wholly-owned subsidiary of AMVESCAP PLC, a global money management firm. As of
December 31, 1998, INVESCO had approximately $146 million 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 December 31,
1998, Hotchkis and Wiley had approximately $14 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 $250 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 second Adviser to the Portfolio. Fleming USA has been an
Adviser to the Portfolio since August 26, 1999. 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 $64 billion of assets under management as of
March 31, 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 December 31, 1998, had more than $10 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
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<PAGE> 104
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.
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) 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 $157.9 billion of asset 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
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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.
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
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<PAGE> 106
Bond Fund, for the Class B and Class C shares as described above. Fee waivers
and subsidies will increase a Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
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.
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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.
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<PAGE> 108
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
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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.
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<PAGE> 110
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 ,
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:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years, but less
than 5 years, and do not qualify for a reduced sales charge on Class A shares,
you should consider purchasing Class B or Class C shares over Class A shares.
This is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B and Class C shares.
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<PAGE> 111
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.
[ADD FOR TRB FUND]
REDUCTION AND WAIVER OF INITIAL SALES CHARGE -- CLASS A SHARES
Benefit Plans. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
Other Waivers. In addition, Class A shares may be purchased at NAV,
through the Distributor or the Transfer Agent, by:
- officers of the Prudential mutual funds (including the 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,
- 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
B-48
<PAGE> 112
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 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).
B-49
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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.
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.
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.
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
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.
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<PAGE> 114
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 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.
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
B-51
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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 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.
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<PAGE> 116
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.
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;
B-53
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and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decide to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain, or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
The CDSC will be waived in the case of a redemption following the death or
disability of a shareholder or, in the case of a trust account, following the
death or disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
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.
</TABLE>
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<PAGE> 118
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
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.
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.
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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 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.
B-56
<PAGE> 120
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.
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
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<PAGE> 121
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
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.
B-58
<PAGE> 122
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY
INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years................... $ 105 $ 158 $ 210 $ 263
20 Years................... 170 255 340 424
15 Years................... 289 433 578 722
10 Years................... 547 820 1,093 1,366
5 Years................... 1,361 2,041 2,721 3,402
See "Automatic Investment Plan"
</TABLE>
- ---------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of 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.
B-59
<PAGE> 123
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 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
B-60
<PAGE> 124
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
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 Portfolio'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
B-61
<PAGE> 125
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 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.
B-62
<PAGE> 126
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 denominated 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
B-63
<PAGE> 127
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 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 Portfolio 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 Portfolio 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 Portfolio, 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 Portfolio 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 Portfolio will be subject, since the amount of each
Portfolio's assets to be invested in various countries will vary. Except in the
case of the International Equity Portfolios, 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
B-64
<PAGE> 128
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 semi-annual reinvestment and compounding of net
investment income, as described in the Prospectus. 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.
</TABLE>
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).
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.
</TABLE>
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.
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-65
<PAGE> 129
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-66
<PAGE> 130
<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-67
<PAGE> 131
<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-68
<PAGE> 132
<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-69
<PAGE> 133
<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-70
<PAGE> 134
<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-71
<PAGE> 135
<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-72
<PAGE> 136
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 .60 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, .70 of 1% of the
average daily net assets of the International Equity Fund and .45 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-73
<PAGE> 137
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-74
<PAGE> 138
(This Page Intentionally Left Blank)
B-75
<PAGE> 139
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)
91.5% ASSET ALLOCATION
6.7% SECURITY SELECTION/OTHER
1.8% MARKET TIMING
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> 140
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)
<TABLE>
<C> <S>
$5,117 Small Stock
$2,351 Common Stock
$ 44 Bonds
$ 15 T-bills
$ 9 Inflation
</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> 141
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
<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> 142
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 TARGET Portfolio.
I-4
<PAGE> 143
Each bar shows the best TIME REDUCES YOUR RISK
and worst annualized return for BEST AND WORST ANNUALIZED RETURNS OF THE S&P
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 1933 1994-98 1949-58 1979-98
Index, a market-weighted, 1931 1928-32 1929-38 1929-48
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 1 year 5 years 10 years 20 years
is not indicative of the past,
present, or future performance
of any TARGET Portfolio.
Source: Ibbotson
Associates
I-5
<PAGE> 144
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> 145
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)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.(3)
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.
3 On December 10, 1998 Prudential announced its intention to sell Prudential
HealthCare to Aetna Inc. for $1 billion.
III-1
<PAGE> 146
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.
III-2
<PAGE> 147
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.
III-3
<PAGE> 148
(This Page Intentionally Left Blank)
<PAGE> 149
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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<PAGE> 150
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.
IV-2
<PAGE> 151
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.
IV-3
<PAGE> 152
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<C> <C> <S> <C>
(a) (1) Certificate of Trust.*
(2) Agreement and Declaration of Trust.*
(b) By-Laws.*
(c) Not Applicable.
(d) (1) Management Agreement between the Registrant and Prudential
Investments Fund Management LLC (PIFM).**
(2) (i) Form of Subadvisory Agreement between PIFM and INVESCO
Capital Management Inc.**
(ii) Form of Subadvisory Agreement between PIFM and Sawgrass
Asset Management, L.L.C.**
(iii) Form of Subadvisory Agreement between PIFM and Lazard Asset
Management.**
(iv) Form of Subadvisory Agreement between PIFM and Columbus
Circle Investors.**
(v) Form of Subadvisory Agreement between PIFM and Pacific
Investment Management Company.**
(vi) Form of Subadvisory Agreement between PIFM and Hotchkis and
Wiley.**
(vii) Form of Subadvisory Agreement between PIFM and Fleming Asset
Management USA.**
(viii) Form of Subadvisory Agreement between PIFM and Wood,
Struthers & Winthrop Management Corp.**
(ix) Form of Subadvisory Agreement between PIFM and Oak
Associates, Ltd.**
(x) Form of Subadvisory Agreement between PIFM and Lazard Asset
Management.**
(e)(1) Form of Distribution Agreement between the Registrant and
Prudential Investment Management Services LLC.**
(2) Form of Selected Dealer Agreement.**
(g)(1) Form of Custodian Contract between the Registrant and State
Street Bank and Trust Company.**
(2) Form of Amendment to Custodian Contract.**
(h) Form of Transfer Agency and Service Agreement between the
Registrant and Prudential Mutual Fund Services, Inc.**
(i) Opinion of Morris, Nichols, Arsht & Tunnell.**
(j) Consent of Independent Accountants.**
(l) Purchase Agreement.**
(m) (1) Distribution and Service Plan for Class A Shares.**
(2) Distribution and Service Plan for Class B Shares.**
(3) Distribution and Service Plan for Class C Shares.**
(o) Rule 18f-3 Plan.**
</TABLE>
- ---------------
* Incorporated by reference to the Registration Statement on Form N-1A filed
via EDGAR on July 9, 1999. (File No. 333-82621).
** Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 25. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended, (the Investment Company Act) and pursuant to Article VII of
the Agreement and Declaration of
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<PAGE> 153
Trust (Exhibit (a)(2) to the Registration Statement) and Article XI of the
Trust's By-Laws (Exhibit (b) to the Registration Statement), officers, trustees,
employees and agents of the Registrant will not be liable to the Registrant, any
stockholder, officer, director, employee, agent or other person for any action
or failure to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be indemnified
against liabilities in connection with the Registrant, subject to the same
exceptions. Section 3817 of the Delaware Business Trust Act permits
indemnification of trustees who acted in good faith and reasonably believed that
the conduct was in the best interest of the Registrant. As permitted by Section
17(i) of the Investment Company Act, pursuant to Section 10 of the Distribution
Agreement (Exhibit (e)(1) to the Registration Statement), the Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, (Securities Act) may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Investment Company Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Investment Company Act and will be governed by the
final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
Section 8 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreements (Exhibits (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and each Adviser, respectively, to liabilities arising
from willful misfeasance, bad faith or gross negligence in the performance of
their respective duties or from reckless disregard by them of their respective
obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the
Investment Company Act as long as the interpretation of Section 17(h) and 17(i)
of such Act remains in effect and is consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Investments Fund Management LLC
See "How the Trust is Managed -- Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this
Registration Statement.
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<PAGE> 154
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, as most recently amended (File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<S> <C> <C>
Robert F. Gunia.............. Executive Vice President Vice President, Prudential Insurance
and Treasurer Company of America; Executive Vice
President and Treasurer, PIFM; Senior
Vice President, Prudential Securities
Incorporated
William V. Healey............ Executive Vice Executive Vice President, Secretary and
President, Secretary General Counsel, PIFM
and Chief Legal
Officer
</TABLE>
(b) Columbus Circle Investors (CCI)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to CCI's directors and executive officers is included in its
Form ADV filed with the Securities and Exchange Commission (File No. 801-31227),
as most recently amended, the text of which is incorporated herein by reference.
(c) Invesco Capital Management, Inc. (Invesco)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to INVESCO's directors and executive officers is included in
its Form ADV filed with the Securities and Exchange Commission (File No.
801-33949), as most recently amended, the text of which is incorporated herein
by reference.
(d) Hotchkis and Wiley
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to Hotchkis and Wiley is included in the Form ADV of Merrill
Lynch Asset Management, L.P. filed with the Securities and Exchange Commission
(File No. 801-11583), as most recently amended, the text of which is
incorporated herein by reference.
(e) Sawgrass Asset Management, L.L.C. (Sawgrass)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to Sawgrass is included in its Form ADV filed with the
Securities and Exchange Commission (File No. 801-55243), as most recently
amended, the text of which is incorporated herein by reference.
C-3
<PAGE> 155
(f) Fleming Asset Management USA (Fleming USA)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to Fleming USA's directors and executive officers is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-26297), as most recently amended, the text of which is incorporated
herein by reference.
(g) Lazard Asset Management
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to the general members of Lazard Freres & Co. LLC is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-6568), as most recently amended, the text of which is incorporated
herein by reference.
(h) Pacific Investment Management Company (PIMCO)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to PIMCO's partners is included in its Form ADV filed with
the Securities and Exchange Commission (File No. 801-7260), as most recently
amended, the text of which is incorporated herein by reference.
(i) Wood, Struthers & Winthrop Management, Corp.
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to Wood, Struthers & Winthrop Management, Corp.'s directors
and executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-9952), as most recently amended, the text of
which is incorporated herein by reference.
(j) Oak Associates, Ltd.
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to Oak Associates, Ltd.'s directors and executive officers
is included in its Form ADV filed with the Securities and Exchange Commission
(File No. 801-23632), as most recently amended, the text of which is
incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for the Cash Accumulation Trust, Command Government
Fund, Command Money Fund, Command Tax-Free Fund, The Global Total Return Fund,
Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Balanced Fund, Prudential
California Municipal Fund, Prudential Distressed Securities Fund, Inc.,
Prudential Diversified Bond Fund, Inc., Prudential Diversified Funds, Prudential
Emerging Growth Fund, Inc., Prudential Equity Fund, Prudential Equity Income
Fund, Prudential Europe Growth
C-4
<PAGE> 156
Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited
Maturity Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Government Securities Trust, Prudential High Yield Fund, Inc., Prudential High
Yield Total Return Fund, Inc., Prudential Index Series Fund, Prudential
Institutional Liquidity Portfolio, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap Value
Fund, Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund,
Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential Special Money Market Fund, Inc., Prudential Structured Maturity
Fund, Inc., Prudential 20/20 Focus Fund, Prudential Tax-Managed Equity Fund,
Prudential Utility Fund, Inc., Prudential World Fund, Inc., The Prudential
Investment Portfolios, Inc., Prudential Sector Funds, Inc., Target Funds and The
Target Portfolio Trust.
(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND
NAME(1) WITH UNDERWRITER OFFICES WITH REGISTRANT
------- --------------------- -----------------------
<S> <C> <C>
Margaret M. Deverell...................... Vice President and None
Chief Financial Officer
Robert F. Gunia........................... President Vice President
Kevin B. Frawley.......................... Senior Vice President and None
Chief Compliance Officer
Jean D. Hamilton.......................... Executive Vice President None
William V. Healey......................... Senior Vice President, Secretary None
and Chief Legal Officer
Brian Henderson........................... Senior Vice President and None
Chief Operating Officer
John R. Strangfeld, Jr.................... Advisory Board Member None
</TABLE>
- ---------------
(1) The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102, unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act and the Rules thereunder are
maintained at the offices of State Street Bank and Trust Company, One Heritage
Drive, North Quincy, Massachusetts 02171; the Registrant, Gateway Center Three,
100 Mulberry Street, Newark, New Jersey 07102-4077; and Prudential Mutual Fund
Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents required by
Rules 31a-1(b)(4), (5), (6), (7), (9), (10) and (11), 31a-1(d), and 31a-1(f)
will be kept at 100 Mulberry Street, Gateway Center Three, Newark, New Jersey
07102-4077 and the remaining accounts, books and other documents required by
such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "How the Trust is Managed" in the
Prospectus and the caption "Investment Advisory and Other Services" in the
Statement of Additional Information, constituting Parts A and B, respectively,
of this Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS.
Not applicable.
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<PAGE> 157
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newark and
State of New Jersey, on the 10th day of September, 1999.
TARGET FUNDS
/s/ JOHN R. STRANGFELD
--------------------------------------
(John R. Strangfeld, President)
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN R. STRANGFELD President and Trustee September 10, 1999
- ---------------------------------------------------
John R. Strangfeld
/s/ EUGENE C. DORSEY Trustee September 10, 1999
- ---------------------------------------------------
Eugene C. Dorsey
/s/ DOUGLAS H. MCCORKINDALE Trustee September 10, 1999
- ---------------------------------------------------
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY Trustee September 10, 1999
- ---------------------------------------------------
Thomas T. Mooney
/s/ GRACE C. TORRES Treasurer and Principal September 10, 1999
- --------------------------------------------------- Financial and Accounting
Grace C. Torres Officer
</TABLE>
C-6
<PAGE> 158
EXHIBIT INDEX
<TABLE>
<C> <C> <S> <C>
(d) (1) Form of Management Agreement between the Registrant and
Prudential Investments Fund Management LLC (PIFM).
(2) (i) Form of Subadvisory Agreement between PIFM and INVESCO
Capital Management Inc.
(ii) Form of Subadvisory Agreement between PIFM and Sawgrass
Asset Management, L.L.C.
(iii) Form of Subadvisory Agreement between PIFM and Lazard Asset
Management.
(iv) Form of Subadvisory Agreement between PIFM and Columbus
Circle Investors.
(v) Form of Subadvisory Agreement between PIFM and Pacific
Investment Management Company.
(vi) Form of Subadvisory Agreement between PIFM and Hotchkis and
Wiley.
(vii) Form of Subadvisory Agreement between PIFM and Fleming Asset
Management USA.
(viii) Form of Subadvisory Agreement between PIFM and Wood,
Struthers & Winthrop Management Corp.
(ix) Form of Subadvisory Agreement between PIFM and Oak
Associates, Ltd.
(x) Form of Subadvisory Agreement between PIFM and Lazard Asset
Management.
(e)(1) Form of Distribution Agreement between the Registrant and
Prudential Investment Management Services LLC.
(2) Form of Selected Dealer Agreement.
(g)(1) Form of Custodian Contract between the Registrant and State
Street Bank and Trust Company.
(2) Form of Amendment to Custodian Contract.
(h) Form of Transfer Agency and Service Agreement between the
Registrant and Prudential Mutual Fund Services, Inc.
(i) Opinion of Morris, Nichols, Arsht & Tunnell.
(j) Consent of Independent Accountants.
(l) Purchase Agreement.
(m) (1) Distribution and Service Plan for Class A Shares.
(2) Distribution and Service Plan for Class B Shares.
(3) Distribution and Service Plan for Class C Shares.
(o) Rule 18f-3 Plan.
</TABLE>
<PAGE> 1
EXHIBIT (d)(l)
TARGET FUNDS
Management Agreement
Agreement made this 25th day of August, 1999, between Target
Funds (the Trust), and Prudential Investments Fund Management LLC, a New York
limited liability company (the Manager).
W I T N E S S E T H
WHEREAS, the Trust is a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the 1940 Act);
WHEREAS, the shares of beneficial interest of the Trust are
divided into separate series or funds (each a Fund), each of which is
established pursuant to a resolution of the Board of Trustees of the Trust
(Board of Trustees), and the Trustees may from time to time terminate such Funds
or establish and terminate additional Funds; and
WHEREAS, the Trust desires to retain the Manager to render or
contract to obtain as hereinafter provided investment advisory services to the
Trust and the Trust also desires to avail itself of the facilities available to
the Manager with respect to the administration of its day-to-day corporate
affairs, and the Manager is willing to render such investment advisory and
administrative services;
NOW, THEREFORE, the parties agree as follows:
1. The Trust hereby appoints the Manager to act as manager of
the Trust and administrator of its corporate affairs for the period and on the
terms set forth in this
<PAGE> 2
Agreement. The Manager accepts such appointment and agrees to render the
services herein described, for the compensation herein provided. The Manager is
authorized to enter into sub-advisory agreements for investment advisory
services in connection with the management of the Trust and each Fund thereof.
Any such agreement may be entered into by the Manager on such terms and in such
manner as may be permitted by the 1940 Act and the rules thereunder. The Manager
will continue to have responsibility for all investment advisory services
furnished pursuant to any such sub-advisory agreements. The Manager will review
the performance of all sub-advisers (each an Adviser), and make recommendations
to the Trustees of the Trust with respect to the retention and renewal of
contracts.
2. Subject to the supervision of the Board of Trustees of the
Trust, the Manager shall administer the Trust's corporate affairs and, in
connection therewith, shall furnish the Trust with office facilities and with
clerical, bookkeeping and recordkeeping services at such office facilities and,
subject to Section 1 hereof, the Manager shall manage the investment operations
of the Trust and each Fund thereof and the composition of each Fund of the
Trust, including the purchase, retention and disposition thereof, in accordance
with each Fund's investment objective, policies and restrictions as stated in
the Prospectus (hereinafter defined) and subject to the following
understandings:
(a) The Manager shall provide supervision of each Fund's
investments and determine from time to time what investments or
securities will be purchased, retained, sold or loaned by the Fund, and
what portion of its assets will be
2
<PAGE> 3
invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and
obligations under this Agreement, shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus (hereinafter defined) of
the Trust and with the instructions and directions of the Board of
Trustees and will conform to and comply with the requirements of the
1940 Act and all other applicable federal and state laws and
regulations.
(c) The Manager shall determine the securities and futures
contracts to be purchased or sold by each Fund and will place orders
pursuant to its determinations with or through such persons, brokers,
dealers or futures commission merchants (including but not limited to
Prudential Securities Incorporated, and brokers, dealers and futures
commissions merchants which are "affiliated persons" of an Adviser) in
conformity with the policy with respect to brokerage as set forth in the
Trust's Registration Statement and Prospectus (hereinafter defined) or
as the Board of Trustees may direct from time to time. In providing the
Trust with investment supervision, it is recognized that the Manager
will give primary consideration to securing the most favorable price and
efficient execution. Consistent with this policy, the Manager may
consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager
or an Adviser may be a party. It is understood that Prudential
Securities
3
<PAGE> 4
Incorporated or a broker which is an "affiliated person" of an Adviser
may be used as principal broker for securities transactions but that no
formula has been adopted for allocation of the Trust's investment
transaction business. It is also understood that it is desirable for
the Trust that the Manager and each Adviser have access to supplemental
investment and market research and security and economic analysis
provided by brokers or futures commission merchants and that such
brokers may execute brokerage transactions at a higher cost to the
Trust than may result when allocating brokerage to other brokers or
futures commission merchants on the basis of seeking the most favorable
price and efficient execution. Therefore, the Manager and each Adviser
is authorized to pay higher brokerage commissions for the purchase and
sale of securities and futures contracts for the Trust to brokers or
futures commission merchants who provide such research and analysis,
subject to review by the Board of Trustees from time to time with
respect to the extent and continuation of this practice. It is
understood that the services provided by such broker or futures
commission merchant may be useful to the Manager or an Adviser in
connection with its services to other clients.
On occasions when the Manager or an Adviser deems the purchase
or sale of a security or a futures contract to be in the best interest
of the Trust as well as other clients of the Manager or the Adviser, the
Manager or the Adviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be so sold or
4
<PAGE> 5
purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or sold,
as well as the expenses incurred in the transaction, will be made by
the Manager or the Adviser in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Fund,
the Trust and to such other clients.
(d) The Manager shall maintain all books and records with
respect to the Trust's portfolio transactions and shall render to the
Board of Trustees such periodic and special reports as the Board may
reasonably request.
(e) The Manager shall be responsible for the financial and
accounting records to be maintained by the Trust (including those being
maintained by the Trust's custodian (the Custodian)).
(f) The Manager shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning
the Trust's assets.
(g) The investment management services of the Manager to the
Trust under this Agreement are not to be deemed exclusive, and the
Manager shall be free to render similar services to others.
3. The Trust has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Agreement and Declaration of Trust (such Agreement and
Declaration of Trust, as in effect on the date hereof and as amended
from time to time, is hereinafter called the "Declaration of Trust");
5
<PAGE> 6
(b) By-Laws of the Trust (such By-Laws, as in effect on the
date hereof and as amended from time to time, are hereinafter called the
"By-Laws");
(c) Certified resolutions of the Board of Trustees of the Trust
authorizing the appointment of the Manager and approving the form of
this Agreement;
(d) Registration Statement under the 1940 Act and the
Securities Act of 1933, as amended, on Form N-1A (the Registration
Statement), as filed with the Securities and Exchange Commission (the
Commission) relating to the Trust and its shares of beneficial interest
and all amendments thereto;
(e) Notification of Registration of the Trust under the 1940
Act on Form N-8A as filed with the Commission and all amendments
thereto; and
(f) Prospectus and Statement of Additional Information of the
Trust (such Prospectus and Statement of Additional Information, as
currently in effect and as amended or supplemented from time to time,
being hereinafter called the "Prospectus").
4. The Manager shall authorize and permit any of its officers
and employees who may be elected as Trustees or officers of the Trust to serve
in the capacities in which they are elected. All services to be furnished by the
Manager under this Agreement may be furnished through the medium of any such
officers or employees of the Manager.
5. The Manager shall keep the Trust's books and records
required to be maintained by it pursuant to Paragraph 2 hereof, including all
books and records prescribed by Rule 31a-1 under the 1940 Act other than those
books and records
6
<PAGE> 7
maintained by the Trust or its other service providers. The Manager agrees that
all records which it maintains for the Trust are the property of the Trust and
it will surrender promptly to the Trust any such records upon the Trust's
request, provided however that the Manager may retain a copy of such records.
The Manager further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any such records as are required to be maintained by the
Manager pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Trust and
the Manager except the fees and expenses of Trustees who are not
affiliated persons of the Manager or of any Adviser;
(ii) all expenses incurred by the Manager or by the Trust in
connection with managing the ordinary course of the Trust's business
other than those assumed by the Trust herein; and
(iii) the costs and expenses payable to any Adviser pursuant to
any sub-advisory agreements.
The Trust assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Trust in connection
with the management of the investment and reinvestment of each Fund's
assets;
(b) the fees and expenses of Trustees who are not affiliated
persons of the Manager or the Trust's Advisers;
7
<PAGE> 8
(c) the fees and expenses of the Custodian that relate to (i)
the custodial function and the recordkeeping connected therewith; (ii)
preparing and maintaining the general accounting records of the Trust
and the providing of any such records to the Manager useful to the
Manager in connection with the Manager's responsibility for the
accounting records of the Trust pursuant to Section 31 of the 1940 Act
and the rules promulgated thereunder; (iii) the pricing of the shares of
the Trust, including the cost of any pricing service or services which
may be retained pursuant to the authorization of the Board of Trustees;
and (iv) for both mail and wire orders, the cashiering function in
connection with the issuance and redemption of the Trust's securities;
(d) the fees and expenses of the Trust's transfer and dividend
disbursing agent, which may be the Custodian, that relate to the
maintenance of each shareholder account;
(e) the charges and expenses of legal counsel and independent
accountants for the Trust;
(f) brokers' commissions and any issue or transfer taxes
chargeable to the Trust in connection with its securities and futures
transactions;
(g) all taxes and corporate fees payable by the Trust to
federal, state or other governmental agencies;
(h) the fees of any trade associations of which the Trust may
be a member;
8
<PAGE> 9
(i) the cost of share certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the Trust;
(j) the cost of fidelity, trustees and officers and errors and
omissions insurance;
(k) the fees and expenses involved in registering and
maintaining registration of the Trust and of its shares with the
Commission, registering the Trust as a broker or dealer and qualifying
its shares under state securities laws, including the preparation and
printing of the Trust's registration statements, prospectuses and
statements of additional information for filing under federal and state
securities laws for such purposes;
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders;
(m) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the
Trust's business; and
(n) any expenses assumed by the Trust pursuant to a plan of
distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. For the services provided and the expenses assumed pursuant
to this Agreement, the Trust will pay to the Manager as full compensation
therefor a fee as set forth below. This fee will be computed daily and will be
paid to the Manager monthly. Any reduction in the fee payable shall be made
monthly. Any such reductions or
9
<PAGE> 10
payments are subject to readjustment during the year.
<TABLE>
<CAPTION>
Rate as a percentage of
Name of Fund average daily net assets
- ------------ ------------------------
<S> <C>
Large Capitalization Growth Fund .70%
Large Capitalization Value Fund .70%
Small Capitalization Growth Fund .70%
Small Capitalization Value Fund .70%
International Equity Fund .80%
Total Return Bond Fund .50%
</TABLE>
8. The Manager shall not be liable for any error of judgment or
for any loss suffered by the Trust in connection with the matters to which this
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section
36(b)(3) of the 1940 Act) or loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Agreement.
9. This Agreement shall continue in effect for a period of more
than two years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the requirements of
the 1940 Act; provided, however, that this Agreement may be terminated with
respect to any Fund by the Trust at any time, without the payment of any
penalty, by the Board of Trustees or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund, or by the Manager at
any time, without the payment of any penalty, on not more than 60 days' nor less
than 30 days' written notice to the other party. This Agreement shall
10
<PAGE> 11
terminate automatically in the event of its assignment (as defined in the 1940
Act).
10. Nothing in this Agreement shall limit or restrict the right
of any officer or employee of the Manager who may also be a Trustee, officer or
employee of the Trust to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
11. Except as otherwise provided herein or authorized by the
Board of Trustees from time to time, the Manager shall for all purposes herein
be deemed to be an independent contractor and shall have no authority to act for
or represent the Trust in any way or otherwise be deemed an agent of the Trust.
12. During the term of this Agreement, the Trust agrees to
furnish the Manager at its principal office all prospectuses, proxy statements,
reports to shareholders, sales literature, or other material prepared for
distribution to shareholders of the Trust or the public, which refer in any way
to the Manager, prior to use thereof and not to use such material if the Manager
reasonably objects in writing within five business days (or such other time as
may be mutually agreed) after receipt thereof. In the event of termination of
this Agreement, the Trust will continue to furnish to the Manager copies of any
of the above-mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery. The Trust shall furnish
or otherwise make available to the Manager such other information
11
<PAGE> 12
relating to the business affairs of the Trust as the Manager at any time, or
from time to time, reasonably requests in order to discharge its obligations
hereunder.
13. This Agreement may be amended by mutual consent, but the
consent of the Trust must be obtained in conformity with the requirements of the
1940 Act.
14. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Manager at Gateway Center Three,
100 Mulberry Street, Newark, NJ 07102-4077, Attention: Secretary; or (2) to the
Trust at Gateway Center Three, 100 Mulberry Street, Newark, NJ 07102-4077,
Attention: President.
15. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
16. The Trust is a business trust organized under the Delaware
Business Trust Act pursuant to a Certificate of Trust dated July 8, 1999. The
Trust is a series trust and all debts, liabilities, obligations and expenses of
a particular Fund shall be enforceable only against the assets of that Fund and
not against the assets of any other Fund or of the Trust as a whole. This
Agreement is executed by a Trustee or officer of the Trust in such capacity and
not individually. Neither the Trustees, officers, agents or shareholders of the
Trust assume any personal liability for obligations entered into on behalf of
the Trust (or a Fund thereof).
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
12
<PAGE> 13
TARGET FUNDS
By:/s/John R. Strangfeld
------------------------------
John R. Strangfeld
President
PRUDENTIAL INVESTMENTS FUND
MANAGEMENT LLC
By: /s/Robert F. Gunia
------------------------------
Robert F. Gunia
Executive Vice President
13
<PAGE> 1
EXHIBIT (d)(2)(i)
TARGET FUNDS
SUBADVISORY AGREEMENT
Agreement made as of this ____ day of September, 1999, between
Prudential Investments Fund Management LLC (PIFM or the Manager), a New York
limited liability company, and INVESCO Capital Management, Inc. (the "Adviser").
WHEREAS, PMF has entered into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Large Capitalization Value Fund of the Trust
(the Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such portfolio, including the purchase, retention and disposition thereof, in
accordance with the Portfolio's investment objectives,
<PAGE> 2
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus") and
subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and shall determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolio with investment supervision, it is
recognized that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this policy,
the Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction or
other transactions to which the Adviser's other clients may be a party. It is
understood that Prudential Securities Incorporated may be used as principal
broker for securities transactions but that no formula has been adopted for
allocation of the Portfolio's investment transaction business. It
2
<PAGE> 3
is also understood that it is desirable for the Trust that the Adviser have
access to supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may result when
allocating brokerage to other brokers on the basis of seeking the most favorable
price and efficient execution. Therefore, the Adviser is authorized to place
orders for the purchase and sale of securities and futures contracts for the
Portfolio with such brokers or futures commission merchants, subject to review
by the Trustees from time to time with respect to the extent and continuation of
this practice. It is understood that the services provided by such brokers or
futures commission merchants may be useful to the Adviser in connection with the
Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
3
<PAGE> 4
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the portion of the
4
<PAGE> 5
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from the
willful misfeasance, bad faith or gross negligence of the Adviser's in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers, or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph 1(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably
5
<PAGE> 6
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile transmission equipment or
hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By: __________________________________
INVESCO CAPITAL MANAGEMENT, INC.
By: ___________________________________
6
<PAGE> 1
EXHIBIT (d)(2)(ii)
TARGET FUNDS
(Small Capitalization Growth Fund)
SUBADVISORY AGREEMENT
Agreement made on this _____ day of September, 1999, between Prudential
Investments Fund Management LLC (PIFM or the Manager), a New York limited
liability company, and Sawgrass Asset Management, L.L.C. (the Adviser), a
Delaware limited liability company.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and an
open-end management investment company registered under the Investment Company
Act of 1940 (the 1940 Act), pursuant to which PIFM will act as manager of the
Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust, and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and desires to retain the Adviser to provide investment advisory services to the
Small Capitalization Growth Fund of the Trust (the Fund) in connection with the
management of the Trust and to manage such portion of the Fund as the Manager
shall from time to time direct, and the Adviser is willing to render such
investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Fund as the Manager shall direct and shall manage the composition of such
portion of the Fund, including the purchase, retention and disposition thereof,
in accordance with the Fund's investment objective, policies and restrictions as
stated in the Prospectus (such Prospectus and
<PAGE> 2
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time being herein called the "Prospectus") as
delivered to the Adviser from time to time by the Manager and subject to the
following understandings:
(i) The Adviser shall provide supervision of such portion of
the Fund's investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the Fund, and what
portion of the assets it manages will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Agreement and
Declaration of Trust, By-Laws and Prospectus of the Trust and the Fund as
provided to the Adviser by the Manager and with the written instructions and
directions of the Manager and of the Trustees of the Trust and will conform to
and comply with the requirements of the 1940 Act, the Internal Revenue Code of
1986, as amended, and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and
commodities or other assets to be purchased or sold by such portion of the Fund
and will place orders pursuant to its determination with or through such
persons, brokers, dealers or futures commission merchants (including but not
limited to Prudential Securities Incorporated) to carry out the policy with
respect to brokerage as set forth in the Trust's Registration Statement and
Prospectus or as the Trustees may direct from time to time. In providing the
Fund with investment supervision, it is recognized that the Adviser will give
primary consideration to securing best execution. Within the framework of this
policy, the Adviser may consider the financial responsibility, research and
investment information and other services provided by brokers, dealers or
futures commission merchants who may effect or be a party to any such
transaction or other transactions to which the Adviser's other clients may be a
party. It is understood that Prudential Securities Incorporated may be used as a
broker for securities transactions but that no formula has been adopted for
allocation of
2
<PAGE> 3
the Fund's investment transaction business. It is also understood that it is
desirable for the Trust that the Adviser have access to supplemental investment
and market research and security and economic analysis provided by brokers or
futures commission merchants who may execute brokerage transactions at a higher
cost to the Trust than may result when allocating brokerage to other brokers
solely on the basis of seeking lowest price. Therefore, the Adviser is
authorized to place orders for the purchase and sale of securities and
commodities or other assets for the Fund with such brokers or futures commission
merchants, subject to review by the Trustees from time to time with respect to
the extent and continuation of this practice. It is understood that the services
provided by such brokers or futures commission merchants may be useful to the
Adviser in connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security,
commodity or other asset to be in the best interest of the Fund as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities, commodities or other assets to be sold or purchased in order to
obtain best execution. In such event, allocation of the securities, commodities
or other assets so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Adviser in the manner the Adviser considers to
be the most equitable and consistent with its fiduciary obligations to the Trust
and to such other clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's custodian (the
Custodian) on each business day with information relating to all transactions
concerning the portion of the Fund's assets it manages and shall provide the
3
<PAGE> 4
Manager with such information upon request of the Manager. The Adviser shall
reconcile its records of the Fund's securities and cash managed by the Adviser
with statements provided by the Custodian at least once each month. The Adviser
shall provide the Manager with a written report on each such reconciliation,
including information on any discrepancies noted and actions taken by the
Adviser in response thereto, by the tenth business day of the following month to
the extent reasonably practicable.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Fund's books and records required to be
maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall timely
furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Fund are the property of the Trust and the Adviser
will surrender promptly to the Trust any of such records upon the Trust's
request. The Adviser further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act any such records as are required to be maintained
by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal laws and regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
reports prepared in accordance with the compliance procedures maintained
pursuant to paragraph 1(d) hereof as the Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Fund pursuant to the Management Agreement and shall
4
<PAGE> 5
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement at the annual
rate of .40 of 1% of the average daily net assets of the portion of the Fund
managed by the Adviser. This fee will be computed daily and paid monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Fund, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement, provided, however, that nothing in this Agreement
shall be deemed to waive any rights the Manager or the Trust may have against
the Adviser under federal or state securities laws, including for acts of good
faith.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, or by the Manager or the Adviser at any time, without the payment of
any penalty, on not more than 60 days' nor less than 30 days' written notice to
the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or dissimilar nature,
5
<PAGE> 6
nor limit the Adviser's right to engage in any other business or to render
services of any kind to any other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way;
provided, however, that any such item which describes or characterizes the
Adviser's investment process with respect to the Fund, the names of any of its
clients (other than the Trust or advisory clients of PIFM and its affiliates) or
any of its performance results shall be furnished to the Adviser by first class
or overnight mail, facsimile transmission equipment or hand delivery prior to
use thereof, and such item shall not be used if the Adviser reasonably objects
to such use in writing within forty-eight (48) hours (or such other time as may
be mutually agreed) after receipt thereof (provided, however, that if such item
is not received by the Adviser during normal business hours on a business day,
such period shall end forty-eight (48) hours after the start of normal business
hours on the next succeeding business day).
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK.
6
<PAGE> 7
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below on the day and year first above
written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By: ______________________________________
SAWGRASS ASSET MANAGEMENT, L.L.C.
By: ______________________________________
7
<PAGE> 1
EXHIBIT (d)(2)(iii)
TARGET FUNDS
SUBADVISORY AGREEMENT
Agreement made as of this ______ day of September, 1999, between
Prudential Investments Fund Management LLC (PIFM or the Manager), a New York
limited liability company, and Lazard Asset Management, a division of Lazard
Freres & Co., (the Adviser), a New York limited partnership.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Small Capitalization Value Fund of the Trust
(the Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such portfolio, including the purchase, retention and
<PAGE> 2
disposition thereof, in accordance with each Portfolio's investment objectives,
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus") and
subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and shall determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated and Lazard Freres & Co.) to carry out the policy with respect to
brokerage as set forth in the Trust's Registration Statement and Prospectus or
as the Trustees may direct from time to time. In providing the Portfolio with
investment supervision, it is recognized that the Adviser will give primary
consideration to securing the most favorable price and efficient execution.
Within the framework of this policy, the Adviser may consider the financial
responsibility, research and investment information and other services provided
by brokers, dealers or futures commission merchants who may effect or be a party
to any such transaction or other transactions to which the Adviser's other
clients may be a party. It is understood that Prudential Securities
2
<PAGE> 3
Incorporated and Lazard Freres & Co. may each be used as principal broker for
securities transactions but that no formula has been adopted for allocation of
the Portfolio's investment transaction business. It is also understood that it
is desirable for the Trust that the Adviser have access to supplemental
investment and market research and security and economic analysis provided by
brokers or futures commission merchants who may execute brokerage transactions
at a higher cost to the Trust than may result when allocating brokerage to other
brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the Adviser is authorized to place orders for the purchase
and sale of securities and futures contracts for the Portfolio with such brokers
or futures commission merchants, subject to review by the Trustees from time to
time with respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers or futures commission
merchants may be useful to the Adviser in connection with the Adviser's services
to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall
3
<PAGE> 4
render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
4
<PAGE> 5
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .40 of 1% of the average daily net assets of the portion of the
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from the
willful misfeasance, bad faith or gross negligence of the Adviser in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
5
<PAGE> 6
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph 1(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. In the event of the termination of this Agreement, the
manager will continue to furnish the Adviser copies of such materials which
refer to the Adviser. Sales literature may be furnished to the Adviser hereunder
by first class or overnight mail, facsimile transmission equipment or hand
delivery.
8. The Manager has delivered to the Adviser copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust, as filed with the Secretary of State
of Delaware (such Declaration of Trust, as in effect on the date hereof and as
amended from time to time, are herein called the Declaration of Trust);
(b) By-Laws of the Trust (such By-Laws, as in effect on the
date hereof and as amended from time to time, are herein called the By-Laws);
(c) Certified resolutions of the Trustees of the Trust
authorizing the appointment of the Manager and the Adviser and approving the
form of this Agreement;
(d) Registration Statement under the 1940 Act and the
Securities Act of 1933, as amended, on Form N-1A (the Registration Statement),
as filed with the Securities and Exchange Commission (the Commission) relating
to the Portfolio and shares of beneficial interest of the Portfolio and all
amendments thereto;
6
<PAGE> 7
(e) Notification of Registration of the Trust under the 1940
Act on Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Portfolio (such Prospectus and Statement
of Additional Information, as currently in effect and as amended or supplemented
from time to time, being herein called the Prospectus).
9. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by the laws of the State of New
York.
11. The Adviser agrees to notify the Manager of any change in the
membership of the Adviser within a reasonable time following such change. The
Manager agrees that the Adviser may refrain from providing any advice or
services concerning securities of companies of which any officers, directors,
partners or employees of the Adviser or any of the Adviser's affiliates are
officers or directors, or of companies for which the Adviser or any of the
Adviser's affiliates act as financial adviser, investment manager or in any
capacity that the adviser deems confidential, unless the Adviser determines in
its sole discretion that it may appropriately do so. The Manager appreciates
that, for good commercial and legal reasons, material nonpublic information
which becomes available to affiliates of the Adviser through these relationships
cannot be passed on to the Manager.
7
<PAGE> 8
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT
LLC
By: __________________________________
LAZARD ASSET MANAGEMENT
By: __________________________________
8
<PAGE> 1
EXHIBIT (d)(2)(iv)
TARGET FUNDS
SUBADVISORY AGREEMENT
Agreement made as of this ______ day of September, 1999, between
Prudential Investments Fund Management LLC (PIFM or the Manager), a New York
limited liability company, and Columbus Circle Investors (the Adviser), a
Delaware partnership.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Large Capitalization Growth Fund of the Trust
(the Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage the investment operations of the Portfolio
as the Manager shall direct and shall manage the composition of its portfolio,
including the purchase, retention and disposition thereof, in
<PAGE> 2
accordance with the Portfolio's investment objectives, policies and restrictions
as stated in the Prospectus (such Prospectus and Statement of Additional
Information as currently in effect and as amended or supplemented from time to
time, being herein called the "Prospectus") and subject to the following
understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and shall determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolio with investment supervision, it is
recognized that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this policy,
the Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction or
other transactions to which the Adviser's other clients may be a party. It is
understood that Prudential Securities Incorporated may be used as
2
<PAGE> 3
principal broker for securities transactions but that no formula has been
adopted for allocation of the Portfolio's investment transaction business. It is
also understood that it is desirable for the Trust that the Adviser have access
to supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may result when
allocating brokerage to other brokers on the basis of seeking the most favorable
price and efficient execution. Therefore, the Adviser is authorized to place
orders for the purchase and sale of securities and futures contracts for the
Portfolio with such brokers or futures commission merchants, subject to review
by the Trustees from time to time with respect to the extent and continuation of
this practice. It is understood that the services provided by such brokers or
futures commission merchants may be useful to the Adviser in connection with the
Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
3
<PAGE> 4
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
4
<PAGE> 5
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the portion of the
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit the Adviser's right to engage in any other business or to render services
of any kind to any other corporation, firm, individual or association, except as
described in Paragraph 1(a)(vi) above.
5
<PAGE> 6
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile transmission equipment or
hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By: __________________________________
COLUMBUS CIRCLE INVESTORS
By: ___________________________________
6
<PAGE> 1
Exhibit (d)(2)(v)
TARGET FUNDS
SUBADVISORY AGREEMENT
Agreement made as of this _____ day of September, 1999, between
Prudential Investments Fund Management LLC (PIFM or the Manager), a New York
limited liability company, and Pacific Investment Management Company (the
Adviser), a Delaware general partnership.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Total Return Bond Fund of the Trust (the
Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such Portfolio, including the purchase, retention and disposition thereof, in
accordance with the Portfolio's investment objectives,
<PAGE> 2
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus") and
subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and determine from time
to time what investments and securities will be purchased, retained, sold or
loaned by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolio with investment supervision, it is
recognized that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this policy,
the Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction or
other transactions to which the Adviser's other clients may be a party. It is
understood that Prudential Securities Incorporated may be used as principal
broker for securities transactions but that no formula has been adopted for
allocation of the Portfolio's investment transaction business. It
2
<PAGE> 3
is also understood that it is desirable for the Trust that the Adviser have
access to supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may result when
allocating brokerage to other brokers on the basis of seeking the most favorable
price and efficient execution. Therefore, the Adviser is authorized to place
orders for the purchase and sale of securities and futures contracts for the
Portfolio with such brokers or futures commission merchants, subject to review
by the Trustees from time to time with respect to the extent and continuation of
this practice. It is understood that the services provided by such brokers or
futures commission merchants may be useful to the Adviser in connection with the
Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
3
<PAGE> 4
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .25 of 1% of the average daily net assets of the portion of the
4
<PAGE> 5
Portfolio managed by the Adviser. This fee will be computed daily and
paid monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. To the extent indemnification is provided to the Manager by the
Trust under the Management Agreement, the Manager shall indemnify the Adviser
and hold it harmless from and against all damages, liabilities, costs and
expenses (including reasonable attorneys' fees and amounts reasonably paid in
settlement) incurred by the Adviser in or by reason of any pending, threatened
or completed action, suit, investigation or other proceeding (including an
action or suit by or in the right of the Trust or its security holders) arising
out of or otherwise based upon any action actually or allegedly taken or omitted
to be taken by the Manager, the Trust or the Adviser in connection with this
Agreement; provided, however, that nothing contained herein shall protect or be
deemed to protect the Adviser against or entitle or be deemed to entitle the
Adviser to indemnification in respect of any liability to the Trust or its
security holders to which the Adviser would otherwise be subject by reason of
its willful misfeasance, bad faith or gross negligence in the performance of its
duties, by reason of its reckless disregard of its duties and obligations under
this Agreement.
6. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the
5
<PAGE> 6
payment of any penalty, on not more than 60 days' nor less than 30 days' written
notice to the other party. This Agreement shall terminate automatically in the
event of its assignment (as defined in the 1940 Act) or upon the termination of
the Management Agreement.
7. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph 1(a)(vi) above.
8. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile transmission equipment or
hand delivery.
9. It is understood that the name "Pacific Investment Management
Company" or "PIMCO" or any derivative thereof or logo associated with that name
is the valuable property of the Adviser and that the Manager or the Trust has
the right to use such name (or derivative or logo) in offering materials of the
Trust and/or Portfolio with the approval of the Adviser and for so long as the
Adviser is a subadviser to the Trust and/or the Portfolio. Upon termination of
this Agreement between the Adviser and the Manager, the Trust and the Manager
shall forthwith cease to use such name (or derivative or logo), except as may be
required by applicable law or regulation.
10. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
6
<PAGE> 7
11. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By: __________________________________
PACIFIC INVESTMENT MANAGEMENT COMPANY
By: ___________________________________
7
<PAGE> 1
Exhibit (d)(2)(vi)
TARGET FUNDS
SUBADVISORY AGREEMENT
Agreement made as of this ______ day of September, 1999, between
Prudential Investments Fund Management LLC (PIFM or the Manager), a New York
limited liability company, and HOTCHKIS AND WILEY, a division of Merrill Lynch
Asset Management, L.P. (the "Adviser").
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Large Capitalization Value Fund of the Trust
(the Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services: NOW, THEREFORE, the Parties
agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such portfolio, including the purchase, retention and disposition thereof, in
accordance with the Portfolio's investment objectives,
<PAGE> 2
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus") and
subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and shall determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolio with investment supervision, it is
recognized that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this policy,
the Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction or
other transactions to which the Adviser's other clients may be a party. It is
understood that Prudential Securities Incorporated may be used as principal
broker for securities transactions but that no formula has been adopted for
allocation of the Portfolio's investment transaction business. It
2
<PAGE> 3
is also understood that it is desirable for the Trust that the Adviser have
access to supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may result when
allocating brokerage to other brokers on the basis of seeking the most favorable
price and efficient execution. Therefore, the Adviser is authorized to place
orders for the purchase and sale of securities and futures contracts for the
Portfolio with such brokers or futures commission merchants, subject to review
by the Trustees from time to time with respect to the extent and continuation of
this practice. It is understood that the services provided by such brokers or
futures commission merchants may be useful to the Adviser in connection with the
Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
3
<PAGE> 4
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the portion of the
4
<PAGE> 5
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from the
willful misfeasance, bad faith or gross negligence of the Adviser's in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's partners, officers or employees to engage in any other business
or to devote his or her time and attention in part to the management or other
aspects of any business, whether of a similar or dissimilar nature, nor limit or
restrict the Adviser's right to engage in any other business or to render
services of any kind to any other corporation, firm, individual or association,
except as described in Paragraph 1(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably
5
<PAGE> 6
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile transmission equipment or
hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By: ______________________________________
HOTCHKIS AND WILEY
By: ______________________________________
6
<PAGE> 1
Exhibit (d)(2)(vii)
TARGET FUNDS
(Small Capitalization Growth Fund)
SUBADVISORY AGREEMENT
Agreement made on this _____ day of August, 1999, between Prudential
Investments Fund Management LLC (PIFM or the Manager), a New York limited
liability company, and Fleming Asset Management USA (the Adviser), a division of
Robert Fleming, Inc., a Delaware corporation.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and an
open-end management investment company registered under the Investment Company
Act of 1940 (the 1940 Act), pursuant to which PIFM will act as manager of the
Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust, and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and desires to retain the Adviser to provide investment advisory services to the
Small Capitalization Growth Fund of the Trust (the Fund) in connection with the
management of the Trust and to manage such portion of the Fund as the Manager
shall from time to time direct, and the Adviser is willing to render such
investment advisory services.
<PAGE> 2
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of the
Trust, the Adviser shall manage such portion of the investment operations of the
Fund as the Manager shall direct and shall manage the composition of such
portion of the Fund, including the purchase, retention and disposition thereof,
in accordance with the Fund's investment objective, policies and restrictions as
stated in the Prospectus (such Prospectus and Statement of Additional
Information as currently in effect and as amended or supplemented from time to
time being herein called the "Prospectus") as delivered to the Adviser from time
to time by the Manager and subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of the Fund's
investments and determine from time to time what investments and securities will
be purchased, retained, sold or loaned by the Fund, and what portion of the
assets it manages will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Adviser shall act in conformity with the Agreement and
Declaration of Trust, By-Laws and Prospectus of the Trust and the Fund as
provided to the Adviser by the Manager and with the written instructions and
directions of the Manager and of the Trustees of the Trust and will conform to
and comply with the requirements of the 1940 Act, the Internal Revenue Code of
1986, as amended, and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and commodities or
other assets to be purchased or sold by such portion of the Fund and will place
orders pursuant to its determination
2
<PAGE> 3
with or through such persons, brokers, dealers or futures commission merchants
(including but not limited to Prudential Securities Incorporated) to carry out
the policy with respect to brokerage as set forth in the Trust's Registration
Statement and Prospectus or as the Trustees may direct from time to time. In
providing the Fund with investment supervision, it is recognized that the
Adviser will give primary consideration to securing best execution. Within the
framework of this policy, the Adviser may consider the financial responsibility,
research and investment information and other services provided by brokers,
dealers or futures commission merchants who may effect or be a party to any such
transaction or other transactions to which the Adviser's other clients may be a
party. It is understood that Prudential Securities Incorporated may be used as a
broker for securities transactions but that no formula has been adopted for
allocation of the Fund's investment transaction business. It is also understood
that it is desirable for the Trust that the Adviser have access to supplemental
investment and market research and security and economic analysis provided by
brokers or futures commission merchants who may execute brokerage transactions
at a higher cost to the Trust than may result when allocating brokerage to other
brokers solely on the basis of seeking lowest price. Therefore, the Adviser is
authorized to place orders for the purchase and sale of securities and
commodities or other assets for the Fund with such brokers or futures commission
merchants, subject to review by the Trustees from time to time with respect to
the extent and continuation of this practice. It is understood that the services
provided by such brokers or futures commission merchants may be useful to the
Adviser in connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security,
commodity or other asset to be in the best interest of the Fund as well as other
clients of the Adviser, the Adviser,
3
<PAGE> 4
to the extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities, commodities or other assets to
be sold or purchased in order to obtain best execution. In such event,
allocation of the securities, commodities or other assets so purchased or sold,
as well as the expenses incurred in the transaction, will be made by the Adviser
in the manner the Adviser considers to be the most equitable and consistent with
its fiduciary obligations to the Trust and to such other clients.
(iv) The Adviser shall maintain all books and records with respect to
the portfolio transactions required by subparagraphs (b)(5), (6), (7), (9), (10)
and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and shall render to
the Trustees such periodic and special reports as the Board may reasonably
request.
(v) The Adviser shall provide the Trust's custodian (the Custodian) on
each business day with information relating to all transactions concerning the
portion of the Fund's assets it manages and shall provide the Manager with such
information upon request of the Manager. The Adviser shall reconcile its records
of the Fund's securities and cash managed by the Adviser with statements
provided by the Custodian at least once each month. The Adviser shall provide
the Manager with a written report on each such reconciliation, including
information on any discrepancies noted and actions taken by the Adviser in
response thereto, within five business days after the Adviser receives the
above-referenced statement from the Custodian, to the extent reasonably
practicable.
(vi) The investment management services provided by the Adviser
hereunder are not exclusive, and the Adviser shall be free to render similar
services to others.
(vii) The Manager shall forward to the Adviser or its proxy voting
agent any proxy materials relating to portfolio securities held by the portion
of the Fund managed by the Adviser.
4
<PAGE> 5
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Fund's books and records required to be
maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall timely
furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Fund are the property of the Trust and the Adviser
will surrender promptly to the Trust any of such records upon the Trust's
request. The Adviser further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act any such records as are required to be maintained
by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal laws and regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
reports prepared in accordance with the compliance procedures maintained
pursuant to paragraph 1(d) hereof as the Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Fund pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement at the annual
rate of .40 of 1% of the
5
<PAGE> 6
average daily net assets of the portion of the Fund managed by the Adviser. This
fee will be computed daily and paid monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Fund, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement, provided, however, that nothing in this Agreement
shall be deemed to waive any rights the Manager or the Trust may have against
the Adviser under federal or state securities laws, including for acts of good
faith.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, or by the Manager or the Adviser at any time, without the payment of
any penalty, on not more than 60 days' nor less than 30 days' written notice to
the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or dissimilar nature, nor
limit the Adviser's right to engage in any other business or to render services
6
<PAGE> 7
of any kind to any other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way;
provided, however, that any such item which describes or characterizes the
Adviser's investment process with respect to the Fund, the names of any of its
clients (other than the Trust or advisory clients of PIFM and its affiliates) or
any of its performance results shall be furnished to the Adviser by first class
or overnight mail, facsimile transmission equipment or hand delivery prior to
use thereof, and such item shall not be used if the Adviser reasonably objects
to such use in writing within forty-eight (48) hours (or such other time as may
be mutually agreed) after receipt thereof (provided, however, that if such item
is not received by the Adviser during normal business hours on a business day,
such period shall end forty-eight (48) hours after the start of normal business
hours on the next succeeding business day).
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below on the day and year first
above written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By________________________________________
FLEMING ASSET MANAGEMENT USA
By________________________________________
7
<PAGE> 1
Exhibit (d)(2)(viii)
TARGET FUNDS
SUBADVISORY AGREEMENT
Agreement made as of this _____ day of September, 1999, between
Prudential Investments Fund Management LLC (PIFM or the Manager), a New York
limited liability company, and Wood, Struthers & Winthrop Management Corp. (the
Adviser), a subsidiary of Donaldson, Lufkin & Jenrette Securities Corporation.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Small Capitalization Value Fund of the Trust
(the Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services. NOW, THEREFORE, the Parties
agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such portfolio, including the purchase, retention and disposition thereof, in
accordance with the Portfolio's investment objectives,
<PAGE> 2
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus") and
subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and determine from time
to time what investments and securities will be purchased, retained, sold or
loaned by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolio with investment supervision, it is
recognized that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this policy,
the Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction or
other transactions to which the Adviser's other clients may be a party. It is
understood that Prudential Securities Incorporated may be used as principal
broker for securities transactions but that no formula has been adopted for
allocation of the Portfolio's investment transaction business. It
2
<PAGE> 3
is also understood that it is desirable for the Trust that the Adviser have
access to supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may result when
allocating brokerage to other brokers on the basis of seeking the most favorable
price and efficient execution. Therefore, the Adviser is authorized to place
orders for the purchase and sale of securities and futures contracts for the
Portfolio with such brokers or futures commission merchants, subject to review
by the Trustees from time to time with respect to the extent and continuation of
this practice. It is understood that the services provided by such brokers or
futures commission merchants may be useful to the Adviser in connection with the
Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
3
<PAGE> 4
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .40 of 1% of the average daily net assets of the portion of the
4
<PAGE> 5
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph 1(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably
5
<PAGE> 6
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile transmission equipment or
hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By: _______________________________________
WOOD, STRUTHERS & WINTHROP MANAGEMENT CORP.
By: _______________________________________
6
<PAGE> 1
Exhibit (d)(2)(ix)
TARGET FUNDS
SUBADVISORY AGREEMENT
Agreement made as of this ______ day of September, 1999, between
Prudential Investments Fund Management LLC (PIFM or the Manager), a New York
limited liability company, and Oak Associates, Ltd. (the Adviser), a limited
liability company organized under the laws of the State of Ohio.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM acts as
Manager of the Trust;
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios;
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Large Capitalization Growth Fund of the Trust
(the Portfolio) in connection with the management of the Trust; and
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services: NOW, THEREFORE, the Parties
agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such portfolio, including the purchase, retention and disposition thereof, in
accordance with the Portfolio's investment objectives,
<PAGE> 2
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus") and
subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and shall determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolio with investment supervision, it is
recognized that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this policy,
the Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction or
other transactions to which the Adviser's other clients may be a party. It is
understood that Prudential Securities Incorporated may be used as principal
broker for securities transactions but that no formula has been adopted for
allocation of the Portfolio's investment transaction business. It
2
<PAGE> 3
is also understood that it is desirable for the Trust that the Adviser have
access to supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may result when
allocating brokerage to other brokers on the basis of seeking the most favorable
price and efficient execution. Therefore, the Adviser is authorized to place
orders for the purchase and sale of securities and futures contracts for the
Portfolio with such brokers or futures commission merchants, subject to review
by the Trustees from time to time with respect to the extent and continuation of
this practice. It is understood that the services provided by such brokers or
futures commission merchants may be useful to the Adviser in connection with the
Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
3
<PAGE> 4
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the portion of the
4
<PAGE> 5
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from the
willful misfeasance, bad faith or gross negligence of the Adviser in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph 1(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably
5
<PAGE> 6
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile transmission equipment or
hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By: ______________________________________
OAK ASSOCIATES, LTD.
By: ______________________________________
6
<PAGE> 1
Exhibit (d)(2)(x)
TARGET FUNDS
(International Equity Fund)
SUBADVISORY AGREEMENT
Agreement made as of this ____ day of September, 1999, between
Prudential Investments Fund Management LLC (PIFM or the Manager), a New York
limited liability company, and Lazard Asset Management, a division of Lazard
Freres & Co. (the Adviser), a New York limited partnership.
WHEREAS, PIFM will enter into a management agreement (the Management
Agreement) with Target Funds (the Trust), a Delaware business trust and a
diversified open-end management investment company registered under the
Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM will act
as manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and desires to retain the Adviser to provide investment advisory services to the
International Equity Fund of the Trust (the Portfolio) in connection with the
management of the Trust and the Adviser is willing to render such investment
advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage the investment operations of the Portfolio
and the composition of its portfolio, including the purchase, retention and
disposition thereof, in accordance with the Portfolio's investment objectives,
policies and restrictions as stated in the Prospectus
<PAGE> 2
(such Prospectus and Statement of Additional Information as currently in effect
and as amended or supplemented from time to time, being herein called the
"Prospectus") and subject to the following understandings:
(i) The Adviser shall provide supervision of the Portfolio's
investments and determine from time to time what investments and securities will
be purchased, retained, sold or loaned by the Portfolio, and what portion of the
assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by the Portfolio and will place orders
pursuant to its determination with or through such persons, brokers, dealers or
futures commission merchants (including but not limited to Prudential Securities
Incorporated and Lazard Freres & Co.) in conformity with the policy with respect
to brokerage as set forth in the Trust's Registration Statement and Prospectus
or as the Trustees may direct from time to time. In providing the Portfolio with
investment supervision, it is recognized that the Adviser will give primary
consideration to securing the most favorable price and efficient execution.
Within the framework of this policy, the Adviser may consider the financial
responsibility, research and investment information and other services provided
by brokers, dealers or futures commission merchants who may effect or be a party
to any such transaction or other transactions to which the Adviser's other
clients may be a party. It is understood that Prudential Securities Incorporated
and Lazard Freres & Co. may each be used as broker for securities transactions
but that no formula has been adopted for allocation of the Portfolio's
investment transaction business. It is also understood that it
2
<PAGE> 3
is desirable for the Trust that the Adviser have access to supplemental
investment and market research and security and economic analysis provided by
brokers or futures commission merchants who may execute brokerage transactions
at a higher cost to the Trust than may result when allocating brokerage to other
brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the Adviser is authorized to place orders for the purchase
and sale of securities and futures contracts for the Portfolio with such brokers
or futures commission merchants, subject to review by the Trustees from time to
time with respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers or futures commission
merchants may be useful to the Adviser in connection with the Adviser's services
to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
3
<PAGE> 4
Portfolio's assets and shall provide the Manager with such information upon
request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its partners, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal laws and regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
4
<PAGE> 5
annual rate of .40 of 1% of the average daily net assets of the Portfolio. This
fee will be computed daily and paid monthly in arrears.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's partners, officers or employees to engage in any other business
or to devote his or her time and attention in part to the management or other
aspects of any business, whether of a similar or dissimilar nature, nor limit
the Adviser's right to engage in any other business or to render services of any
kind to any other corporation, firm, individual or association, except as
described in Paragraph 1(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any
5
<PAGE> 6
way, prior to use thereof and not to use material if the Adviser reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of the termination of this
Agreement, the Manager will continue to furnish the Adviser copies of such
materials which refer to the Adviser. Sales literature may be furnished to the
Adviser hereunder by first class or overnight mail, facsimile transmission
equipment or hand delivery.
8. The Manager has delivered to the Adviser copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust, as filed with the Secretary of State
of Delaware (such Declaration of Trust, as in effect on the date hereof and as
amended from time to time, are herein called the Declaration of Trust);
(b) By-Laws of the Trust (such By-Laws, as in effect on the
date hereof and as amended from time to time, are herein called the By-Laws);
(c) Certified resolutions of the Trustees of the Trust
authorizing the appointment of the Manager and the Adviser and approving the
form of this Agreement;
(d) Registration Statement under the 1940 Act and the
Securities Act of 1933, as amended, on Form N-1A (the Registration Statement),
as filed with the Securities and Exchange Commission (the Commission) relating
to the Portfolio and shares of beneficial interest of the Portfolio and all
amendments thereto;
(e) Notification of Registration of the Trust under the 1940
Act on Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Portfolio (such Prospectus and Statement
of Additional Information, as currently in effect and as amended or supplemented
from time to time, being herein called the Prospectus).
9. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
6
<PAGE> 7
10. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By: ______________________________________
LAZARD ASSET MANAGEMENT
By: ______________________________________
7
<PAGE> 1
Exhibit (e)(1)
TARGET FUNDS
Distribution Agreement
Agreement made as of August 25, 1999, between Target Funds, a
Delaware business trust (the Trust), and Prudential Investment Management
Services LLC, a Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Trust is registered under the Investment Company
Act of 1940, as amended (the Investment Company Act), as a diversified,
open-end, management investment company and it is in the interest of the Trust
to offer its shares for sale continuously;
WHEREAS, the shares of the Trust may be divided into classes
and/or series (all such shares being referred to herein as Shares) and the Trust
currently is authorized to offer Class A, Class B and Class C Shares.
WHEREAS, the Distributor is a broker-dealer registered under
the Securities Exchange Act of 1934, as amended, and is engaged in the business
of selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other, with respect to the continuous offering of the
Trust's Shares from and after the date hereof in order to promote the growth of
the Trust and facilitate the distribution of its Shares; and
WHEREAS, the Trust has adopted a plan (or plans) of
distribution pursuant to Rule 12b-1 under the Investment Company Act with
respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Trust to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Trust hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Trust to sell Shares to the
public on behalf of the Trust and the Distributor hereby accepts such
appointment and agrees to act hereunder.
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The Trust hereby agrees during the term of this Agreement to sell Shares of the
Trust through the Distributor on the terms and conditions set forth below.
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the
Trust to act as principal underwriter and distributor of the Trust's Shares,
except that:
2.1 The exclusive rights granted to the Distributor to sell
Shares of the Trust shall not apply to Shares of the Trust issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Trust or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding shares of any such
company by the Trust.
2.2 Such exclusive rights shall not apply to Shares issued by
the Trust pursuant to reinvestment of dividends or capital gains distributions
or through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by
the Trust pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Trust's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Trust. The term "Prospectus"
shall mean the Prospectus and Statement of Additional Information included as
part of the Trust's Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement filed by the
Trust with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (Securities Act), and the Investment Company
Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Trust
3.1 The Distributor shall have the right to buy from the Trust
on behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of
the Trust and delivered by the Distributor or selected dealers, as described in
Section 6.4 hereof, to investors at the offering price as set forth in the
Prospectus.
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3.3 The Trust shall have the right to suspend the sale of any
or all classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as may
be determined by the Board. The Trust shall also have the right to suspend the
sale of any or all classes and/or series of its Shares if a banking moratorium
shall have been declared by federal or New Jersey authorities.
3.4 The Trust, or any agent of the Trust designated in writing
by the Trust, shall be promptly advised of all purchase orders for Shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Shares. The Trust (or its agent)
will confirm orders upon their receipt, will make appropriate book entries and
upon receipt by the Trust (or its agent) of payment therefor, will deliver
deposit receipts for such Shares pursuant to the instructions of the
Distributor. Payment shall be made to the Trust in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Trust (or its agent).
Section 4. Repurchase or Redemption of Shares by the Trust
4.1 Any of the outstanding Shares may be tendered for
redemption at any time, and the Trust agrees to repurchase or redeem the Shares
so tendered in accordance with its Declaration of Trust as amended from time to
time, and in accordance with the applicable provisions of the Prospectus. The
price to be paid to redeem or repurchase the Shares shall be equal to the net
asset value determined as set forth in the Prospectus. All payments by the Trust
hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Trust shall pay the total amount of the redemption
price as defined in the above paragraph pursuant to the instructions of the
Distributor on or before the seventh day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Shares
shall be paid by the Trust as follows: (i) in the case of Shares subject to a
contingent deferred sales charge, any applicable contingent deferred sales
charge shall be paid to the Distributor, and the balance shall be paid to or for
the account of the redeeming shareholder, in each case in accordance with
applicable provisions of the Prospectus; and (ii) in the case of all other
Shares, proceeds shall be paid to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of any class and/or series of Shares or payment
may be suspended at times when the New York Stock Exchange is closed for other
than customary weekends and holidays, when trading on said Exchange is
restricted, when
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an emergency exists as a result of which disposal by the Trust of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Trust fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Trust
5.1 Subject to the possible suspension of the sale of Shares
as provided herein, the Trust agrees to sell its Shares so long as it has Shares
of the respective class and/or series available.
5.2 The Trust shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Trust by independent public accountants.
The Trust shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Trust shall take, from time to time, but subject to
the necessary approval of the Board and the shareholders, all necessary action
to register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Trust agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Trust shall use its best efforts to notify such states
as the Distributor and the Trust may approve of its intention to sell any
appropriate number of its Shares; provided that the Trust shall not be required
to amend its Declaration of Trust or By-Laws to comply with the laws of any
state, to maintain an office in any state, to change the terms of the offering
of its Shares in any state from the terms set forth in its Registration
Statement, to qualify as a foreign corporation in any state or to consent to
service of process in any state other than with respect to claims arising out of
the offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Trust at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Trust. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Trust
in connection with such notifications.
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Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to
effect sales of Shares, but shall not be obligated to sell any specific number
of Shares. Sales of the Shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with other
investment companies. The Distributor shall compensate the selected dealers as
set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Trust to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Trust.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into
selected dealer agreements with registered and qualified securities dealers and
other financial institutions of its choice for the sale of Shares, provided that
the Trust shall approve the forms of such agreements. Within the United States,
the Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
7.1 With respect to classes and/or series of Shares which
impose a front-end sales charge, the Distributor shall receive and may retain
any portion of any front-end sales charge which is imposed on such sales and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Rule 2830 of the Conduct Rules of the NASD. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.
7.2 With respect to classes and/or series of Shares which
impose a contingent deferred sales charge, the Distributor shall receive and may
retain any contingent deferred sales charge which is imposed on such sales as
set forth in the
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Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules of the
NASD. Payment of these amounts to the Distributor is not contingent upon the
adoption or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Trust shall pay to the Distributor as compensation for
services under any Plans adopted by the Trust and this Agreement a distribution
and service fee with respect to the Trust's classes and/or series of Shares as
described in each of the Trust's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect,
the Distributor shall inform the Board of the commissions and account servicing
fees with respect to the relevant class and/or series of Shares to be paid by
the Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Trust, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
The Trust shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and periodic reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Trust shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Trust as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Trust and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Trust decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Trust shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
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Section 10. Indemnification
10.1 The Trust agrees to indemnify, defend and hold the
Distributor, its officers and directors and any person who controls the
Distributor within the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any reasonable counsel fees incurred in connection therewith)
which the Distributor, its officers, members or any such controlling person may
incur under the Securities Act, or under common law or otherwise, arising out of
or based upon any untrue statement of a material fact contained in the
Registration Statement or Prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information furnished by
the Distributor to the Trust for use in the Registration Statement or
Prospectus; provided, however, that this indemnity agreement shall not inure to
the benefit of any such officer, member or controlling person unless a court of
competent jurisdiction shall determine in a final decision on the merits, that
the person to be indemnified was not liable by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations under this Agreement (disabling
conduct), or, in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnified person was not liable by
reason of disabling conduct, by (a) a vote of a majority of a quorum of trustees
or trustees who are neither "interested persons" of the Trust as defined in
Section 2(a)(19) of the Investment Company Act nor parties to the proceeding, or
(b) an independent legal counsel in a written opinion. The Trust's agreement to
indemnify the Distributor, its officers and members and any such controlling
person as aforesaid is expressly conditioned upon the Trust's being promptly
notified of any action brought against the Distributor, its officers or members,
or any such controlling person, such notification to be given by letter or
telegram addressed to the Trust at its principal business office. The Trust
agrees promptly to notify the Distributor of the commencement of any litigation
or proceedings against it or any of its officers or directors in connection with
the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the
Trust, its officers and trustees and any person who controls the Trust, if any,
within the meaning of Section 15 of the Securities Act, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Trust, its officers and trustees or any such controlling person may incur under
the Securities Act or under common law or
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otherwise, but only to the extent that such liability or expense incurred by the
Trust, its trustees or officers or such controlling person resulting from such
claims or demands shall arise out of or be based upon any alleged untrue
statement of a material fact contained in information furnished by the
Distributor to the Trust for use in the Registration Statement or Prospectus or
shall arise out of or be based upon any alleged omission to state a material
fact in connection with such information required to be stated in the
Registration Statement or Prospectus or necessary to make such information not
misleading. The Distributor's agreement to indemnify the Trust, its officers and
trustees and any such controlling person as aforesaid, is expressly conditioned
upon the Distributor's being promptly notified of any action brought against the
Trust, its officers and trustees or any such controlling person, such
notification being given to the Distributor at its principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date
first above written and shall remain in force for two years from the date hereof
and thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Trust, or by the vote of a majority of
the outstanding voting securities of the applicable class and/or series of the
Trust, and (b) by the vote of a majority of those trustees who are not parties
to this Agreement or interested persons of any such parties and who have no
direct or indirect financial interest in this Agreement or in the operation of
any of the Trust's Plans or in any agreement related thereto (independent
trustees), cast in person at a meeting called for the purpose of voting upon
such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent trustees or by vote of
a majority of the outstanding voting securities of the applicable class and/or
series of the Trust, or by the Distributor, on sixty (60) days' written notice
to the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when used
in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Board of the Trust, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Trust, and (b) by the vote of a majority of the independent
trustees cast in person at a meeting called
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for the purpose of voting on such amendment.
Section 13. Separate Agreement as to Classes and/or Series
The amendment or termination of this Agreement with respect to
any class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. Governing Law
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New Jersey as at the
time in effect and the applicable provisions of the Investment Company Act. To
the extent that the applicable law of the State of New Jersey, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year above written.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ________________________
TARGET FUNDS
By: ________________________
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Exhibit (e)(2)
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i) a
broker-dealer registered with the Securities and Exchange Commission ("SEC");
(ii) a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"); and (iii) licensed by the appropriate regulatory agency
of each state or other jurisdiction in which Dealer will offer and sell Shares
of the Funds, to the extent necessary to perform the duties and activities
contemplated by this Agreement.
b. Dealer represents and warrants that each of its partners,
directors, officers, employees, and agents who will be utilized by Dealer with
respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects
subject to the Conduct Rules of the NASD and such Conduct Rules shall control
any provision to the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all
applicable state and federal laws and all rules and regulations promulgated
thereunder generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds
(including those of each of its classes) only at the regular public offering
price applicable to such Shares and in effect at the time of each transaction.
The procedures relating to all orders and the handling of each order (including
the manner of computing the net asset value of Shares and the effective time of
orders received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
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additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without
notice to Dealer, to suspend the sale of Shares or to withdraw or limit the
offering of Shares. Distributor reserves the unqualified right not to accept any
specific order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer
is not authorized to act as broker or agent for, or employee of, Distributor,
any Fund or any other dealer, and Dealer shall not in any manner represent to
any third party that Dealer has such authority or is acting in such capacity.
Rather, Dealer agrees that it is acting as principal for Dealer's own account or
as agent on behalf of Dealer's customers in all transactions in Shares, except
as provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its
sole discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders
placed through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if the
NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor or
from Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares
only from Distributor and only for the purpose of covering purchase orders
Dealer has already received from its customers or for Dealer's own bona fide
investment.
c. Dealer agrees to date and time stamp all orders received by
Dealer and promptly, upon receipt of any and all orders, to transmit to
Distributor all orders received prior to
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the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and
sales of Shares made through Dealer and to furnish Distributor or regulatory
authorities with copies of such records upon request. In that regard, Dealer
agrees that, unless Dealer holds Shares as nominee for its customers or
participates in the NSCC Fund/Serv Networking program, at certain matrix levels,
it will provide Distributor with all necessary information to comply properly
with all federal, state and local reporting requirements and backup and
nonresident alien withholding requirements for its customer accounts including,
without limitation, those requirements that apply by treating Shares issued by
the Funds as readily tradable instruments. Dealer represents and agrees that all
Taxpayer Identification Numbers ("TINs") provided are certified, and that no
account that requires a certified TIN will be established without such certified
TIN. With respect to all other accounts, including Shares held by Dealer in
omnibus accounts and Shares purchased or sold through the NSCC Fund/Serv
Networking program, at certain matrix levels, Dealer agrees to perform all
federal, state and local tax reporting with respect to such accounts, including
without limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund
or is tendered for redemption within seven (7) business days after confirmation
by Distributor of the original purchase order from Dealer, Dealer shall forfeit
its right to any concession or commission received by Dealer with respect to
such Share and shall forthwith refund to Distributor the full concession allowed
to Dealer or commission paid to Dealer on the original sale. Distributor agrees
to notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from
Distributor shall be in Fed Funds, New York clearinghouse or other immediately
available funds and that such funds shall be received by Distributor by the
earlier of: (i) the end of the third (3rd) business day following Dealer's
receipt of the customer's order to purchase such Shares; or (ii) the settlement
date established in accordance with Rule 15c6-1 under the Securities Exchange
Act of 1934, as amended. If such payment is not received by Distributor by such
date, Dealer shall forfeit its right to any concession or commission with
respect to such order, and Distributor reserves the right, without notice,
forthwith to cancel the sale, or, at its option, to sell the Shares ordered back
to the Fund, in which case Distributor may hold Dealer responsible for any loss,
including loss of profit, suffered by Distributor resulting from Dealer's
failure to make payment as aforesaid. If a purchase is made by check, the
purchase is deemed made upon conversion of the purchase instrument into Fed
Funds, New York clearinghouse or other immediately available funds.
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h. Dealer agrees that it: (i) shall assume responsibility for
any loss to the Fund caused by a correction to any order placed by Dealer that
is made subsequent to the trade date for the order, provided such order
correction was not based on any negligence on Distributor's part; and (ii) will
immediately pay such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the
purchase of Shares on behalf of any IRAs, 401(k) plans or other retirement plan
accounts, by mail, telephone, or wire, Dealer shall act as agent for the
custodian or trustee of such plans (solely with respect to the time of receipt
of the application and payments), and Dealer shall not place such an order with
Distributor until it has received from its customer payment for such purchase
and, if such purchase represents the first contribution to such a retirement
plan account, the completed documents necessary to establish the retirement
plan. Dealer agrees to indemnify Distributor and its affiliates for any claim,
loss, or liability resulting from incorrect investment instructions received by
Distributor from Dealer.
j. Dealer agrees that it will not make any conditional orders
for the purchase or redemption of Shares and acknowledges that Distributor will
not accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by
it in connection with its activities under this Agreement will be borne by
Dealer.
l. Dealer agrees that it will keep in force appropriate
broker's blanket bond insurance policies covering any and all acts of Dealer's
partners, directors, officers, employees, and agents adequate to reasonably
protect and indemnify the Distributor and the Funds against any loss which any
party may suffer or incur, directly or indirectly, as a result of any action by
Dealer or Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net
capital as specified by the rules and regulations of the SEC, NASD and other
regulatory authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor, the
total sales charges and dealer concessions or commissions, if any, payable to
Dealer shall be as stated on Schedule A to this Agreement, which may be amended
by Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must be
notified at the time of the sale that the sale qualifies for the reduced sales
charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same sales
charge structure as the Fund, or class thereof, from which the exchange was
made, in accordance with the Prospectus.
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<PAGE> 5
b. In accordance with the Funds' Prospectuses, Distributor or
any affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares purchased
in a Qualifying Sale are redeemed within twelve (12) months of the end of the
month of purchase, Distributor shall be entitled to recover any advance payment
attributable to the redeemed Shares by reducing any account payable or other
monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which
distribution plans have been adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended ("Rule 12b-1 Plans"), Distributor also is
authorized to pay the Dealer continuing distribution and/or service fees, as
specified in Schedule A and the relevant Fund Prospectus, with respect to Shares
of any such Fund, to the extent that Dealer provides distribution, marketing,
administrative and other services and activities regarding the promotion of such
Shares and the maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or
service fees under Rule 12b-1 Plans applicable to Shares purchased by Dealer's
customers, Distributor directs Dealer to provide enhanced shareholder services
such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees
shall be based on the value of Shares attributable to Dealer's customers and
eligible for such payment, and shall be calculated on the basis of and at the
rates set forth in the compensation schedule then in effect. Without prior
approval by a majority of the outstanding shares of a Fund, the aggregate annual
fees paid to Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts
stated as the "annual maximums" in each Fund's Prospectus, which amount shall be
a specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and
the Distributor shall control over this Agreement in the event of any
inconsistency. Each Rule 12b-1 Plan in effect on the date of this Agreement is
described in the relevant Fund's Prospectus. Dealer
A-5
<PAGE> 6
hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions
whereby the Fund, under all ordinary circumstances, will redeem Shares held by
shareholders on demand. Dealer agrees that it will not make any representations
to shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its
customers at a price below that next quoted by the Fund for redemption or
repurchase, i.e., at the net asset value of such Shares, less any applicable
deferred sales charge, or redemption fee, in accordance with the Fund's
Prospectus. Dealer shall, however, be permitted to sell Shares for the account
of the customer or record owner to the Funds at the repurchase price then
currently in effect for such Shares and may charge the customer or record owner
a fair service fee or commission for handling the transaction, provided Dealer
discloses the fee or commission to the customer or record owner. Nevertheless,
Dealer agrees that it shall not under any circumstances maintain a secondary
market in such repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it
has made, if instructions in proper form, including any outstanding
certificates, are not received by Distributor within the time customary or the
time required by law, the redemption may be canceled forthwith without any
responsibility or liability on Distributor's part or on the part of any Fund, or
Distributor, at its option, may buy the shares redeemed on behalf of the Fund,
in which latter case Distributor may hold Dealer responsible for any loss,
including loss of profit, suffered by Distributor resulting from Distributor's
failure to settle the redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
Distributor may, from time to time, provide Dealer with
written guidelines or standards relating to the sale or distribution of Funds
offering multiple classes of Shares with different sales charges and
distribution-related operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners,
directors, officers, employees, and agents is authorized to give any information
or make any representations concerning Shares of any Fund except those contained
in the Fund's then current Prospectus or in materials provided by Distributor.
A-6
<PAGE> 7
b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising or
sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and
Distributor shall have no obligation or responsibility with respect to Dealer's
right to purchase or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with
information identifying the states or jurisdictions in which it is believed that
all necessary notice, registration or exemptive filings for Shares have been
made under applicable securities laws such that offers and sales of Shares may
be made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states
or jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws
regulating the sale of securities in the United States or any foreign
jurisdiction, with respect to the qualification or status of Dealer or Dealer's
personnel selling Fund Shares. Distributor shall not, in any event, be liable or
responsible for the issue, form, validity, enforceability and value of such
Shares or for any matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of
Shares in any foreign jurisdiction, except with the express written consent of
Distributor.
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless
Distributor and the Funds and their predecessors, successors, and affiliates,
each current or former partner, officer, director, employee, shareholder or
agent and each person who controls or is controlled by Distributor from any and
all losses, claims, liabilities, costs, and expenses, including attorney fees,
that may be assessed against or suffered or incurred by any of them howsoever
they arise, and as they are incurred, which relate in any way to: (i) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the United States or any state or foreign
country) or any alleged tort or breach of contract, related to the offer or sale
by Dealer of Shares of the Funds pursuant to this Agreement (except to the
extent that Distributor's negligence or failure to follow correct instructions
received from Dealer is the cause of such loss,
A-7
<PAGE> 8
claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless
Dealer and its predecessors, successors and affiliates, each current or former
partner, officer, director, employee or agent, and each person who controls or
is controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable
time, of any claim or complaint or any enforcement action or other proceeding
with respect to Shares offered hereunder against Dealer or its partners,
affiliates, officers, directors, employees or agents, or any person who controls
Dealer, within the meaning of Section 15 of the Securities Act of 1933, as
amended.
d. Dealer further agrees promptly to send Distributor copies
of (i) any report filed pursuant to NASD Conduct Rule 3070, including, without
limitation quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed
with any other self-regulatory organization in lieu of Rule 3070 reports
pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification
provisions shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to this
Agreement may terminate this Agreement immediately by giving written notice to
the other party of that other party's material breach of this Agreement. Such
notice shall be deemed to have been given and to be effective on the date on
which it was either delivered personally to the other party or any officer or
member thereof, or was mailed postpaid or delivered to a telegraph office for
transmission to the other party's designated person at the addresses shown
herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the
appointment of a Trustee under the Securities Investor Protection Act or any
other act of insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing
means shall have no effect upon transactions entered into prior to the effective
date of termination and shall
A-8
<PAGE> 9
not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any time by
written notice to Dealer. Dealer's placing of an order or accepting payment of
any kind after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and
existing and in good standing under the laws of the state of Delaware and is
duly registered or exempt from registration as a broker-dealer in all states and
jurisdictions in which it provides services as principal underwriter and
distributor for the Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's
charter and by-laws to enter into this Agreement and perform all activities and
services of the Distributor provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Distributor's ability to perform under this
Agreement.
d. All requisite actions have been taken to authorize
Distributor to enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties found
elsewhere in this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing
under the laws of the state, commonwealth or other jurisdiction in which Dealer
is organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
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<PAGE> 10
b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all activities
and services of the Dealer provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Dealer's ability to perform under this
Agreement.
c. All requisite actions have been taken to authorize Dealer
to enter into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement,
subject to any enforcement or other proceeding with respect to its activities
under state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with Distributor
have a debit balance, Distributor shall be permitted to offset and recover the
amount owed from any other account Dealer has with Distributor, without notice
or demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in
accordance with the laws of the state of New Jersey, not including any provision
which would require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only,
are not a party hereof, and are not to be used in construing or interpreting any
aspect hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements. This Agreement shall be binding upon the
parties hereto when signed by Dealer and accepted by Distributor.
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<PAGE> 11
17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements and/or understandings of the parties. This
Agreement shall be binding upon the parties hereto when signed by Dealer and
accepted by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: _______________________________
Name: _______________________________
Title: _______________________________
Date:_________________________________
DEALER: _____________________________
By: _____________________________
(Signature)
Name: _____________________________
Title: _____________________________
Address:
_____________________________
_____________________________
_____________________________
Telephone: __________________________
NASD CRD # _________________________
Prudential Dealer # _________________
(Internal Use Only)
Date: _____________________________
A-11
<PAGE> 1
EXHIBIT (g)(1)
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held by It..................................................-1-
2. Duties to the Custodian with Respect to Property of The Fund Held By the Custodian in the United
States.................................................................................................-2-
2.1 Holding Securities............................................................................-2-
2.2 Delivery of Securities........................................................................-2-
2.3 Registration of Securities....................................................................-6-
2.4 Bank Accounts.................................................................................-7-
2.5 Availability of Federal Funds.................................................................-7-
2.6 Collection of Income..........................................................................-8-
2.7 Payment of Fund Monies........................................................................-8-
2.8 Liability for Payment in Advance of Receipt of Securities Purchased..........................-11-
2.9 Appointment of Agents........................................................................-11-
2.10 Deposit of Securities in Securities Systems..................................................-11-
2.10A Fund Assets Held in the Custodian's Direct Paper System......................................-13-
2.11 Segregated Account...........................................................................-14-
2.12 Ownership Certificates for Tax Purposes......................................................-15-
2.13 Proxies......................................................................................-16-
2.14 Communications Relating to Fund Portfolio Securities.........................................-16-
2.15 Reports to Fund by Independent Public Accountants............................................-16-
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States........-17-
3.1 Appointment of Foreign Sub-Custodians........................................................-17-
3.2 Assets to be Held............................................................................-17-
3.3 Foreign Securities Depositories..............................................................-18-
3.4 Segregation of Securities....................................................................-18-
3.5 Agreements with Foreign Banking Institutions.................................................-18-
3.6 Access of Independent Accountants of the Fund................................................-19-
3.7 Reports by Custodian.........................................................................-19-
3.9 Liability of Foreign Sub-Custodians..........................................................-20-
3.10 Liability of Custodian.......................................................................-21-
3.11 Reimbursements for Advances..................................................................-21-
3.12 Monitoring Responsibilities..................................................................-22-
3.13 Branches of U.S. Banks.......................................................................-22-
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund...............................-23-
</TABLE>
<PAGE> 3
-i-
<TABLE>
<S> <C>
5. Proper Instructions...................................................................................-24-
6. Actions Permitted without Express Authority...........................................................-24-
7. Evidence of Authority.................................................................................-25-
8. Duties of Custodian with Respect to the Books of Account and Calculation of Net
Asset Value and Net Income............................................................................-26-
9. Records...............................................................................................-26-
10. Opinion of Fund's Independent Accountant..............................................................-27-
11. Compensation of Custodian.............................................................................-27-
12. Responsibility of Custodian...........................................................................-27-
13. Effective Period, Termination and Amendment...........................................................-29-
14. Successor Custodian...................................................................................-30-
15. Interpretive and Additional Provisions................................................................-32-
16. Massachusetts Law to Apply............................................................................-32-
17. Prior Contracts.......................................................................................-32-
18. The Parties...........................................................................................-32-
19. Limitation of Liability...............................................................................-33-
</TABLE>
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian", and each Fund listed on Appendix A which evidences its agreement to
be bound hereby executing a copy of this Contract (each such Fund individually
hereinafter referred to as the "Fund").
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<PAGE> 4
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/Declaration of Trust. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the Board of Directors/Trustees of the Fund, and provided that the Custodian
shall have the same responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed as any such sub-custodian
has to the Custodian, provided that the Custodian agreement with any such
domestic sub-custodian shall impose on such sub-custodian responsibilities and
liabilities similar in nature and scope to those imposed by this Agreement with
respect to the functions to be performed by such sub-custodian. The Custodian
may employ as sub-custodians for the Fund's securities and other assets the
foreign banking institutions and foreign securities depositories designated in
Schedule "A" hereto but only
-3-
<PAGE> 5
in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of The Fund Held By
the Custodian in the United States.
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property, to be held by it in
the United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of Treasury, collectively referred to herein
as "Securities System" and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book-entry
system account ("Direct Paper System") only upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the parties, and
only in the following cases:
(1) Upon sale of such securities for the account of the
Fund and receipt of payment therefor;
(2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities
entered into by the Fund;
(3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section
2.10 hereof;
-4-
<PAGE> 6
(4) To the depository agent in connection with tender or
other similar offers for portfolio securities of the
Fund;
(5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or otherwise
become payable; provided that, in any such case, the
cash or other consideration is to be delivered to the
Custodian;
(6) To the issuer thereof, or its agent, for transfer
into the name of the Fund or into the name of any
nominee or nominees of the Custodian or into the name
or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for
exchange for a different number of bonds,
certificates or other evidence representing the same
aggregate face amount or number of units; provided
that, in any such case, the new securities are to be
delivered to the Custodian;
(7) Upon the sale of such securities for the account of
the Fund, to the broker or its clearing agent,
against a receipt, for examination in accordance with
"street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or
liability for any loss arising from the delivery of
such securities prior to receiving payment for such
securities except as may arise from the Custodian's
own negligence or willful misconduct;
(8) For exchange or conversation pursuant to any plan of
merger, consolidation, recapitalization,
reorganization or readjustment of the securities of
the issuer of such securities, or pursuant to
provisions for
-5-
<PAGE> 7
conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be
delivered to the Custodian;
(9) In the case of warrants, rights or similar
securities, the surrender thereof in the exercise of
such warrants, rights or similar securities or the
surrender of interim receipts or temporary securities
for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be
delivered to the Custodian;
(10) For delivery in connection with any loans of
securities made by the Fund, but only against receipt
of adequate collateral as agreed upon from time to
time by the Custodian and the Fund, which may be in
the form of cash or obligations issued by the United
States government, its agencies or instrumentalities,
except that in connection with any loans for which
collateral is to be credited to the Custodian's
account in the book-entry system authorized by the
U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of
securities owned by the Fund prior to the receipt of
such collateral;
(11) For delivery as security in connection with any
borrowings by the Fund requiring a pledge of assets
by the Fund, but only against receipt of amounts
borrowed;
(12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a
broker-dealer registered under the Securities
-6-
<PAGE> 8
Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities
Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of
any similar organization or organizations, regarding
escrow or other arrangements in connection with
transactions by the Fund;
(13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a
Futures Commission Merchant registered under the
Commodity Exchange Act, relating to compliance with
the rules of the Commodity Futures Trading Commission
and/or any Contract Market, or any similar
organization or organizations, regarding account
deposits in connection with transactions by the Fund;
(14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be
described from time to time in the Fund's currently
effective prospectus and statement of additional
information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or
redemption; and
(15) For any other proper business purpose, but only upon
receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board of
Directors/Trustees or of the Executive Committee
signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary,
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<PAGE> 9
specifying the securities to be delivered, setting
forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper business
purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominees of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless the
Fund has authorized in writing the appointment of a nominee to be used in common
with other registered investment companies having the same investment adviser as
the Fund, or in the name or nominee name of any agent appointed pursuant to
Section 2.9 or in the name or nominee name of any sub-custodian appointed
pursuant to Article 1. All securities accepted by the Custodian on behalf of the
Fund under the terms of this Contract shall be in "street name" or other good
delivery form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its best efforts to
timely collect income due the Fund on such securities and to notify the Fund on
a best efforts basis of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund, in a bank account established and used in
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accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held
by the Custodian for the Fund may be deposited by it to its credit as Custodian
in the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each such bank or
trust company and the funds to be deposited with each such bank or trust company
shall be approved by vote of a majority of the Board of Directors/Trustees of
the Fund. Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the
Fund and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in the amount of
checks received in payment for Shares of the Fund which are deposited into the
Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the securities business, and
shall collect on a timely basis all income and other payments with respect to
bearer securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's custodian account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due and
shall
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collect interest when due on securities held hereunder. Income due the Fund on
securities loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such information or
data as may be necessary to assist the Fund in arranging for the timely delivery
to the Custodian of the income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
(1) Upon the purchase of securities held domestically,
options, futures contracts or options on futures
contracts for the account of the Fund but only (a)
against the delivery of such securities, or evidence
of title to such options, futures contracts or
options on futures contracts, to the Custodian (or
any bank, banking firm or trust company doing
business in the United States or abroad which is
qualified under the Investment Company Act of 1940,
as amended, to act as a custodian and has been
designated by the Custodian as its agent for this
purpose) registered in the name of the Fund or in the
name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer;
(b) in the case of a purchase effected through a
Securities System, in accordance with the conditions
set forth in Section 2.10 hereof; (c) in the case of
a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section
2.10A; (d) in the case of repurchase agreements
entered into between the
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Fund and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against
delivery of the securities either in certificate form
or through an entry crediting the Custodian's account
at the Federal Reserve Bank with such securities or
(ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the
Custodian along with written evidence of the
agreement by the Custodian to repurchase such
securities from the Fund or (e) for transfer to a
time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker
and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
(2) In connection with conversion, exchange or surrender
of securities owned by the Fund as set forth in
Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued by
the Fund as set forth in Article 4 hereof;
(4) For the payment of any expense or liability incurred
by the Fund, including but not limited to the
following payments for the account of the Fund:
interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the
Fund whether or not such expenses are to be in whole
or part capitalized or treated as deferred expenses;
(5) For the payment of any dividends declared pursuant to
the governing documents of the Fund;
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<PAGE> 13
(6) For payment of the amount of dividends received in
respect of securities sold short;
(7) For any other proper purpose, but only upon receipt
of, in addition to Proper Instructions, a certified
copy of a resolution of Board of Directors/Trustees
or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its Secretary
or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which
such payment is to be made, declaring such purpose to
be a proper purpose, and naming the person or persons
to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of securities for the account of the Fund
is made by the Custodian in advance of receipt of the securities purchased in
the absence of specific written instructions from the Fund to so pay in advance,
the Custodian shall be absolutely liable to the Fund for such securities to the
same extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940, as
amended, to act as a custodian, as its agent to carry out such of the provisions
of this Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the Custodian of
its responsibilities or liabilities hereunder.
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2.10 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(1) The Custodian may keep domestic securities of the
Fund in a Securities System provided that such
securities are represented in an account ("Account")
of the Custodian in the Securities System which shall
not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise
for customers;
(2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a
Securities System shall identify by book-entry those
securities belonging to the Fund;
(3) The Custodian shall pay for domestic securities
purchased for the account of the Fund upon (i)
receipt of advice from the Securities System that
such securities have been transferred to the Account,
and (ii.) the making of an entry on the records of
the Custodian to reflect such payment and transfer
for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of
the Fund upon (i) receipt of advice from the
Securities System that payment for such securities
has been transferred
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to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of
all advices from the Securities System of transfers
of domestic securities for the account of the Fund
shall identify the Fund, be maintained for the Fund
by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish
the Fund confirmation of each transfer to or from the
account of the Fund in the form of a written advice
or notice and shall furnish promptly to the Fund
copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the
account of the Fund.
(4) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and
procedures for safeguarding securities deposited in
the Securities System;
(5) The Custodian shall have received the initial or
annual certificate, as the case may be, required by
Article 13 hereof;
(6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to the
Fund for any loss or damage to the Fund resulting
from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or
any such agent to enforce effectively such rights as
it may have against the Securities System; at the
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election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with
respect to any claim against the Securities System or
any other person which the Custodian may have as a
consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any
such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund in the Direct Paper
System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of
Proper Instructions;
(2) The Custodian may keep securities of the Fund in the
Direct Paper System only if such securities are
represented in an account ("Account") of the
Custodian in the Direct Paper System which shall not
include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for
customers;
(3) The records of the Custodian with respect to
securities of the Fund which are maintained in the
Direct Paper System shall identify by book-entry
those securities belonging to the Fund;
(4) The Custodian shall pay for securities purchased for
the account of the Fund upon the making of an entry
on the records of the Custodian to reflect such
payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities
sold for the account of the Fund
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<PAGE> 17
upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of
payment for the account of the Fund;
(5) The Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund, in
the form of a written advice or notice, of Direct
Paper on the next business day following such
transfer and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the
account of the Fund;
(6) The Custodian shall provide the Fund with any report
on its system of internal accounting control as the
Fund may reasonably request from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions
of any agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash, government securities or liquid,
high-grade debt obligations in connection with options purchased, sold or
written by the Fund or commodity futures contracts or options thereon purchased
or sold by the Fund, (iii) for the purposes of
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<PAGE> 18
compliance by the Fund with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate purposes,
but only, in the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of
Directors/Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary, setting forth the
purpose or purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection with
transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject to
the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund
all written information (including, without limitation, pendency of calls and
maturities of securities held domestically and expirations of rights in
connection therewith and notices of exercise of call and put options
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written by the Fund and the maturity of futures contracts purchased or sold by
the Fund) received by the Custodian from issuers of the securities being held
for the Fund. With respect to tender or exchange offers, the Custodian shall
transmit promptly to the Fund all written information received by the Custodian
from issuers of the securities whose tender or exchange is sought and from the
party (or his agents) making the tender or exchange offer. If the Fund desires
to take action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three business
days prior to the date of which the Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian
shall provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system, internal
accounting control and procedures for safeguarding securities, futures contracts
and options on futures contracts, including securities deposited and/or
maintained in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of
the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes
and instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the foreign
banking institutions and foreign securities
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depositories designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this Contract,
together with a certified resolution of the Fund's Board of Directors/Trustees,
the Custodian and the Fund may agree to amend Schedule A hereto from time to
time to designate additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper Instructions, the
Fund may instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under the
Investment Company Act of 1940, and (b) cash and cash equivalents in such
amounts as the Custodian or the Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
upon in writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its
books as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian. Each agreement pursuant to which the Custodian employs a
foreign banking institution shall require that such institution establish a
custody account for the Custodian on behalf of the Fund and physically segregate
in that account, securities and other assets of the Fund, and, in the event that
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such institution deposits the Fund's securities in a foreign securities
depository, that it shall identify on its books as belonging to the Custodian,
as agent for the Fund, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth in
Exhibit I hereto and shall provide that (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b) beneficial
ownership of the Fund's assets will be freely transferable without the payment
of money or value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Fund; (d) officers
of or auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institution
under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of the securities
and other assets of the Fund held
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by foreign sub-custodians, including but not limited to an identification of
entities having possession of the Fund's securities and other assets and advices
or notifications of any transfers of securities to or from each custodial
account maintained by a foreign banking institution for the Custodian on behalf
of the Fund indicating, as to securities acquired for the Fund, the identity of
the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this
Section 3.8, the provision of Sections 2.2 and 2.7 of this Contract shall apply,
in their entirety to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the
contrary, settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefore (or an agent for
such purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's nominee to the same
extent as set forth in Section 2.3 of this Contract, and the Fund agrees to hold
any such nominee harmless from any liability as a holder of record of such
securities.
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3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the Custodian and
each Fund from and against any loss, damage, cost, expense, liability or claim
arising out of or in connection with the institution's performance of such
obligations. At the election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts
or omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless of
whether assets are maintained in the custody of a foreign banking institution, a
foreign securities depository or a branch of a U.S. bank as contemplated by
paragraph 3.13 hereof, the Custodian shall not be liable for any loss, damage,
cost, expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the
sub-custodian has otherwise exercised reasonable care. Notwithstanding the
foregoing provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except such loss
as may result from (a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses (excluding
a bankruptcy or insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear
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incident or other losses under circumstances where the Custodian and State
Street London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that the
Custodian or its nominees shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as any arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the Fund shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund assets to the
extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually
to the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will promptly inform the
Fund in the event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the subject
of an exemptive order from the Securities and Exchange Commission is notified by
such foreign sub-custodian that there appears to be a substantial likelihood
that its shareholders' equity will decline below $200 million (U.S. dollars or
the equivalent thereof) or that its shareholders' equity has declined below $200
million (in each case
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computed in accordance with generally accepted U.S. accounting principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the
provisions of Article 3 shall not apply where the custody of the Fund assets are
maintained in a foreign branch of a banking institution which is a "bank" as
defined by Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of any
such branch as a sub-custodian shall be governed by paragraph 1 of this
Contract.
(b) Cash held for the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the direction of
the Custodian, State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the
Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and any
applicable votes of the Board of Directors/Trustees of the Fund pursuant
thereto, the Custodian shall, upon receipt of instructions from the Transfer
Agent, make funds available for payment to holders of Shares who have delivered
to the Transfer Agent a request for redemption or repurchase of their Shares. In
connection with the redemption or repurchase of Shares of the Fund, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares of the
Fund, the Custodian shall honor checks drawn on the Custodian by a holder of
Shares, which checks have been furnished by the Fund to the holder of Shares,
when presented to
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the Custodian in accordance with such procedures and controls as are mutually
agreed upon from time to time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares
or from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions.
Proper Instructions as used herein means a writing signed or initialed
by one or more person or persons as the officers of the Fund shall have from
time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be confirmed
in writing. It is understood and agreed that the Board of
Directors/Directors/Trustees has authorized (i) Prudential Mutual Fund
Management Inc., as Manager of the Fund, and (ii) The Prudential Investment
Corporation (or Prudential-Bache Securities Inc.), as Subadviser to the Fund, to
deliver proper instructions with respect to all matters for which proper
instructions are required by this Article 5. The Custodian may rely upon the
certificate of an officer of the Manager or Subadviser, as the case may be, with
respect to the person or persons authorized on behalf of the Manager and
Subadviser, respectively, to sign, initial or give proper instructions for the
purpose of this Article 5. Proper Instructions may
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<PAGE> 27
include communications effected directly between electro-mechanical or
electronic devices provided that the Fund and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.11.
6. Actions Permitted without Express Authority.
The Custodian may in its discretion, without express authority from the
Fund:
(1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to the Fund;
(2) surrender securities in temporary form for securities in
definitive form;
(3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as otherwise
directed by the Board of Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the
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Board of Directors/Trustees pursuant to the Articles of Incorporation/
Declaration of Trust as described in such vote, and such vote may be considered
as in full force and effect until receipt by the Custodian of written notice to
the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors/Trustees of the Fund
to keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers,
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<PAGE> 29
employees or agents of the Fund and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case
of a closed end fund) and Form N-SAR or other periodic reports to the Securities
and Exchange Commission and with respect to any other requirements of such
Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held
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<PAGE> 30
to the exercise of reasonable care in carrying out the provisions of this
Contract but shall be kept indemnified by and shall be without liability to the
Fund for any action taken or omitted by it in good faith without negligence. It
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice. Notwithstanding the
foregoing, the responsibility of the Custodian with respect to redemptions
effected by check shall be in accordance with a separate Agreement entered into
between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from, or caused by, the direction of or authorization by the Fund to
maintain custody or any securities or cash of the Fund in a foreign country
including, but not limited to, losses resulting from nationalization,
expropriation, currency restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
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<PAGE> 31
If the Fund requires the Custodian to advance cash or securities for
any purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall give the Fund
notice of its intention to dispose of assets identifying such assets and the
Fund shall have one business day from receipt of such notice to notify the
Custodian if the Fund wishes the Custodian to dispose of Fund assets of equal
value other than those identified in such notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors/Trustees of the Fund has approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of
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<PAGE> 32
1940, as amended and that the Custodian shall not act under Section 2.10A hereof
in the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the use by the Fund of the Direct Paper System; provided further,
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Articles of Incorporation/Declaration of Trust, and further, provided,
that the Fund may at any time by action of its Board of Directors/Trustees (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
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<PAGE> 33
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver at the office of the Custodian and
transfer such securities, funds and other properties in accordance with such
vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
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<PAGE> 34
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/Declaration of Trust of the Fund. No interpretive
or additional provisions made as provided in the preceding sentence shall be
deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
18. The Parties
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a Massachusetts Business Trust, references to Board of Directors
and Articles of Incorporation shall be deemed a reference to Board of
Directors/Trustees and Articles of Incorporation/Declaration of Trust
respectively and reference to shares of capital stock shall be deemed a
reference to shares of beneficial interest.
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<PAGE> 35
19. Limitation of Liability
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
ATTEST STATE STREET BANK AND TRUST COMPANY
_________________________ By____________________________________
Assistant Secretary Vice President
ATTEST
EACH OF THE FUNDS LISTED ON APPENDIX A
_________________________
Deborah A. Docs By____________________________________
Secretary Robert F. Gunia
Vice President
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<PAGE> 1
Exhibit (g)(2)
AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT
This Amendment to the respective Custodian Contract/Agreement is made
as of February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.
WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and
WHEREAS, each Fund and the Custodian desire to amend certain provisions
of the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, each Fund and the Custodian desire to amend and restate
certain other provisions of the Contract relating to the custody of assets of
each of the Funds held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereby agree to
amend the Contract, to add the following new provisions which supersede the
provisions in the existing contracts relating to the custody of assets of the
Funds outside the United States.
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.1. DEFINITIONS.
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
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<PAGE> 2
"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule
17f-5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.
3.3. COUNTRIES COVERED.
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list
on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody
Manager to maintain the assets of the Funds which list of Eligible Foreign
Custodians may be amended from time to time in the sole discretion of the
Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Execution of this Amendment by the Fund shall be deemed to be a Proper
Instruction to open an account, or to place or maintain Foreign Assets, in each
country listed on Schedule A in which the Custodian has previously placed or
currently maintains Foreign Assets pursuant to the terms of the Contract.
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<PAGE> 3
Following the receipt of Proper Instructions directing the Foreign Custody
Manager to close the account of a Fund with the Eligible Foreign Custodian
selected by the Foreign Custody Manager in a designated country, the delegation
by that Fund's Board to the Custodian as Foreign Custody Manager for that
country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING.
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign Custody Manager which is a foreign securities
depository or clearing agency that is not a
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<PAGE> 4
Mandatory Securities Depository). The Foreign Custody Manager shall provide the
Board at least annually with information as to the factors used in such
monitoring system. If the Foreign Custody Manager determines that the custody
arrangements with an Eligible Foreign Custodian it has selected are no longer
appropriate, the Foreign Custody Manager shall notify the Board in accordance
with Section 3.7 hereunder and withdraw the Foreign Assets from such Eligible
Foreign Custodian as soon as reasonably practicable.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO.
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17f-5.
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY
MANAGER.
The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty (60)
days after receipt by the non-terminating party of such notice. The provisions
of Section 3.3 hereof shall govern the delegation to and termination of the
Custodian as Foreign Custody Manager of the Funds with respect to designated
countries.
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<PAGE> 5
3.10. MOST FAVORED CLIENT.
If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUNDS HELD
OUTSIDE THE UNITED STATES.
4.1 DEFINITIONS.
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign Sub-Custodian in an account that is identified as
belonging to the Custodian for the benefit of its customers, provided however,
that (i) the records of the Custodian with respect to foreign securities of the
Funds which are maintained in such account shall identify those securities as
belonging to the Funds and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign
Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
4.4.1. DELIVERY OF FOREIGN ASSETS.
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<PAGE> 6
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Fund in
accordance with customary market practice in the country where
such foreign securities are held or traded, including, without
limitation: (A) delivery against expectation of receiving
later payment; or (B) in the case of a sale effected through a
Foreign Securities System, in accordance with the rules
governing the operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign
securities are called, redeemed, retired or otherwise become
payable;
(v) to the issuer thereof, or its agent, for transfer into the
name of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such
Foreign Sub-Custodian) or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with reasonable
market custom; provided that in any such case the Foreign
Sub-Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from
the Foreign Sub-Custodian's own negligence or willful
misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
(ix) for delivery as security in connection with any borrowing by
the Funds requiring a
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<PAGE> 7
pledge of assets by the Funds;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, but only upon receipt of Proper
Instructions specifying the foreign securities to be
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper
trust\corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
4.4.2. PAYMENT OF FUND MONIES.
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, in accordance with
reasonable market settlement practice in the country where
such foreign securities are held or traded, including, without
limitation, (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer)
against expectation of receiving later delivery of such
foreign securities; or (B) in the case of a purchase effected
through a Foreign Securities System, in accordance with the
rules governing the operation of such Foreign Securities
System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Fund;
(iii) for the payment of any expense or liability of the Fund,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees
under this Contract, legal fees, accounting fees, and other
operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign
exchange contracts for the Fund, including transactions
executed with or through the Custodian or its Foreign
Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
7
<PAGE> 8
(vi) for payment of part or all of the dividends received in
respect of securities sold short;
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, but only upon receipt of Proper
Instructions specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper trust\corporate purpose,
and naming the person or persons to whom such payment is to be
made.
4.4.3. MARKET CONDITIONS; MARKET INFORMATION.
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension funds or substantially similar institutions which, as a part
of their ordinary business operations, purchase or sell securities and make use
of global custody services.
The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:
(i) legal opinions relating to whether local law restricts with
respect to U.S. registered mutual funds (a) access of a fund's
independent public accountants to books and records of a
Foreign Sub-Custodian or Foreign Securities System, (b) a
fund's ability to recover in the event of bankruptcy or
insolvency of a Foreign Sub-Custodian or Foreign Securities
System, (c) a fund's ability to recover in the event of a loss
by a Foreign Sub-Custodian or Foreign Securities System, and
(d) the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars;
8
<PAGE> 9
(ii) summary of information regarding Foreign Securities Systems;
and
(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership
limits, and (f) unique market arrangements.
4.5. REGISTRATION OF FOREIGN SECURITIES.
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign
Sub-Custodian or in the name of any nominee of the foregoing, and the Fund
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities, except to the extent that the Fund incurs
loss or damage due to failure of such nominee to meet its standard of care set
forth in the Contract. The Custodian or a Foreign Sub-Custodian shall not be
obligated to accept securities on behalf of a Fund under the terms of this
Contract unless the form of such securities and the manner in which they are
delivered are in accordance with reasonable market practice.
4.6. BANK ACCOUNTS.
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.
4.7. COLLECTION OF INCOME.
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
4.8. SHAREHOLDER RIGHTS.
With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use reasonable commercial efforts to facilitate the exercise of
voting and other shareholder rights, subject always to the laws, regulations and
practical constraints that may exist in the country where such securities are
issued. The Fund acknowledges that local conditions, including lack of
9
<PAGE> 10
regulation, onerous procedural obligations, lack of notice and other factors may
have the effect of severely limiting the ability of the Fund to exercise
shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.
4.11. TAX LAW.
Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section 4.11
or from the failure of any Foreign Sub-Custodian to perform in accordance with
the terms of the applicable subcustody agreement, the Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on a
Fund, a series thereof or the Custodian as custodian of the Fund by the tax law
of the United States or of any state or political subdivision thereof. It shall
be the responsibility of each Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of the Fund by the tax law of
countries other than those mentioned in the above sentence, including
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to
10
<PAGE> 11
such tax law shall be to use reasonable efforts to assist the Fund with respect
to any claim for exemption or refund under the tax law of countries for which
the Fund has provided such information.
4.12. LIABILITY OF CUSTODIAN.
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in
the event of any conflict between the provisions of Articles 3 and 4
hereof, the provisions of Article 3 shall prevail.
11
<PAGE> 12
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
<TABLE>
<CAPTION>
WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY
<S> <C>
/s/ Marc L. Parsons By: /s/ Ronald E. Logue
- ------------------- --------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios Fund, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.
</TABLE>
<PAGE> 13
<TABLE>
<S> <C>
Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Prudential Tax-Free Money Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.
</TABLE>
WITNESSED BY:
By: /s/ S. Jane Rose By: /s/ Grace Torres
------------------------- -----------------------------
Grace Torres
Treasurer
First Financial Fund, Inc.
The High Yield Plus Fund, Inc.
WITNESSED BY:
By: /s/ Stephanie L. Bourque By: /s/ Arthur J. Brown
------------------------- -----------------------------
Arthur J. Brown
Secretary
<PAGE> 14
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Oesterreichischen --
Sparkassen AG
Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale de Banque --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano S.A. --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. Deposito Central de
Valores S.A.
People's Republic The Hongkong and Shanghai --
of China Banking Corporation Limited,
Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
</TABLE>
<PAGE> 15
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Costa Rica Banco BCT S.A. --
Croatia Privredna Banka Zagreb d.d --
Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. The Bank of Greece,
System for Monitoring
Transactions in Securities
in Book-Entry Form
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
Iceland Icebank Ltd.
</TABLE>
<PAGE> 16
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
India Deutsche Bank AG --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.
Japan The Daiwa Bank, Limited Japan Securities Depository
Center
The Fuji Bank, Limited
Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic of Korea The Hongkong and Shanghai Banking
Corporation Limited
Latvia JSC Hansabank-Latvija --
Lebanon British Bank of the Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
</TABLE>
<PAGE> 17
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa --
The Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
Portugal Banco Comercial Portugues --
</TABLE>
<PAGE> 18
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Romania ING Bank N.V. --
Russia Credit Suisse First Boston AO, Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)
Singapore The Development Bank --
of Singapore Limited
Slovak Republic Ceskoslovenska Obchodni Banka, A.S. --
Slovenia Bank Austria d.d. Ljubljana --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland UBS AG --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
Trinidad & Tobago Republic Bank Limited --
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
Ottoman Bank
</TABLE>
<PAGE> 19
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Ukraine ING Bank, Ukraine --
United Kingdom State Street Bank and Trust Company, --
London Branch
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
</TABLE>
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities)
* The global custody network approved by each fund is set forth below on
Schedules A-1 and A-2.
<PAGE> 20
SCHEDULE A-1
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
<TABLE>
<CAPTION>
COUNTRY FUNDS
- -------------------- ---------------------- --------------------------------------
<S> <C> <C>
Argentina Mexico Global Utility Fund, Inc.
Australia Morocco Prudential 20/20 Focus Fund
Austria Netherlands Prudential Balanced Fund
Bangladesh+ New Zealand Prudential Equity Fund, Inc.
Belgium Norway Prudential Equity Income Fund
Brazil Pakistan Prudential Developing Markets Fund
Canada Peru Prudential Diversified Bond Fund, Inc.
Chile Philippines Prudential Distressed Securities Fund, Inc.
China Poland Prudential Diversified Funds
Columbia Portugal Prudential Emerging Growth Fund, Inc.
Cyprus Russia Prudential Global Genesis Fund, Inc.
Czech Republic Singapore Prudential Global Limited Maturity Fund, Inc.
Denmark Slovak Republic Prudential Index Series Fund
Ecuador South Africa Prudential Intermediate Global Income Fund, Inc.
Egypt Spain Prudential International Bond Fund, Inc.,
Finland Sri Lanka Prudential Mid-Cap Value Fund
France Sweden Prudential Natural Resources Fund, Inc.
Germany Switzerland Prudential Pacific Growth Fund, Inc.
Ghana Taiwan Prudential Real Estate Securities Fund
Greece Thailand Prudential Small-Cap Quantum Fund, Inc.
Hong Kong Turkey Prudential Small Company Value Fund, Inc.
Hungary Transnational Prudential Tax-Managed Equity Fund
India United Kingdom Prudential Utility Fund, Inc.
Indonesia Uruguay Prudential World Fund, Inc.
Ireland Venezuela The Prudential Investment Portfolios Fund, Inc.
Israel The Target Portfolio Trust
Italy The Global Total Return Fund, Inc.
Ivory Coast
Japan
Jordan
Kenya
Korea
Lebanon
Malaysia
</TABLE>
- --------------------
+ Countries marked by a dagger have been approved only for The Target Portfolio
Trust.
<PAGE> 21
SCHEDULE A-2
PRUDENTIAL MUTUAL FUNDS
STATE STREET GLOBAL CUSTODY NETWORK
COUNTRY FUNDS
- ----------------- -------------------------------------------------
United Kingdom Cash Accumulation Trust
Command Government Fund
Command Money Fund
Prudential Government Income Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential High Yield Income Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
<PAGE> 22
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depot et de
Virement de Titres S.A.
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)
Bolsa de Valores de Rio de Janeiro
All SSB clients presently use CBLC
Central de Custodia e de Liquidacao
Financeira de Titulos
Canada The Canadian Depository
for Securities Limited
People's Republic Shanghai Securities Central Clearing
of China and Registration Corporation
Shenzhen Securities Central Clearing
Co., Ltd.
Croatia
Czech Republic Stredisko cennych papiru
Czech National Bank
Denmark Vaerdipapircentralen
(the Danish Securities Center)
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 23
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Egypt Misr Company for Clearing, Settlement,
and Central Depository
Finland The Finnish Central Securities
Depository
France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository
b (Apothetirion Titlon AE)
Hong Kong The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]
India The National Securities Depository Limited
Indonesia Bank Indonesia
Ireland Central Bank of Ireland
Securities Settlement Office
Israel The Tel Aviv Stock Exchange Clearing
House Ltd.
Bank of Israel
Italy Monte Titoli S.p.A.
Banca d'Italia
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 24
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Japan Bank of Japan Net System
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository Corporation
Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.
The Central Bank of Lebanon
Malaysia The Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and
Safekeeping System
Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores)
Morocco Maroclear
The Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand New Zealand Central Securities
Depository Limited
Norway Verdipapirsentralen (the Norwegian
Registry of Securities)
Pakistan Central Depository Company of Pakistan
Limited
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 25
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
Philippines The Philippines Central Depository, Inc.
The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury
Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych)
Central Treasury Bills Registrar
Portugal Central de Valores Mobiliarios (Central)
Romania National Securities Clearing, Settlement
and Depository Co.
Bucharest Stock Exchange Registry Division
Singapore The Central Depository (Pte)
Limited
Monetary Authority of Singapore
Slovak Republic Stredisko Cennych Papierov
National Bank of Slovakia
South Africa The Central Depository Limited
Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana,
Central de Anotaciones en Cuenta
Sri Lanka Central Depository System
(Pvt) Limited
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 26
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.
Thailand Thailand Securities Depository
Company Limited
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
Venezuela Central Bank of Venezuela
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 27
SCHEDULE C
MARKET INFORMATION
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
(FREQUENCY)
The Guide to Custody in World Markets An overview of safekeeping and
settlement practices and procedures
in each market in which State Street
(annually) Bank and Trust Company offers
custodial services.
Global Custody Network Review Information relating to the
operating history and structure
of depositories and subcustodians
(annually) located in the markets in which
State Street Bank and Trust Company
offers custodial services, including
transnational depositories.
Global Legal Survey
(annually) With respect to each market in which
State Street Bank and Trust Company
offers custodial services, opinions
relating to whether local law
restricts (i) access of a fund's
independent public accountants to
books and records of a Foreign
Sub-Custodian or Foreign Securities
System, (ii) the Fund's ability to
recover in the event of bankruptcy
or insolvency of a Foreign
Sub-Custodian or Foreign Securities
System, (iii) the Fund's ability to
recover in the event of a loss by a
Foreign Sub-Custodian or Foreign
Securities System, and (iv) the
ability of a foreign investor to
convert cash and cash equivalents to
U.S. dollars.
Subcustodian Agreements Copies of the subcustodian contracts
State Street Bank and Trust Company
(annually) has entered into with each
subcustodian in the markets in which
State Street Bank and Trust Company
offers subcustody services to its US
mutual fund clients.
Network Bulletins (weekly): Developments of interest to
investors in the markets in which
State Street Bank and Trust Company
offers custodial services.
Foreign Custody Advisories With respect to markets in which
State Street Bank and Trust Company
(as necessary): offers custodial services which
exhibit special custody risks,
developments which may impact State
Street's ability to deliver expected
levels of service.
<PAGE> 28
SCHEDULE D
LIST OF FUNDS,CONTRACTS AND AGREEMENTS
<TABLE>
<CAPTION>
FUND NAME EXECUTION DATE
- --------- --------------
<S> <C>
Cash Accumulation Trust December 12, 1997
Command Government Fund July 1, 1990
Command Money Fund July 1, 1990
Command Tax-Free Fund July 1, 1990
The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield Fund, Inc.)
Prudential 20/20 Focus Fund April 14, 1998
Prudential California Municipal Fund August 1, 1990
Prudential Developing Markets Fund June 1, 1998
Prudential Distressed Securities Fund, Inc. February 8, 1996
Prudential Diversified Bond Fund, Inc. January 3, 1995
Prudential Diversified Funds September 2, 1998
Prudential Emerging Growth Fund, Inc. October 21, 1996
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Limited Maturity Fund, Inc. October 25, 1990
(formerly Prudential Short-Term Global
Income Fund, Inc.)
Prudential Government Income Fund, Inc. July 31, 1990
(formerly Prudential Government Plus Fund)
Prudential Government Securities Trust July 26, 1990
Prudential High Yield Fund, Inc. July 26, 1990
Prudential High Yield Total Return Fund, Inc. May 30, 1997
Prudential International Bond Fund, Inc. January 16, 1996
(formerly The Global Government Plus Fund, Inc.)
The Prudential Investment Portfolios Fund, Inc. October 27, 1995
(formerly Prudential Jennison Series Fund, Inc.)
Prudential Mid-Cap Value Fund April 14, 1998
Prudential MoneyMart Assets, Inc. July 25, 1990
</TABLE>
<PAGE> 29
<TABLE>
<S> <C>
Prudential Mortgage Income Fund, Inc. August 1, 1990
(formerly Prudential GNMA Fund, Inc.)
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990
Prudential National Municipals Fund, Inc. July 26, 1990
Prudential Pacific Growth Fund, Inc. July 16, 1992
Prudential Real Estate Securities Fund February 18, 1998
Prudential Small Cap Quantum Fund, Inc. August 1, 1997
Prudential Small Company Value Fund, Inc. July 26, 1990
(formerly Prudential Growth Opportunity Fund, Inc.)
Prudential Special Money Market Fund, Inc. January 12, 1990
Prudential Structured Maturity Fund, Inc. July 25, 1989
Prudential Tax-Free Money Fund, Inc. July 26, 1990
Prudential Utility Fund, Inc. June 6, 1990
Prudential World Fund, Inc. June 7, 1990
(formerly Prudential Global Fund, Inc.)
The Target Portfolio Trust November 9, 1992
Global Utility Fund, Inc. December 21, 1989
Nicholas-Applegate Fund, Inc. April 10, 1987
Prudential Balanced Fund September 4, 1987
Prudential Equity Income Fund January 6, 1987
Prudential Global Genesis Fund, Inc. October 21, 1987
Prudential Institutional Liquidity Portfolio, Inc. November 20,. 1987
Prudential Intermediate Global Income Fund, Inc. May 19, 1988
Prudential Municipal Bond Fund August 25, 1987
Prudential Natural Resources Fund, Inc. September 18, 1987
Prudential Tax-Managed Equity Fund December 8, 1998
The Asia Pacific Fund April 24, 1987
Duff & Phelps Utilities Tax-Free Income Fund, Inc. November 21, 1991
</TABLE>
<PAGE> 30
<TABLE>
<S> <C>
First Financial Fund, Inc. May 1, 1986
The High Yield Income Fund, Inc. November 6, 1987
The High Yield Plus Fund, Inc. March 15, 1988
</TABLE>
<PAGE> 1
Exhibit (h)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
TARGET FUNDS
and
PRUDENTIAL MUTUAL FUND SERVICES LLC
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Article 1 Terms of Appointment; Duties of the Agent .......... 1
Article 2 Fees and Expenses................................... 5
Article 3 Representations and Warranties of PMFS.............. 5
Article 4 Representations of Warranties of the Fund........... 7
Article 5 Duty of Care and Indemnification.................... 7
Article 6 Documents and Covenants of the Fund and PMFS........ 10
Article 7 Termination of Agreement............................ 11
Article 8 Assignment.......................................... 12
Article 9 Affiliations........................................ 12
Article 10 Amendment........................................... 13
Article 11 Applicable Law...................................... 13
Article 12 Miscellaneous....................................... 13
Article 13 Merger of Agreement................................. 15
</TABLE>
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the ____ day of August, 1999 by and between TARGET
FUNDS (the Trust), a Delaware business trust having its principal office and
place of business at Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102, and PRUDENTIAL MUTUAL FUND SERVICES LLC (the Agent or PMFS), a New
Jersey limited liability corporation, having its principal office and place of
business at Raritan Plaza One, Edison, New Jersey 08837.
WHEREAS, the Trust desires to appoint PMFS as its transfer agent,
dividend disbursing agent and shareholder servicing agent in connection with
certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in this
Agreement, the Trust hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of beneficial
interest of each series or Fund of the Trust, $.01 par value (Shares), dividend
disbursing agent and shareholder servicing agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Trust or any series or Fund thereof (Shareholders) and set out in the currently
effective prospectuses and statement of additional information (prospectus) of
the Trust, including without limitation any periodic investment plan or periodic
withdrawal program.
1.02 PMFS agrees that it will perform the following services:
3
<PAGE> 4
(a) In accordance with procedures established from time to time by
agreement between the Trust and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the custodian
(the Custodian) of the Trust authorized pursuant to the Agreement and
Declaration of Trust (Declaration of Trust) of the Trust;
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Trust;
(vii) Calculate any sales charges payable by a Shareholder on
purchases and/or redemptions of Shares of the Trust as such charges may be
reflected in the prospectus;
(viii) Maintain records of account for and advise the Trust and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Trust and maintain
pursuant to
4
<PAGE> 5
Rule 17Ad-10(e) under the Securities Exchange Act of 1934 (1934 Act) a record of
the total number of Shares of the Trust which are authorized, based upon data
provided to it by the Trust, and issued and outstanding. PMFS shall also provide
to the Trust on a regular basis the total number of Shares which are authorized,
issued and outstanding. When recording the issuance of Shares, PMFS shall have
no obligation to take cognizance of any Blue Sky laws relating to the issue or
sale of such Shares, which functions shall be the sole responsibility of the
Trust.
(b) In addition to and not in lieu of the services set forth in the
above paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders and
providing Shareholder account information and (ii) provide a system which will
enable the Trust to monitor the total number of Shares sold in each State or
other jurisdiction.
(c) In addition, the Trust shall (i) identify to PMFS in writing
those
5
<PAGE> 6
transactions and assets to be treated as exempt from Blue Sky notice for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of PMFS for the Trust's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is solely limited
to the initial establishment of transactions subject to Blue Sky compliance by
the Trust and the reporting of such transactions to the Trust as provided above
and as agreed from time to time by the Trust and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Trust and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be
established from time to time by agreement between the Trust and PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement, the
Trust agrees to pay PMFS an annual maintenance fee for each Shareholder account
and certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Trust and PMFS.
2.02 In addition to the fees paid under Section 2.01 above,
the Trust agrees to reimburse PMFS for out-of-pocket expenses or advances
incurred by PMFS for the items set out in Schedule A attached hereto. In
addition, any other expenses incurred by PMFS at the request or with the consent
of the Trust will be reimbursed by
6
<PAGE> 7
the Trust.
2.03 The Trust agrees to pay all fees and reimbursable
expenses within a reasonable period of time following the mailing of the
respective billing notice. Postage for mailing of dividends, proxies, Trust
reports and other mailings to all Shareholder accounts shall be advanced to PMFS
by the Trust upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Trust that:
3.01 It is a corporation duly organized and existing and in
good standing under the laws of the State of New Jersey and it is duly qualified
to carry on its business in New Jersey.
3.02 It is and will remain registered with the U.S.
Securities and Exchange Commission (SEC) as a Transfer Agent pursuant to the
requirements of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its
charter and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the
necessary facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
Article 4 Representations and Warranties of the Trust
The Trust represents and warrants to PMFS that:
4.01 It is a business trust duly organized and existing and
in good
7
<PAGE> 8
standing under the laws of Delaware.
4.02 It is empowered under applicable laws and by its
Declaration of Trust and By-Laws to enter into and perform this Agreement.
4.03 All proceedings required by said Declaration of Trust
and By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is an investment company registered or to be
registered with the SEC under the Investment Company Act of 1940, as amended
(the 1940 Act).
4.05 A registration statement under the Securities Act of
1933 (the 1933 Act) is currently effective or is anticipated to become
effective, and will remain effective, and appropriate state securities law
notice filings have been made and will continue to be made, with respect to all
Shares of the Trust being offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Trust shall
indemnify and hold PMFS harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Trust's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Trust's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Trust hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors
of information, records and documents which (i) are received by PMFS or its
agents or
8
<PAGE> 9
subcontractors and furnished to it by or on behalf of the Trust, and (ii) have
been prepared and/or maintained by the Trust or any other person or firm on
behalf of the Trust.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Trust.
(e) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations or the securities or Blue Sky
laws of any State or other jurisdiction that notice of such Shares be filed in
such State or other jurisdiction or in violation of any stop order or other
determination or ruling by any federal agency or any State or other jurisdiction
with respect to the offer or sale of such Shares in such State or other
jurisdiction.
5.02 PMFS shall indemnify and hold the Trust harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by PMFS as a result of PMFS' lack of good faith, negligence
or willful misconduct.
5.03 At any time PMFS may apply to any officer of the Trust for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Trust for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Trust, reasonably believed to
be genuine and to have been signed by the proper
9
<PAGE> 10
person or persons, or upon any instruction, information, data, records or
documents provided to PMFS or its agents or subcontractors by machine readable
input, telex, CRT data entry or other similar means authorized by the Trust, and
shall not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Trust. PMFS, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signature of the officers of the Trust, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the
10
<PAGE> 11
defense of such claim. The party seeking indemnification shall in no case
confess any claim or make any compromise in any case in which the other party
may be required to indemnify it except with the other party's prior written
consent.
Article 6 Documents and Covenants of the Trust and PMFS
6.01 The Trust shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Trustees of
the Trust authorizing the appointment of PMFS and the execution and delivery of
this Agreement;
(b) A certified copy of the Declaration of Trust and By-Laws of the
Trust and all amendments thereto;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act and the 1940 Act;
(d) A specimen of the certificates for Shares of the Trust in the
forms approved by the Board of Trustees, with a certificate of the Secretary of
the Trust as to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Trust; and
(f) Such other certificates, documents or opinions as the Agent
deems to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Trust for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and
11
<PAGE> 12
for keeping account of, such certificates, forms and devices.
6.03 PMFS shall prepare and keep records relating to the services
to be performed hereunder, in the form and manner as it may deem advisable. To
the extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Trust and will be preserved, maintained and made available in accordance
with such Section 31 of the 1940 Act, and the Rules and Regulations thereunder,
and will be surrendered promptly to the Trust on and in accordance with its
request.
6.04 PMFS and the Trust agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the
Trust.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Trust, PMFS will endeavor to notify the Trust and to
secure instructions from an authorized officer of the Trust as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
12
<PAGE> 13
7.02 Should the Trust exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Trust. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further
consent by the Trust, subcontract, in whole or in part, for the performance of
its obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential Securities Incorporated (Prudential Securities), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
(Prudential), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential Securities or Prudential subsidiary or affiliate duly
registered as a broker-dealer and/or a transfer agent pursuant to the 1934 Act
or (v) any other Prudential Securities or Prudential affiliate or subsidiary;
provided, however, that PMFS shall be as fully responsible to the Trust for the
acts and omissions of any agent or subcontractor as it is for its own acts and
omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of or
notice to
13
<PAGE> 14
the Trust, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company registered with the SEC under the 1940 Act, including
without limitation any investment company whose adviser, administrator, sponsor
or principal underwriter is or may become affiliated with Prudential Securities
and/or Prudential or any of its or their direct or indirect subsidiaries or
affiliates.
9.02 It is understood and agreed that the trustees,
officers, employees, agents and Shareholders of the Trust, and the trustees,
officers, employees, agents and shareholders of the Trust's investment adviser
and/or distributor, are or may be interested in the Agent as trustees, officers,
employees, agents, shareholders or otherwise, and that the trustees, officers,
employees, agents or shareholders of the Agent may be interested in the Trust as
trustees, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, trustees, employees, agents,
shareholders or otherwise.
Article 10 Amendment
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Trustees of the Trust.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the State of New
Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction of any
Share
14
<PAGE> 15
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Trust issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Trust for the issuance of a replacement certificate,
in cases where the alleged loss is in the amount of $1,000 or less.
12.02 In the event that any check or other order for payment
of money on the account of any Shareholder or new investor is returned unpaid
for any reason, PMFS will (a) give prompt notification to the Trust's
distributor (Distributor) of such non-payment; and (b) take such other action,
including imposition of a reasonable processing or handling fee, as PMFS may, in
its sole discretion, deem appropriate or as the Trust and the Distributor may
instruct PMFS.
12.03 Any notice or other instrument authorized or required
by this Agreement to be given in writing to the Trust or to PMFS shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Trust:
Target Funds
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
Attention: President
15
<PAGE> 16
To PMFS:
Prudential Mutual Fund Services LLC
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with respect to
the subject matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf under their seals by
and through their duly authorized officers, as of the day and year first above
written.
TARGET FUNDS
By: __________________
John R. Strangfeld
President
PRUDENTIAL MUTUAL FUND SERVICES LLC
By: __________________
16
<PAGE> 17
Schedule A
Prudential Mutual Fund Services LLC
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. In addition, there is a one time set-up
charge per account for manually established accounts and a monthly charge for
inactive zero balance accounts. The effective period of this fee schedule is
September 22, 1999 through September 21, 2000 and shall continue thereafter from
year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Annual Maintenance Per Account Fee $9.00 (annual dividend portfolios)
$9.50 (semi-annual dividend portfolios)
$10.00 (quarterly dividend portfolios)
Other Charges
New Account Set-up Fee for Manually $2.00
Established Accounts
Monthly Inactive Zero Balance Account Fee $ .20
Out-of-Pocket Expenses - out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Trust.
Payment - An invoice will be presented to the Trust on a monthly basis assessing
the Trust the appropriate fee and out-of-pocket expenses.
TARGET FUNDS PRUDENTIAL MUTUAL FUND
SERVICES LLC
BY:____________________________ BY:____________________________
TITLE:_________________________ TITLE:_________________________
17
<PAGE> 18
DATE: August , 1998 DATE: August , 1998
18
<PAGE> 1
EXHIBIT (i)
July 9, 1999
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, Delaware 19899-1347
Target Funds
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
Re: Target Funds
Ladies and Gentlemen:
We have acted as special Delaware counsel to Target Funds, a Delaware business
trust (the "Trust"), in connection with the creation of the Trust and certain
matters relating to the proposed issuance of Shares of the Trust. Capitalized
terms used herein and not otherwise herein defined are used as defined in the
Agreement and Declaration of Trust of the Trust dated July 8, 1999 (the
"Governing Instrument").
In rendering this opinion, we have examined copies of the following documents,
each in the form provided to us: the Certificate of Trust of the Trust as filed
in the Office of the Secretary of State of the State of Delaware (the "State
Office") on July 8, 1999 (the "Certificate"); the Governing Instrument; the
By-laws of the Trust (the "By-laws"); a Unanimous Written Consent of the Board
of Trustees of the Trust dated July 8, 1999 (the "Consent" and, together with
the Governing Instrument and the By-laws, the "Governing Documents"); the
Notification of Registration Filed Pursuant to Section 8(a) of the Investment
Company Act of 1940 on Form N-8A of the Trust to be filed with the Securities
and Exchange Commission on or about the date hereof; the Registration Statement
on Form N-1A of the Trust to be filed with the Securities and Exchange
Commission on or about the date hereof (the "Registration Statement"); and a
certification of good standing of the Trust obtained as of a recent date from
the State Office. In such examinations, we have assumed the genuineness of all
signatures, the conformity to original documents of all documents submitted to
us as copies or drafts of documents to be executed, and the legal capacity of
natural persons to complete the execution of documents. We have further assumed
for the purpose of this opinion: (i) the due adoption, authorization, execution
and delivery by, or on behalf of, each of the parties thereto of the
above-referenced resolutions, instruments, certificates and other documents, and
of all documents contemplated by the Governing Instrument, the By-laws and
applicable resolutions of the Trustees of the Trust to be executed by investors
acquiring Shares; (ii) the payment of consideration for Shares, and the
application of such consideration, as provided in the Governing Instrument and
all applicable resolutions of the Trustees of the Trust, and compliance with the
other terms, conditions and restrictions set forth in the Governing Documents in
connection with the issuance of Shares (including, without limitation, the
taking of all appropriate action by the Trustees to designate Series of Shares
and the rights and preferences attributable thereto as contemplated by the
Governing Instrument); (iii) that appropriate notation of the names and
addresses of, the number of Shares held by, and the consideration paid by,
Shareholders will be maintained in the appropriate registers and other books and
records of the Trust in connection with the issuance, redemption or transfer of
Shares; (iv) that no event has occurred subsequent to the filing of the
Certificate that would cause a termination or reorganization of the Trust under
Section 2 or Section 3 of Article VIII of the Governing Instrument; (v) that the
activities of the Trust have been and will be conducted in accordance with the
terms of the Governing Instrument and the Delaware Business Trust Act, 12 Del.
C. Sections 3801 et seq. (the "Delaware Act"); and (vi) that each of the
documents examined by us is in full force and effect and has not been amended,
supplemented or otherwise modified. No opinion is expressed herein with respect
to the requirements of, or compliance with, federal or state securities or blue
sky laws. Further, we
<PAGE> 2
have not participated in the preparation of the Registration Statement or any
other offering documentation relating to the Trust or the Shares and we assume
no responsibility for their contents. As to any facts material to our opinion,
other than those assumed, we have relied without independent investigation on
the above-referenced documents and on the accuracy, as of the date hereof, of
the matters therein contained.
Based on and subject to the foregoing, and limited in all respects to matters of
Delaware law, it is our opinion that:
The Trust is a duly created and validly existing business trust in good standing
under the laws of the State of Delaware.
The issuance of the Shares has been duly authorized on behalf of the Trust and,
when issued to Shareholders in accordance with the terms, conditions,
requirements and procedures and for the consideration set forth in the Governing
Documents, will constitute legally issued, fully paid and non-assessable Shares
of beneficial interest in the Trust
Under the Delaware Act and the terms of the Governing Instrument, each
Shareholder of the Trust, in such capacity, will be entitled to the same
limitation of personal liability as that extended to stockholders of private
corporations for profit organized under the general corporation law of the State
of Delaware; provided, however, that we express no opinion with respect to the
liability of any Shareholder who is, was or may become a named Trustee of the
Trust. Neither the existence nor exercise of the voting rights granted to
Shareholders under the Governing Instrument will, of itself, cause a Shareholder
to be deemed a trustee of the Trust under the Delaware Act. Notwithstanding the
foregoing or the opinion expressed in paragraph 2 above, we note that, pursuant
to Section 5 of Article IV of the Governing Instrument, the Trustees have the
power to cause Shareholders, or Shareholders of a particular Series, to pay
certain custodian, transfer, servicing or similar agent charges by setting off
the same against declared but unpaid dividends or by reducing Share ownership
(or by both means).
We hereby consent to the filing of a copy of this opinion with the Securities
and Exchange Commission with the Registration Statement. In giving this consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder. Except as provided in this paragraph, the opinion set forth above is
expressed solely for the benefit of the addressee hereof in connection with the
matters contemplated hereby and may not be relied upon for any other purpose or
by any other person or entity without our prior written consent.
Sincerely,
MORRIS, NICHOLS, ARSHT & TUNNELL
/s/ Morris, Nichols, Arsht & Tunnell
<PAGE> 1
Exhibit (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
September 7, 1999, relating to the statements of assets and liabilities of
Target Funds (consisting 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), which appear in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which constitutes
part of this Registration Statement. We also consent to the reference to us
under the heading "Investment Advisory and Other Services" in such Statement of
Additional Information.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 7, 1999
<PAGE> 1
EXHIBIT (l)
PURCHASE AGREEMENT
Target Funds (the Trust), a Delaware business trust registered as an
open-end, diversified management investment company, and Prudential Investments
Fund Management LLC, a New York limited liability company (PIFM), intending to
be legally bound, hereby agree as follows:
1. In order to provide the Trust with its initial capital, the Trust
hereby sells to PIFM, and PIFM hereby purchases: (i) 600 shares of beneficial
interest of each of Class A, Class B and Class C of the Large Capitalization
Growth Fund; (ii) 600 shares of beneficial interest of each of Class A, Class B
and Class C of the Large Capitalization Value Fund; (iii) 600 shares of
beneficial interest of each of Class A, Class B and Class C of the Small
Capitalization Growth Fund; (iv) 600 shares of beneficial interest of each of
Class A, Class B and Class C of the Small Capitalization Value Fund; (v) 600
shares of beneficial interest of each of Class A, Class B and Class C of the
International Equity Fund; and (vi) 334 shares of beneficial interest of Class A
and 333 shares of beneficial interest of each of Class B and Class C of the
Total Return Bond Fund (collectively with the shares referenced in (i) through
(v) above, the "Shares"), in each case at the net asset value per share of
$10.00. The Trust hereby acknowledges receipt from PIFM of funds in the amount
of $100,000 in full payment for the Shares.
2. PIFM represents and warrants to the Trust that the Shares are being
acquired for investment purposes and not with a view to distribution thereof and
that PIFM has no present intention to redeem and dispose of any of the Shares.
3. PIFM hereby agrees that it will not redeem any of the Shares except
in direct proportion to the amortization of organizational expenses by the
Trust. In the event that the Trust liquidates before deferred organizational
expenses are fully amortized, then the Shares shall bear their proportionate
share of such unamortized organizational expenses.
IN WITNESS THEREOF, the parties have executed this agreement as of the
2nd day of September, 1999.
<PAGE> 2
TARGET FUNDS
By: /s/ John R. Strangfeld
___________________________
John R. Strangfeld
President
PRUDENTIAL INVESTMENTS FUND
MANAGEMENT LLC
By: /s/ Robert F. Gunia
___________________________
Robert F. Gunia
Executive Vice President
<PAGE> 1
EXHIBIT (m)(1)
TARGET FUNDS
Distribution and Service Plan
(Class A Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Target Funds (the Trust) and by Prudential Investment Management
Services LLC, the Trust's distributor (the Distributor).
The Trust has entered into a distribution agreement pursuant to which
the Trust will employ the Distributor to distribute Class A shares issued by the
Trust (Class A shares). Under the Plan, the Trust intends to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class A shares.
A majority of the Board of Trustees of the Trust, including a majority
of those Trustees who are not "interested persons" of the Trust (as defined in
the Investment Company Act) and who have no direct or indirect financial
interest in the operation of this Plan or any agreements related to it (the Rule
12b-1 Trustees), have determined by votes cast in person at a meeting called for
the purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Trust and its
shareholders. Expenditures under this Plan by the Trust for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
A shares
1
<PAGE> 2
of the Trust within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Trust, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Trust shall engage the Distributor to distribute Class A shares of
the Trust and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Trust are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Trust shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Trust shall
2
<PAGE> 3
calculate and accrue daily amounts payable by the Class A shares of the Trust
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Trustees may determine.
3. Payment for Distribution Activities
The Trust shall pay to the Distributor as compensation for its services
a distribution fee, together with the service fee (described in Section 2
hereof), of .30 of 1% per annum of the average daily net assets of the Class A
shares of the Trust for the performance of Distribution Activities. The Trust
shall calculate and accrue daily amounts payable by the Class A shares of the
Trust hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Trustees may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Trust will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Trust except that distribution expenses attributable to
the Trust as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of Trust's shares over
the Trust's fiscal year or such other allocation method approved by the Board of
Trustees. The allocation of distribution expenses among classes will be subject
to the review of the Board of Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions and trailer commissions paid to, or on
account of, account executives of the Distributor;
3
<PAGE> 4
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A
shares of the Trust, including sales commissions, trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Trust in various forms through any
available medium, including the cost of printing and mailing
Trust prospectuses, statements of additional information and
periodic financial reports and sales literature to persons
other than current shareholders of the Trust; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions
(other than Prudential Securities or Prusec) which have
entered into selected dealer agreements with the Distributor
with respect to Class A shares of the Trust.
4. Quarterly Reports; Additional Information
An appropriate officer of the Trust will provide to the Board of
Trustees of the Trust for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Trustees of the Trust such additional
information as the Board shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be undertaken by the
Distributor.
The Distributor will inform the Board of Trustees of the Trust of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the
4
<PAGE> 5
Distributor and to broker-dealers and financial institutions which have selected
dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Trust.
If approved by a vote of a majority of the outstanding voting
securities of the Class A shares of the Trust, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Trustees of the Trust and a majority of
the Rule 12b-1 Trustees by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares of
the Trust.
7. Amendments
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class A shares of the Trust.
All material amendments of the Plan shall be approved by a majority of the Board
of Trustees of the Trust and a majority of
5
<PAGE> 6
the Rule 12b-1 Trustees by votes cast in person at a meeting called for the
purpose of voting on the Plan.
8. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the
Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Trust shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: August 25, 1999
6
<PAGE> 1
EXHIBIT (m)(2)
TARGET FUNDS
Distribution and Service Plan
(Class B Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Target Funds (the Trust) and by Prudential Investment Management
Services LLC, the Trust's distributor (the Distributor).
The Trust has entered into a distribution agreement pursuant to which
the Trust will employ the Distributor to distribute Class B shares issued by the
Trust (Class B shares). Under the Plan, the Trust wishes to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class B shares.
A majority of the Board of Trustees of the Trust, including a majority
who are not "interested persons" of the Trust (as defined in the Investment
Company Act) and who have no direct or indirect financial interest in the
operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Trust and its
shareholders. Expenditures under this Plan by the Trust for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
B shares
1
<PAGE> 2
of the Trust within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Trust, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Trust shall engage the Distributor to distribute Class B shares of
the Trust and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Trust are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Trust shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Trust shall
2
<PAGE> 3
calculate and accrue daily amounts payable by the Class B shares of the Trust
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Trustees may determine.
3. Payment for Distribution Activities
The Trust shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Trust for the performance of Distribution Activities. The
Trust shall calculate and accrue daily amounts payable by the Class B shares of
the Trust hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Trust will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Trust except that distribution expenses attributable to
the Trust as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Trust's shares
over the Trust's fiscal year or such other allocation method approved by the
Board of Trustees. The allocation of distribution expenses among classes will be
subject to the review of the Board of Trustees. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred, unless
otherwise determined by the Board of Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on
3
<PAGE> 4
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of Distribution Activities including central
office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for
performing services under a selected dealer agreement between
Prudential Securities or Prusec and the Distributor for sale
of Class B shares of the Trust, including sales commissions
and trailer commissions paid to, or on account of, agents and
indirect and overhead costs associated with Distribution
Activities;
(d) advertising for the Trust in various forms through any
available medium, including the cost of printing and mailing
Trust prospectuses, statements of additional information and
periodic financial reports and sales literature to persons
other than current shareholders of the Trust; and
(e) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and other financial
institutions (other than Prudential Securities or Prusec)
which have entered into selected dealer agreements with the
Distributor with respect to Class B shares of the Trust.
4. Quarterly Reports; Additional Information
An appropriate officer of the Trust will provide to the Board of
Trustees of the Trust for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Trustees of the Trust such additional
information as they shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be undertaken by the
Distributor.
The Distributor will inform the Board of Trustees of the Trust of the
commissions
4
<PAGE> 5
and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Trust.
If approved by a vote of a majority of the outstanding voting
securities of the Class B shares of the Trust, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Trustees of the Trust and a majority of
the Rule 12b-1 Trustees by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Trust.
7. Amendments
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Trust. All material amendments
5
<PAGE> 6
of the Plan shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Rule 12b-1 Trustees by votes cast in person at a
meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Trust shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: August 25, 1999
6
<PAGE> 1
EXHIBIT (m)(3)
TARGET FUNDS
Distribution and Service Plan
(Class C Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Target Funds (the Trust) and by Prudential Investment Management
Services LLC, the Trust's distributor (the Distributor).
The Trust has entered into a distribution agreement pursuant to which
the Trust will employ the Distributor to distribute Class C shares issued by the
Trust (Class C shares). Under the Plan, the Trust wishes to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class C shares.
A majority of the Board of Trustees of the Trust, including a majority
who are not "interested persons" of the Trust (as defined in the Investment
Company Act) and who have no direct or indirect financial interest in the
operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Trust and its
shareholders. Expenditures under this Plan by the Trust for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
C shares of the Trust within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under
1
<PAGE> 2
the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Trust, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Trust shall engage the Distributor to distribute Class C shares of
the Trust and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Trust are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Trust shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Trust shall calculate and accrue daily amounts payable by the Class C
shares of the Trust
2
<PAGE> 3
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Trustees may determine.
3. Payment for Distribution Activities
The Trust shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Trust for the performance of Distribution Activities. The
Trust shall calculate and accrue daily amounts payable by the Class C shares of
the Trust hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Trust will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Trust except that distribution expenses attributable to
the Trust as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Trust's shares
over the Trust's fiscal year or such other allocation method approved by the
Board of Trustees. The allocation of distribution expenses among classes will be
subject to the review of the Board of Trustees. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred, unless
otherwise determined by the Board of Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
3
<PAGE> 4
(b) indirect and overhead costs of the Distributor associated
with performance of Distribution Activities including central
office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for
performing services under a selected dealer agreement between
Prudential Securities or Prusec and the Distributor for sale
of Class C shares of the Trust, including sales commissions
and trailer commissions paid to, or on account of, agents and
indirect and overhead costs associated with Distribution
Activities;
(d) advertising for the Trust in various forms through any
available medium, including the cost of printing and mailing
Trust prospectuses, statements of additional information and
periodic financial reports and sales literature to persons
other than current shareholders of the Trust; and
(e) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and other financial
institutions (other than Prudential Securities or Prusec)
which have entered into selected dealer agreements with the
Distributor with respect to Class C shares of the Trust.
4. Quarterly Reports; Additional Information
An appropriate officer of the Trust will provide to the Board of
Trustees of the Trust for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Trustees of the Trust such additional
information as they shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be undertaken by the
Distributor.
The Distributor will inform the Board of Trustees of the Trust of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the
4
<PAGE> 5
Distributor and to broker-dealers and other financial institutions which have
selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Trust.
If approved by a vote of a majority of the outstanding voting
securities of the Class C shares of the Trust, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Trustees of the Trust and a majority of
the Rule 12b-1 Trustees by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Trust.
7. Amendments
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Trust. All material amendments of the Plan shall be approved by a majority
of the Board of Trustees of the Trust and a
5
<PAGE> 6
majority of the Rule 12b-1 Trustees by votes cast in person at a meeting called
for the purpose of voting on the Plan.
8. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Trust shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: August 25, 1999
6
<PAGE> 1
EXHIBIT (o)
TARGET FUNDS
(the Trust)
PLAN PURSUANT TO RULE 18F-3
The Trust hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in each investment
portfolio (each a Fund). Any material amendment to this plan is subject to prior
approval of the Board of Trustees, including a majority of the independent
Trustees.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge and a
distribution and/or service fee pursuant to Rule
12b-1 under the 1940 Act (Rule 12b-1 fee) not to
exceed .30 of 1% per annum of the average daily net
assets of the class. The initial sales charge is
waived or reduced for certain eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge but
are subject to a high contingent deferred sales
charge (declining from 5% to zero over a six-year
period) which will be imposed on certain redemptions
and a Rule 12b-1 fee not to exceed 1% per annum of
the average daily net assets of the class. The
contingent deferred sales charge is waived for
certain eligible investors. Class B shares
automatically convert to Class A shares approximately
seven years after purchase.
CLASS C SHARES: Class C shares are subject to a low initial sales charge and a
1% contingent deferred sales charge which will be
imposed on certain redemptions within the first 18
months after purchase and a Rule 12b-1 fee not to
exceed 1% per annum of the average daily net assets
of the class.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and
expenses not allocated to a particular class of a Fund will be
allocated to each class of such Fund on the basis of the net asset
value of that class in relation to the net asset value of the Fund.
<PAGE> 2
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by each Fund to each class of
shares, to the extent paid, will be paid on the same day and at the
same time, and will be determined in the same manner and will be in the
same amount, except that the amount of the dividends and other
distributions declared and paid by a particular class of the Fund may
be different from that paid by another class of the Fund because of
Rule 12b-1 fees and other expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares and Class C Shares shall have
such exchange privileges as set forth in the Trust's current
prospectus. Exchange privileges may vary among classes and among
holders of a Class.
CONVERSION FEATURES
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.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and
shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the
interests of any other class.
B. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the
Trust for the existence of any material conflicts among the interests
of its several classes. The Trustees, including a majority of the
independent Trustees, shall take such action as is reasonably necessary
to eliminate any such conflicts that may develop. Prudential
Investments Fund Management LLC, the Trust's Manager, will be
responsible for reporting any potential or existing conflicts to the
Trustees.
Dated: August 25, 1999
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