<PAGE> 1
PROSPECTUS NOVEMBER 3, 2000
TARGET FUNDS
[BUILD ON THE ROCK GRAPHIC]
As with all mutual funds, the Securities and
Exchange Commission has not approved or
disapproved the Funds' shares nor has the [PRUDENTIAL LOGO]
SEC determined that this prospectus is
complete or accurate. It is a criminal
offense to state otherwise.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
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
22 Investment Risks
28 HOW THE TRUST IS MANAGED
28 Board of Trustees
28 Manager
29 Advisers and Portfolio Managers
34 Distributor
35 FUND DISTRIBUTIONS AND TAX ISSUES
35 Distributions
36 Tax Issues
37 If You Sell or Exchange Your Shares
39 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
39 How to Buy Shares
46 How to Sell Your Shares
50 How to Exchange Your Shares
51 Telephone Redemptions or Exchanges
52 FINANCIAL HIGHLIGHTS
52 Large Capitalization Growth Fund
53 Large Capitalization Value Fund
54 Small Capitalization Growth Fund
55 Small Capitalization Value Fund
56 International Equity Fund
57 Total Return Bond Fund
58 APPENDIX I - DESCRIPTION OF SECURITY RATINGS
61 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
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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.
EQUITY PORTFOLIOS
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)
Composite Stock Price Index (S&P 500).
PRINCIPAL 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.
PRINCIPAL 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
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RISK/RETURN SUMMARY
PRINCIPAL 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.
PRINCIPAL 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.
PRINCIPAL RISKS:
- market risk
- style risk
- small company risk
- foreign market risk
- currency risk
- political developments
INCOME PORTFOLIOS
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
2 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
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RISK/RETURN SUMMARY
its agencies, as well as debt obligations issued by U.S. COMPANIES, FOREIGN
COMPANIES AND FOREIGN GOVERNMENTS and their agencies. The Fund 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.
PRINCIPAL 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
3
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RISK/RETURN SUMMARY
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
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 follow either a growth or value
investment 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. The INTERNATIONAL EQUITY FUND may
also invest in small companies. 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 than interest rates.
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
4 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
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RISK/RETURN SUMMARY
securities are prepaid, the Fund may have to replace them with lower-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 and 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.
POLITICAL DEVELOPMENTS. Political developments may adversely affect the
value of a Fund's foreign securities.
* * *
5
<PAGE> 8
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 have not been in operation for a full calendar year, no
performance history is presented.
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 [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 9
RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
----------------------------------------------------------------------------------
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 .22% .22% .22%
= Total annual Fund operating expenses 1.22% 1.92% 1.92%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.17% 1.92% 1.92%
LARGE CAPITALIZATION VALUE FUND
Management fees .70% .70% .70%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses 1.41% 1.41% 1.41%
= Total annual Fund operating expenses 2.41% 3.11% 3.11%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 2.36% 3.11% 3.11%
SMALL CAPITALIZATION GROWTH FUND
Management fees .70% .70% .70%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses 1.74% 1.74% 1.74%
= Total annual Fund operating expenses 2.74% 3.44% 3.44%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 2.69% 3.44% 3.44%
--------------------------------------------------------------------------------
</TABLE>
(1) For the fiscal year ending July 31, 2001, the Distributor of the Funds has
contractually agreed: (1) to reduce its distribution and service (12b-1)
fees for Class A shares to .25 of 1% of the average daily net assets of
Class A shares, and to reduce its distribution and service (12b-1) 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, and (2) to limit the Funds' operating expenses, exclusive of
12b-1 fees, so as to not exceed (i) 1.40% of the average daily net assets
of each class of shares of the Target Large Cap Value Fund, (ii) 1.55% of
the average daily net assets of each class of shares of the Target Small
Cap Value Fund, (iii) 1.90% of the average daily net assets of each class
of shares of the Target Small Cap Growth Fund, (iv) 1.75% of the average
daily net assets of each class of shares of the Target International Equity
Fund, and (v) .80% of the average daily net assets of each class of shares
of the Target Total Return Bond Fund.
7
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RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
--------------------------------------------------------------------------------
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 2.29% 2.29% 2.29%
= Total annual Fund operating expenses 3.29% 3.99% 3.99%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 3.24% 3.99% 3.99%
INTERNATIONAL EQUITY FUND
Management Fees .80% .80% .80%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses 1.84% 1.84% 1.84%
= Total annual Fund operating expenses 2.94% 3.64% 3.64%
- Fee waiver(1) .05% 0% 0%
= NET ANNUAL FUND OPERATING EXPENSES(1) 2.89% 3.64% 3.64%
TOTAL RETURN BOND FUND
Management Fees .50% .50% .50%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses 1.21% 1.21% 1.21%
= Total annual Fund operating expenses 2.01% 2.71% 2.71%
- Fee waiver(1) .05% .25% .25%
= NET ANNUAL FUND OPERATING EXPENSES(1) 1.96% 2.46% 2.46%
--------------------------------------------------------------------------------
</TABLE>
(1) For the fiscal year ending July 31, 2001, the Distributor of the Funds has
contractually agreed: (1) to reduce its distribution and service (12b-1)
fees for Class A shares to .25 of 1% of the average daily net assets of
Class A shares, and to reduce its distribution and service (12b-1) 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, and (2) to limit the Funds' operating expenses, exclusive of
12b-1 fees, so as to not exceed (i) 1.40% of the average daily net assets
of each class of shares of the Target Large Cap Value Fund, (ii) 1.55% of
the average daily net assets of each class of shares of the Target Small
Cap Value Fund, (iii) 1.90% of the average daily net assets of each class
of shares of the Target Small Cap Growth Fund, (iv) 1.75% of the average
daily net assets of each class of shares of the Target International Equity
Fund, and (v) .80% of the average daily net assets of each class of shares
of the Target Total Return Bond Fund.
8 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 11
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 the Funds with 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 5 YRS 10 YRS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LARGE CAPITALIZATION GROWTH FUND
Class A shares $613 $863 $1,132 $1,899
Class B shares $695 $903 $1,137 $1,976
Class C shares $393 $697 $1,126 $2,321
LARGE CAPITALIZATION VALUE FUND
Class A shares $727 $1,209 $1,717 $3,105
Class B shares $814 $1,260 $1,730 $3,183
Class C shares $511 $1,050 $1,714 $3,486
SMALL CAPITALIZATION GROWTH FUND
Class A shares $759 $1,303 $1,873 $3,413
Class B shares $847 $1,356 $1,888 $3,491
Class C shares $543 $1,146 $1,870 $3,783
SMALL CAPITALIZATION VALUE FUND
Class A shares $811 $1,458 $2,127 $3,903
Class B shares $901 $1,515 $2,146 $3,980
Class C shares $597 $1,303 $2,126 $4,255
--------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERNATIONAL EQUITY FUND
Class A shares $777 $1,360 $1,966 $3,595
Class B shares $866 $1,414 $1,983 $3,672
Class C shares $563 $1,203 $1,964 $3,958
TOTAL RETURN BOND FUND
Class A shares $591 $1,001 $1,435 $2,640
Class B shares $749 $1,118 $1,513 $2,776
Class C shares $447 $910 $1,498 $3,093
--------------------------------------------------------------------------------
</TABLE>
You would pay the following expenses on the same investment if you did not
sell your shares:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LARGE CAPITALIZATION GROWTH FUND
Class A shares $613 $863 $1,132 $1,899
Class B shares $195 $603 $1,037 $1,976
Class C shares $293 $697 $1,126 $2,321
LARGE CAPITALIZATION VALUE FUND
Class A shares $727 $1,209 $1,717 $3,105
Class B shares $314 $960 $1,630 $3,183
Class C shares $411 $1,050 $1,714 $3,486
SMALL CAPITALIZATION GROWTH FUND
Class A shares $759 $1,303 $1,873 $3,413
Class B shares $347 $1,056 $1,788 $3,491
Class C shares $443 $1,146 $1,870 $3,783
SMALL CAPITALIZATION VALUE FUND
Class A shares $811 $1,458 $2,127 $3,903
Class B shares $401 $1,215 $2,046 $3,980
Class C shares $497 $1,303 $2,126 $4,255
--------------------------------------------------------------------------------
</TABLE>
10 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 13
RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERNATIONAL EQUITY FUND
Class A shares $777 $1,360 $1,966 $3,595
Class B shares $366 $1,114 $1,883 $3,672
Class C shares $463 $1,203 $1,964 $3,958
TOTAL RETURN BOND FUND
Class A shares $591 $1,001 $1,435 $2,640
Class B shares $249 $819 $1,413 $2,776
Class C shares $347 $910 $1,498 $3,093
--------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
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 [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 15
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 the Fund's 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> 16
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,
STRIPPED MORTGAGE-BACKED SECURITIES and MULTI-CLASS PASS THROUGH 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 [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 17
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 cash 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 which means if a borrower does not
repay the loan when due, the Fund would suffer a loss.
FACTORS CONSIDERED IN MAKING INVESTMENT DECISIONS
In choosing portfolio securities, the investment advisers to the Total Return
Bond Fund consider economic conditions and interest rate fundamentals and, for
foreign debt securities, country and currency selection. The investment advisers
also evaluate individual debt securities within each fixed-income sector based
upon their relative investment merit and consider
15
<PAGE> 18
HOW THE FUNDS INVEST
factors such as yield, duration and potential for price or currency appreciation
as well as credit quality, maturity and risk.
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 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.
ADDITIONAL INFORMATION ON INVESTMENTS AND RISK
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 described above, we may also use the
following investment strategies to try 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
16 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 19
HOW THE FUNDS INVEST
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 for cash management purposes. 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 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 the Student Loan Marketing Association (SLMA or "Sallie
Mae"), 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.
17
<PAGE> 20
HOW THE FUNDS INVEST
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 Funds 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 automobile loans and credit card
receivables. Unlike mortgage-related securities, asset-backed securities are not
usually collateralized, which means that if the borrower does not repay the
amount loaned when due, the Fund could suffer a loss.
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
18 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 21
HOW THE FUNDS INVEST
other party that creates a fixed return for the Fund. Repurchase agreements are
used for cash management purposes.
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 a
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. 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, each of these
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 net asset values (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
19
<PAGE> 22
HOW THE FUNDS INVEST
to buy or sell securities or currencies 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.
For more information about these strategies, see the SAI "Description of
the Fund, Its Investments and Risks -- Risk Management and Return
Enhancement Strategies."
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 33 1/3% of the value of its total
20 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 23
HOW THE FUNDS INVEST
assets, while each other Fund may 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%. For the fiscal period
ended July 31, 2000, the Fund experienced a portfolio turnover rate of 423%. In
addition, the Small Capitalization Growth Fund had a portfolio turnover rate of
112% for the same fiscal period. 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.
21
<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 other non-principal investments and strategies the Funds
may make. See "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
At least 80% - Companies that pay dividends may not do so appreciation
if they don't have profits or adequate cash
International Equity Fund flow - May be a source of dividend income
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 of small companies are more volatile - Highly successful smaller companies can
STOCKS (market capi- and may decline more than those in the S&P outperform larger ones
talization below 500 Index
$1.5 billion)
- Small companies are more likely to reinvest
Small Cap Growth and earnings and not pay dividends
Small Cap Value Funds
At least 65% - Changes in interest rates may affect the
securities of small companies more than the
International Equity Fund securities of larger companies
Percentage varies
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 25
HOW THE FUNDS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE
% 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 stocks
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
higher its potential volatility - Regular interest income
Up to 35%
Total Return Bond Fund - Market risk -- the risk that the market - High-quality debt obligations are generally
value of an investment may move up or down, more secure than stocks since companies must
Up to 100% sometimes rapidly or unpredictably. Market pay their debts before they pay dividends
risk may affect an industry, a sector, or
the market as a whole
- Investment-grade bonds have a lower risk of
- Interest rate risk -- the value of most default than junk bonds
bonds will fall when interest rates rise The
longer a bond's maturity and the lower its - Bonds with longer maturity dates typically
credit quality, the more its value typically have higher yields
falls. It can lead to price volatility,
particularly for junk bonds and stripped - Intermediate-term securities may be less
securities susceptible to loss of principal than longer
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 - Investors may profit from changing value of
Total Return Bond Fund currencies foreign currencies
Up to 20%
- May be less liquid than U.S. stocks and - Opportunities for diversification
bonds
- Principal and interest on foreign government
- Differences in foreign laws, accounting securities may be guaranteed
standards, public information, custody and
settlement practices provide less reliable
information on foreign investments and
involve more risk
- Not all government securities are insured or
guaranteed by government, but only by the
issuing agency
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<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 - Generally more secure than lower quality
a temporary basis - Market risk 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 - The U.S. government guarantees interest and
Total Return Bond Fund falling interest rates, which could principal payments on certain securities
Percentage varies adversely affect yield to maturity and could
require a Fund to reinvest in lower-yielding - May benefit from security interest in real
securities. estate collateral
- Credit risk -- the risk that the underlying - Pass-through instruments provide greater
mortgages will not be paid by debtors or by diversification than direct ownership of
credit insurers or guarantors of such loans
instruments. Some private mortgage
securities are unsecured or secured by
lower-rated insurers or guarantors and thus
may involve greater risk
- Market risk
- Interest rate risk
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<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 and mortgage-related securities
Total Return Bond Funds - Pass-through instruments provide greater
Percentage varies - Credit risk -- the risk that the underlying diversification than direct ownership of
receivables will not be paid by debtors or loans
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
Percentage varies - One way to manage a Fund's risk/return
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 that can reduce returns
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<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
underlying investment gains
Total Return Bond Fund
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
exceed potential investment gains
Other Funds
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>
26 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<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>
27
<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 Adviser(s)) 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 FUND .70% .30%
LARGE CAPITALIZATION VALUE FUND .70% .30%
SMALL CAPITALIZATION GROWTH FUND .70% .40%
SMALL CAPITALIZATION VALUE FUND .70% .40%
INTERNATIONAL EQUITY FUND .80% .40%
TOTAL RETURN BOND FUND .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 must 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 the
28 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1851
<PAGE> 31
HOW THE TRUST IS MANAGED
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 13, 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, 2000, PIFM served as the
Manager to all 38 of the Prudential mutual funds, and as Manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $76.4 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 which manages approximately 50% of the respective 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.
29
<PAGE> 32
HOW THE TRUST IS MANAGED
CCI has specialized in large-cap equity investing since it was established
in 1975. As of March 31, 2000, CCI had approximately $7.2 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,
Stamford, 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 August 31, 2000, Oak had more than $32 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
J.P. MORGAN INVESTMENT MANAGEMENT INC. (J.P. MORGAN) and MERCURY ADVISORS
(FORMERLY HOTCHKIS AND WILEY) are the Advisers for the Large Capitalization
Value Fund. For their services as Advisers, J.P. Morgan and Mercury Advisors
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.
J.P. MORGAN was created in 1984 out of the Trust and Investment Division of
Morgan Guaranty Trust Company of New York. J.P. Morgan manages assets for
retirement plans, endowments, foundations, public entities, mutual funds and
other institutional investors. As of June 30, 2000, J.P. Morgan managed assets
totaling approximately $369 billion. The address of J.P. Morgan is 522 Fifth
Avenue, New York, NY 10036.
BERNARD KROLL and NANETTE BUZIAK have managed the assets of the Fund since
May 2000. Mr. Kroll is a Managing Director of J.P. Morgan and a portfolio
manager in its Structured Equity Group. Prior to joining J.P. Morgan in 1996,
Mr. Kroll was an equity derivatives specialist at Goldman Sachs & Co., founded
his own options broker-dealer, and managed several derivatives
30 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 33
HOW THE TRUST IS MANAGED
businesses at Kidder, Peabody & Co. Ms. Buziak is a vice president of J.P.
Morgan and a portfolio manager in its Structured Equity Group. Prior to joining
J.P. Morgan in 1997, Ms. Buziak spent four years at First Marathon America,
Inc., where she specialized in convertible bond arbitrage and stock index
arbitrage trading.
MERCURY ADVISORS (formerly Hotchkis and Wiley) is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. It offers investment advisory services
to more than 50 registered investment companies. As of June 30, 2000, Mercury
Advisors and its investment advisory affiliates had approximately $555 billion
in assets under management for corporate, public, endowment and foundation,
individual, mutual fund and other clients. The address of Mercury Advisors is
725 S. Figueroa St., Suite 4000, Los Angeles, CA 90017.
SHELDON LIEBERMAN, a Managing Director and portfolio manager of Mercury
Advisors, has managed the assets of the Fund since August 2000. Mr. Lieberman
has been with Mercury Advisors since 1994.
SMALL CAPITALIZATION GROWTH FUND
SAWGRASS ASSET MANAGEMENT, L.L.C. (SAWGRASS) and CHASE FLEMING ASSET MANAGEMENT
USA (CHASE FLEMING) are the Advisers for the Small Capitalization Growth Fund.
For their services as Advisers, Sawgrass and Chase Fleming 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 March 31, 2000, Sawgrass had approximately $900 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 for Sawgrass. 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.
31
<PAGE> 34
HOW THE TRUST IS MANAGED
CHASE FLEMING is a subsidiary of The Chase Manhattan Corporation. As of
July 31,2000, Chase Fleming managed over $178 billion of assets on behalf of
individual investors, companies, institutions, governments and central banks
worldwide. These assets are spread across a range of separately managed accounts
and open- and closed-end pooled investment vehicles. Chase Fleming's address is
320 Park Avenue, New York, NY 10022.
The assets of the Fund managed by Chase Fleming are managed by a team of
portfolio managers. EYTAN M. SHAPIRO, a Director and portfolio manager of Chase
Fleming, is responsible for the day-to-day management of the Portfolio's assets.
Mr. Shapiro has been with Chase Fleming since 1992 and with the The Fleming
Group since 1985. The other members of the team are TIMOTHY R. V. PARTON,
CHRISTOPHER M. V. JONES and T. GARY LIEBERMAN. Mr. Parton, a Director and
portfolio manager with Chase Fleming, has been with Chase Fleming since 1990 and
with the The Chase Manhattan Corporation or its predecessors since 1986.
Mr. Jones, a Director and portfolio manager of Chase Fleming as well as Chief
Investment Officer of its Small Cap Equity Group, joined Chase Fleming in 1986
and began his career with the The Fleming Group in 1982. Mr. Lieberman is a Vice
President and analyst with Fleming and has been with the firm since 1995. Prior
to joining Chase Fleming Asset, Mr. Lieberman was an analyst with Salomon
Brothers Asset Management.
SMALL CAPITALIZATION VALUE FUND
LAZARD ASSET MANAGEMENT (LAZARD) and the WOOD, STRUTHERS & WINTHROP DIVISION OF
DLJ ASSET MANAGEMENT INC., (DLJAM) (formerly known as WOOD, STRUTHERS & WINTHROP
MANAGEMENT CORP.) are the Advisers for the Small Capitalization Value Fund. For
their services as Advisers, Lazard and DLJAM 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 March 31, 2000, Lazard and its global affiliates had
approximately $75 billion in assets under management. The address of Lazard is
30 Rockefeller Plaza, New York, NY 10112.
32 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 35
HOW THE TRUST IS MANAGED
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.
DLJAM was founded in 1871 and has specialized in small-cap equity investing
since 1967. DLJAM provides investment management services to both individual and
institutional clients. As of March 31, 2000, DLJAM had approximately $6.7
billion in assets under management. The address of DLJAM is 277 Park Avenue, New
York, NY 10172.
ROGER W. VOGEL has managed the assets of the Portfolio since 1995. Mr.
Vogel, who is Senior Vice President for the Equities Division at DLJAM, has been
the lead small-cap equity portfolio manager of DLJAM since 1993.
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 for Lazard. 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, 2000, PIMCO had approximately $199.3 billion
of assets under management. The address of PIMCO is 840 Newport Center Drive,
Suite 300, Newport Beach, CA 92660.
WILLIAM POWERS, Managing Director and a senior member of PIMCO's portfolio
management and investment strategy groups, manages the Fund. He is also one of
five generalists in PIMCO's portfolio management group,
33
<PAGE> 36
HOW THE TRUST IS MANAGED
and co-heads the firm's mortgage team. Mr. Powers joined the firm 10 years ago,
having been previously associated with Salomon Brothers and with Bear Stearns as
Senior Managing Director specializing in mortgage-backed securities. He has 17
years of investment experience.
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.
34 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<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. Dividends
and distributions from the Funds also may be subject to state and local income
tax in the state where you live.
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.
35
<PAGE> 38
FUND DISTRIBUTIONS AND TAX ISSUES
Each Fund also distributes realized net CAPITAL GAINS to shareholders --
typically once a year. Capital gains are generated when the Fund sells its
assets for a profit. For example, if 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. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified or tax-deferred plan or
account. For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of a Fund as part of a qualified or tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified or tax-deferred plan or
account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
36 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 39
FUND DISTRIBUTIONS AND TAX ISSUES
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions and sale proceeds.
Dividends of net investment income and short-term capital gains paid to a
nonresident foreign shareholder generally will be subject to a U.S. withholding
tax of 30%. This rate may be lower, depending on any tax treaty the U.S. may
have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of 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 to reflect the payout, although this may not be apparent because the
value of each share of the Fund also will be affected by the market changes, if
any. The distribution you receive makes up for the decrease in share value.
However, the timing of your purchase does mean that part of your investment came
back to you as taxable income.
QUALIFIED OR TAX-DEFERRED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential Mutual Funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of a Fund for a profit, you have REALIZED A CAPITAL GAIN,
which is subject to tax, unless you hold shares in a qualified or
37
<PAGE> 40
FUND DISTRIBUTIONS AND TAX ISSUES
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.
[GRAPHIC OF RECEIPTS FROM SALE]
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before the
sale of the shares). If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.
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 or tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell -- or exchange -- Fund shares,
as well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares - which happens automatically approximately seven years after
purchase - is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
38 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 41
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> 42
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> <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.
For the fiscal year ending July 31, 2001, the Distributor of the Funds has
contractually agreed: (1) to reduce its distribution and service fees
(12b-1) fees for Class A shares to .25 of 1% of the average daily net
assets of 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.
40 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 43
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 AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above* None None None
</TABLE>
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
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> 44
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)
- 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 Funds and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required 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
registered representatives and employees of brokers that have entered into a
dealer agreement with the Distributor. To qualify for a reduction or waiver of
42 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
the sales charge, you must notify the Transfer Agent or your broker at the time
of purchase. For more information, see the SAI, "Purchase, Redemption and
Pricing of Fund Shares -- Reduction and Waiver of Initial Sales Charge -- Class
A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated (Prudential Securities) or one of its affiliates. These
purchases must be made within 60 days of the redemption. To qualify for this
waiver, you must do one of the following:
- Purchase your shares through an account at Prudential Securities
- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
- 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.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class A shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you 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
43
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
your Fund expenses. We do the conversions quarterly, not on the anniversary date
of your purchase. For more information, see the SAI, "Purchase, Redemption and
Pricing of Fund Shares -- Conversion Feature -- Class B Shares."
-------------------------------------------------------------------------------
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
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund -- or the NAV -- is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the price of mutual
funds daily.
We determine the NAV of each Fund's share once each business day at 4:15
p.m. New York time on days that the New York Stock Exchange (NYSE) is open for
trading. The NYSE is closed on most national holidays and Good Friday. Because
the 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.
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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.
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 8159
PHILADELPHIA, PA 19101
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
45
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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. Eligible investors who apply for PruTector coverage after the
initial 6-month enrollment period will need to provide satisfactory evidence of
insurability. This insurance is subject to other restrictions and is not
available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class B and Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about 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 8149
PHILADELPHIA, PA 19101
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
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
46 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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. As permitted by the
Securities and Exchange Commission, this may happen only 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."
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 signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker-dealer or credit union. For more information, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares -- Sale of Shares -- Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase, 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.
47
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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.
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, 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.
48 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 purchase additional shares
to avoid this action. This involuntary sale does not apply to shareholders who
own their shares as part of a 401(k) plan, an IRA or some other qualified
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.
49
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 a Fund for Class A shares of another Prudential mutual fund, but you
can't exchange Class A shares for Class B, Class C or Class Z shares. Class B
and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 8157
PHILADELPHIA, PA 19101
There is no sales charge for such exchanges. However, if you
exchange and then sell -- Class B shares within approximately six years of your
original purchase or Class C shares within 18 months of your original purchase,
you must still pay the applicable CDSC. If you have exchanged 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
50 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUNDS
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 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 decision
may be based upon dollar amount, volume and frequency of trading. 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.
TELEPHONE REDEMPTIONS OR EXCHANGES
You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852 before 4:15 p.m. New York time. You will receive a redemption
amount based on that day's NAV.
The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming or exchanging shares. The
Fund will not be liable if it follows instructions that it reasonably believes
are made by the shareholder. If the Fund does not follow reasonable procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail.
The telephone redemption or exchange privilege may be modified or
terminated at any time. If this occurs, you will receive a written notice from
the Fund.
51
<PAGE> 54
FINANCIAL HIGHLIGHTS
The financial highlights will help you evaluate each Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that particular Fund, assuming
reinvestment of all dividends and other distributions. The information is for
the period indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information is contained in the annual
report, which you can receive at no charge.
LARGE CAPITALIZATION GROWTH FUND
The financial highlights for the fiscal period ended July 31, 2000 were audited
by PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.
CLASS A, B AND C SHARES (FISCAL PERIOD ENDED 7-31-2000(1))
PER SHARE OPERATING PERFORMANCE(2)
<TABLE>
<CAPTION>
LARGE CAPITALIZATION GROWTH FUND
-----------------------------------------------
CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.06) (0.12) (0.12)
Net realized and unrealized gain on
investment transactions 3.25 3.23 3.23
----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 3.19 3.11 3.11
----------- ----------- -----------
-----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, AND OF PERIOD $ 13.19 $ 13.11 $ 13.11
=========== =========== ===========
TOTAL RETURN(3) 31.90% 31.10% 31.10%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000) $ 38,227 $ 75,819 $ 145,187
Average net assets (000) $ 28,788 $ 59,151 $ 128,884
RATIOS TO AVERAGE NET ASSETS:(4)
Expenses, including distribution and service (12b-1) fees(5) 1.17% 1.92% 1.92%
Expenses, excluding distribution and service (12b-1) fees .92% .92% .92%
Net investment loss (0.62)% (1.36)% (1.32)%
Portfolio turnover rate 39% 39% 39%
</TABLE>
(1) Information is shown for the period 11-3-99 (when Class A, B and C shares
were first offered) through 7-31-2000.
(2) Calculated based upon average shares outstanding during the period.
(3) Total return assumes reinvestment of dividends and any other distributions
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods less than a full year is not annualized.
(4) Annualized.
(5) For the fiscal period ended July 31, 2000, the Distributor waived .05% of
the .30% distribution and service (12b-1) fee for Class A shares.
52 TARGET FUNDS [GRAPHIC OF PHONE] (800) 982-4467
<PAGE> 55
FINANCIAL HIGHLIGHTS
LARGE CAPITALIZATION VALUE FUND
The financial highlights for the period ended July 31, 2000 were audited by
PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.
CLASS A, B AND C SHARES (FISCAL PERIOD ENDED 7-31-2000(1))
PER SHARE OPERATING PERFORMANCE
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.05 --(2) --(2)
Net realized and unrealized loss on
investment transactions (0.69) (0.70) (0.70)
---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS (0.64) (0.70) (0.70)
---------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.03) -- --
Dividends in excess of net investment income -- (0.02) (0.02)
---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 9.33 $ 9.28 $ 9.28
========== ========== ==========
TOTAL RETURN(3) (6.42)% (7.02)% (7.02)%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000) $ 5,162 $ 11,418 $ 12,845
Average net assets (000) $ 4,119 $ 8,794 $ 12,693
RATIOS TO AVERAGE NET ASSETS:(4)
Expenses including distribution and service (12b-1) fees(5) 2.36% 3.11% 3.11%
Expenses, excluding distribution and service (12b-1) fees 2.11% 2.11% 2.11%
NET INVESTMENT INCOME .63% (.13)% (.02)%
Portfolio turnover rate 58% 58% 58%
</TABLE>
(1) Information is shown for the period 11-3-99 (when Class A, B and C shares
were first offered) through 7-31-2000.
(2) Less than $.005 per share.
(3) Total return assumes reinvestment of dividends and any other distributions
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods less than a full year is not annualized.
(4) Annualized.
(5) For the fiscal period ended July 31, 2000, the Distributor waived .05% of
the .30% distribution and service fee (12b-1) for Class A shares.
53
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FINANCIAL HIGHLIGHTS
SMALL CAPITALIZATION GROWTH FUND
The financial highlights for the period ended July 31, 2000 were audited by
PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.
CLASS A, B AND C SHARES (FISCAL PERIOD ENDED 7-31-2000(1))
PER SHARE OPERATING PERFORMANCE
<TABLE>
<CAPTION>
SMALL CAPITALIZATION GROWTH FUND
-------------------------------------------
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.20) (.19) (.23)
Net realized and unrealized gain
on investment transactions 2.82 2.73 2.77
--------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 2.62 2.54 2.54
--------- --------- ---------
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.62 $ 12.54 $ 12.54
========= ========= =========
TOTAL RETURN(2) 26.20% 25.40% 25.40%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000) $ 4,667 $ 8,588 $ 7,659
Average net assets (000) $ 4,799 $ 5,881 $ 6,468
RATIOS TO AVERAGE NET ASSETS:(3)
Expenses, including distribution and service (12b-1) fees(4) 2.69% 3.44% 3.44%
Expenses, excluding distribution and service (12b-1) fees 2.44% 2.44% 2.44%
Net investment income (2.10)% (2.94)% (2.90)%
Portfolio turnover rate 112% 112% 112%
</TABLE>
(1) Information is shown for the period 11-3-99 (when Class A, B and C shares
were first offered) through 7-31-2000.
(2) Total return assumes reinvestment of dividends and any other distributions
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods less than a full year is not annualized.
(3) Annualized.
(4) For the fiscal period ended July 31, 2000, the Distributor waived .05% of
the .30% distribution and service (12b-1) fee for Class A shares.
54 TARGET FUNDS [GRAPHIC OF PHONE] (800) 982-4467
<PAGE> 57
FINANCIAL HIGHLIGHTS
SMALL CAPITALIZATION VALUE FUND
The financial highlights for the period ended July 31, 2000 were audited by
PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.
CLASS A, B AND C SHARES (FISCAL PERIOD ENDED 7-31-2000(1)) PER SHARE OPERATING
PERFORMANCE
<TABLE>
<CAPTION>
SMALL CAPITALIZATION VALUE FUND
-------------------------------------------
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss(2) (.11) (.16) (.17)
Net realized and unrealized gain
on investment transactions 1.19 1.17 1.18
--------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 1.08 1.01 1.01
--------- --------- ---------
--------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.08 $ 11.01 $ 11.01
========= ========= =========
TOTAL RETURN(3) 10.80% 10.10% 10.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $ 3,863 $ 5,379 $ 4,354
Average net assets (000) $ 5,083 $ 3,564 $ 3,776
RATIOS TO AVERAGE NET ASSETS:(4)
Expenses, including distribution and service (12b-1) fees(5) 3.24% 3.99% 3.99%
Expenses, excluding distribution and service (12b-1) fees 2.99% 2.99% 2.99%
Net investment income (loss) (1.37)% (2.20)% (2.16)%
Portfolio turnover rate 34% 34% 34%
</TABLE>
(1) Information is shown for the period 11-3-99 (when Class A, B and C shares
were first offered) through 7-31-2000.
(2) Calculated based upon average shares outstanding during the period.
(3) Total return assumes reinvestment of dividends and any other distributions
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods less than a full year is not annualized.
(4) Annualized.
(5) For the fiscal period ended July 31, 2000, the Distributor waived .05% of
the .30% distribution and service (12b-1) fee for Class A shares.
55
<PAGE> 58
FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY FUND
The financial highlights for the period ended July 31, 2000 were audited by
PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.
CLASS A, B AND C SHARES(FISCAL PERIOD ENDED 7-31-2000(1))
PER SHARE OPERATING PERFORMANCE
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss(2) (0.05) (0.11) (0.11)
Net realized and unrealized(loss) on
investments and foreign currency transactions --(3) --(3) --(3)
--------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS (0.05) (0.11) (0.11)
--------- --------- ---------
------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 9.89 $ 9.89
========= ========= =========
TOTAL RETURN(4) (0.50)% (1.10)% (1.10)%
<CAPTION>
RATIOS/SUPPLEMENTAL DATA CLASS A CLASS B CLASS C
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $ 4,689 $ 7,020 $ 8,955
Average net assets (000) $ 4,447 $ 6,027 $ 8,717
RATIOS TO AVERAGE NET ASSETS:(5)
Expenses, including distribution and service (12b-1) fees(6) 2.89% 3.64% 3.64%
Expenses, excluding distribution and service (12b-1) fees 2.64% 2.64% 2.64%
Net investment loss (0.74)% (1.45)% (1.50)%
Portfolio turnover rate 40% 40% 40%
</TABLE>
(1) Information is shown for the period 11-3-99 (when Class A, B and C shares
were first offered) through 7-31-2000.
(2) Calculated based upon average shares outstanding during the period.
(3) Less than $.005 per share.
(4) Total return assumes reinvestment of dividends and any other distributions
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods less than a full year is not annualized.
(5) Annualized.
(6) For the fiscal period ended July 31, 2000, the Distributor waived .05% of
the .30% distribution and service (12b-1) fee for Class A shares.
56 TARGET FUNDS [GRAPHIC OF PHONE] (800) 982-4467
<PAGE> 59
FINANCIAL HIGHLIGHTS
TOTAL RETURN BOND FUND
The financial highlights for the period ended July 31, 2000 were audited by
PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.
CLASS A, B AND C SHARES (FISCAL PERIOD ENDED 7-31-2000(1))
PER SHARE OPERATING PERFORMANCE
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.33 0.29 0.29
Net realized and unrealized loss on
investment transactions --(2) --(2) --(2)
---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS 0.33 0.29 0.29
---------- ---------- ----------
---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.33) (0.29) (0.29)
Dividends in excess of net investment income (0.01) (0.01) (0.01)
---------- ---------- ----------
TOTAL DISTRIBUTIONS: (0.34) (0.30) (0.30)
---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 9.99 $ 9.99 $ 9.99
========== ========== ==========
TOTAL RETURN(3) 3.32% 2.95% 2.95%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000) $ 9,875 $ 9,739 $ 5,849
Average net assets (000) $ 11,760 $ 7,304 $ 6,393
RATIOS TO AVERAGE NET ASSETS:(4)
Expenses, including distribution and service (12b-1) fees(5) 1.96% 2.46% 2.46%
Expenses, excluding distribution and service (12b-1) fees 1.71% 1.71% 1.71%
Net investment loss 4.66% 4.23% 4.16%
Portfolio turnover rate 423% 423% 423%
</TABLE>
(1) Information is shown for the period 11-3-99 (when Class A, B and C shares
were first offered) through 7-31-2000.
(2) Less than $.005 per share.
(3) Total return assumes reinvestment of dividends and any other distributions
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods less than a full year is not annualized.
(4) Annualized.
(5) For the fiscal period ended July 31, 2000, the Distributor waived .05%, .25%
and .25% of the distribution and service (12b-1) fees for Class A, Class B and
Class C shares, respectively.
57
<PAGE> 60
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.
58 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 61
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 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.
59
<PAGE> 62
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, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
60 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 63
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Equity Opportunity Fund
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
PRUDENTIAL SMALL COMPANY FUND, INC.
PRUDENTIAL TAX-MANAGED FUNDS
Prudential Tax-Managed Equity Fund
PRUDENTIAL Tax-Managed Small-Cap Fund, Inc.
PRUDENTIAL US EMERGING GROWTH FUND, INC.
PRUDENTIAL VALUE 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 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 EUROPE GROWTH FUND, INC.
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
International Equity Fund
61
<PAGE> 64
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL SHORT-TERM CORPORATE BOND FUND INC.
Income Portfolio
PRUDENTIAL TOTAL RETURN BOND FUND, INC.
TARGET FUNDS
Total Return Bond Fund
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Series
California Income Series
PRUDENTIAL MUNICIPAL BOND FUND
High Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
New Jersey Series
New York Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
Money Market Series
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Money Market Series
PRUDENTIAL MUNICIPAL SERIES FUND
New Jersey Money Market Series
New York Money Market Series
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
Institutional Money Market Series
62 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 65
NOTES
63
<PAGE> 66
NOTES
64 TARGET FUNDS [GRAPHIC OF PHONE] (800) 225-1852
<PAGE> 67
NOTES
65
<PAGE> 68
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 8310
PHILADELPHIA, PA 19101
(800) 225-1852
(732) 482-7555 (Calling from outside the U.S.)
-------------------------------------------------------------------------------
Outside Brokers should contact
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 8310
PHILADELPHIA, PA 19101
(800) 778-8769
-------------------------------------------------------------------------------
Visit Prudential's website 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 Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows
BY MAIL
Securities and Exchange Commission Public Reference Section Washington, DC
20549-0102
BY ELECTRONIC REQUEST
[email protected]
(The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call 1-202-942-8090)
VIA THE INTERNET on the EDGAR Database at http://www.sec.gov
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
CUSIP Numbers NASDAQ Symbols
<S> <C>
Large Capitalization Growth Fund
Class A: 87612T-10-3 TLCGA
Class B: 87612T-20-2 TBDBX
Class C: 87612T-30-1 TBDCX
Large Capitalization Value Fund
Class A: 87612T-40-0 TLCVA
Class B: 87612T-50-9 TLCVB
Class C: 87612T-60-8 TLCVC
Small Capitalization Growth Fund
Class A: 87612T-70-7 TSCGA
Class B: 87612T-80-6 TSCGB
Class C: 87612T-81-4 TSCGC
Small Capitalization Value Fund
Class A: 87612T-82-2 TSCVA
Class B: 87612T-83-0 TSCVB
Class C: 87612T-84-8 TSCVC
International Equity Fund
Class A: 87612T-85-5 TIEFA
Class B: 87612T-86-3 TIEFB
Class C: 87612T-87-1 TIEFC
Total Return Bond Fund
Class A: 87612T-88-9 TTRBA
Class B: 87612T-78-0 TTRBB
Class C: 87612T-79-8 TTRBC
</TABLE>
Investment Company Act File No: 811-09439
MF189A [RECYCLE LOGO] Printed on Recycled Paper
<PAGE> 69
TARGET FUNDS
Statement of Additional Information
November 3, 2000
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 November 3, 2000, 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-38
Investment Advisory and Other Services...................... B-39
Brokerage Allocation and Other Practices.................... B-47
Capital Shares, Other Securities and Organization........... B-51
Purchase, Redemption and Pricing of Fund Shares............. B-52
Shareholder Investment Account.............................. B-62
Net Asset Value............................................. B-67
Taxes, Dividends and Distributions.......................... B-68
Performance Information..................................... B-71
Financial Statements........................................ B-75
Appendix I -- General Investment Information................ I-1
Appendix II -- Historical Performance Data.................. II-1
Appendix III -- Glossary of Indexes......................... III-1
-------------------------------------------------------------------
</TABLE>
MF189B
<PAGE> 70
HISTORY OF THE TRUST
The Trust was organized as an unincorporated business trust on July 8, 1999
under the laws of the State of Delaware.
DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Trust is an open-end management investment
company. Each of the Funds is classified as a diversified fund.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment
objectives of the Funds and the principal investment policies and strategies for
seeking to achieve the Funds' objectives are set forth in the Trust's
Prospectus. This section provides additional information on the principal
investment policies and strategies of the Funds, as well as information on
certain non-principal investment policies and strategies. The Funds may not be
successful in achieving their respective objectives and you could lose money.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. government securities.
U.S. TREASURY SECURITIES. U.S. Treasury securities include bills, notes,
bonds and other debt securities issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. Securities issued or guaranteed by agencies or
instrumentalities of the U.S. government include, but are not limited to, GNMA,
FNMA and FHLMC securities. Obligations of GNMA, the Federal Housing
Administration, Farmers Home Administration and the Export-Import Bank are
backed by the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United States, the
Trust must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments. Such securities include obligations issued by the Student Loan
Marketing Association (SLMA), FNMA and FHLMC, each of which may borrow from the
U.S. Treasury to meet its obligations, although the U.S. Treasury is under no
obligation to lend to such entities. GNMA, FNMA and FHLMC may also issue
collateralized mortgage obligations.
STRIPPED U.S. GOVERNMENT SECURITIES. A Fund may invest in component parts
of U.S. government securities, namely either the corpus (principal) of such
obligations or one of the interest payments scheduled to be paid on such
obligations. These obligations may take the form of (1) obligations from which
the interest coupons have been stripped; (2) the interest coupons that are
stripped; and (3) book-entries at a Federal Reserve member bank representing
ownership of obligation components.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A Fund may invest in mortgage backed securities
and other derivative mortgage products, including those representing an
undivided ownership interest in a pool of mortgages, e.g., GNMA, FNMA and FHLMC
certificates where the U.S. government or its agencies or instrumentalities
guarantees the payment of interest and principal of these securities. However,
these guarantees do not extend to the securities' yield or value, which are
likely to vary inversely with fluctuations in interest rates, nor do these
guarantees extend to the yield or value of a Fund's shares. See "Mortgage-Backed
Securities and Asset Backed Securities" below.
Mortgages backing the securities which may be purchased by a Fund include
conventional thirty-year fixed-rate mortgages, graduated payment mortgages,
fifteen-year mortgages, adjustable
B-2
<PAGE> 71
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> 72
and accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the liquidation
of other portfolio securities to satisfy the Fund's distribution obligations, in
which case the Fund will forego the purchase of additional income producing
assets with these funds. Zero coupon U.S. government securities include STRIPS
and CUBES, which are issued by the U.S. Treasury as component parts of U.S.
Treasury bonds and represent scheduled interest and principal payments on the
bonds.
SPECIAL CONSIDERATIONS. Fixed-income U.S. government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. government
securities will change as interest rates fluctuate. To the extent U.S.
government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed-rate U.S. government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. government securities
will not affect investment income from those securities, they may affect the net
asset value of a Fund.
At a time when a Fund has written call options on a portion of its U.S.
government securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the Fund
above the strike price would likely be partially or wholly offset by unrealized
losses on call options written by a Fund. The termination of option positions
under these conditions would generally result in the realization of capital
losses, which would reduce a Fund's capital gains distribution. Accordingly, a
Fund would generally seek to realize capital gains to offset realized losses by
selling portfolio securities. In such circumstances, however, it is likely that
the proceeds of such sales would be reinvested in lower yielding securities.
CUSTODIAL RECEIPTS
Each Fund may invest in receipts evidencing the component parts (corpus or
coupons) of U.S. government obligations that have not actually been stripped.
Such receipts evidence ownership of component parts of U.S. government
obligations (corpus or coupons) purchased by a third party (typically an
investment banking firm) and held on behalf of the third party in physical or
book entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. These custodial receipts include
"Treasury Receipts," "Treasury Investment Growth Receipts" (TIGRs) and
"Certificates of Accrual on Treasury Securities" (CATS). Each Fund will not
invest more than 5% of its net assets in such custodial receipts.
Custodial receipts held by a third party are not issued or guaranteed by
the United States government and are not considered U.S. government securities.
Each Fund may also invest in such custodial receipts.
MONEY MARKET INSTRUMENTS
Each Fund may invest in high-quality money market instruments, including
commercial paper of a U.S. or non-U.S. company or foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and obligations issued or guaranteed by the U.S. government, its
agencies and instrumentalities. Money market obligations will be generally U.S.
dollar denominated. Commercial paper will be rated, at the time of purchase, at
least "A-2" by S&P or "Prime-2" by Moody's, or the equivalent by another NRSRO
or, if not rated, issued by an entity having an outstanding unsecured debt issue
rated at least "A" or "A-2" by S&P or "A" or "Prime-2" by Moody's or the
equivalent by another NRSRO.
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CORPORATE AND OTHER DEBT OBLIGATIONS
The Large Capitalization Value Fund, Small Capitalization Value Fund,
International Equity Fund and Total Return Bond Fund may each invest in
corporate and other debt obligations. Except where otherwise indicated, each
Fund will invest in securities rated A or better or determined by the Adviser to
be of comparable quality. These debt securities may have adjustable or fixed
rates of interest and in certain instances may be secured by assets of the
issuer. Adjustable rate corporate debt securities may have features similar to
those of adjustable rate mortgage-backed securities, but corporate debt
securities, unlike mortgage-backed securities, are not subject to prepayment
risk other than through contractual call provisions which generally impose a
penalty for prepayment. Fixed-rate debt securities may also be subject to call
provisions.
The market value of fixed-income obligations of the Funds will be affected
by general changes in interest rates, which will result in increases or
decreases in the value of the obligations held by the Funds. The market value of
the obligations held by a Fund can be expected to vary inversely with changes in
prevailing interest rates. Investors also should recognize that, in periods of
declining interest rates, a Fund's yield will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, a Fund's yield
will tend to be somewhat lower. Also, when interest rates are falling, the
inflow of net new money to a Fund from the continuous sale of its shares will
tend to be invested in instruments producing lower yields than the balance of
its portfolio, thereby reducing the Fund's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Fund may invest may not yield as high a level of current income as
might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.
Ratings made available by S&P, Moody's and other NRSRO's are relative and
subjective and are not absolute standards of quality. Although these ratings are
initial criteria for selection of portfolio investments, each Adviser will also
make its own evaluation of these securities on behalf of the Fund. Among the
factors that will be considered are the long-term ability of the issuers to pay
principal and interest and general economic trends.
MEDIUM AND LOWER-RATED SECURITIES. The Total Return Bond Fund may invest
in medium (i.e., rated Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO) and lower-rated securities (i.e., rated lower than Baa by Moody's or
lower than BBB by S&P or the equivalent by another NRSRO). However, the Fund
will not purchase any security rated lower than B by Moody's or S&P or the
equivalent by another NRSRO. Securities rated Baa by Moody's or BBB by S&P or
the equivalent by another NRSRO, although considered investment grade, possess
speculative characteristics, including the risk of default, and changes in
economic or other conditions are more likely to impair the ability of issuers of
these securities to make interest and principal payments than is the case with
respect to issuers of higher-grade bonds.
Generally, medium or lower-rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds" (i.e., securities
rated lower than Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO), offer a higher current yield than is offered by higher-rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality bonds. In addition, medium and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
The risk of loss due to default by these issuers is significantly greater
because medium and lower-rated securities and unrated securities of comparable
quality generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Advisers, under the supervision of the
Manager and the Trustees, in evaluating the creditworthiness of an issue whether
rated or
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unrated, take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters.
In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for each Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for a Fund to purchase and may also have the effect
of limiting the ability of a Fund to sell securities at their fair value either
to meet redemption requests or to respond to changes in the economy or the
financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may have
to replace the security with a lower-yielding security, resulting in a decreased
return for investors. Also, as the principal value of bonds moves inversely with
movements in interest rates, in the event of rising interest rates the value of
the securities held by a Fund may decline proportionately more than a portfolio
consisting of higher-rated securities. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated bonds, resulting in a
decline in the overall credit quality of the securities held by the Fund and
increasing the exposure of the Fund to the risks of lower-rated securities.
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 Fund 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 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.
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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. For purposes of this policy, foreign companies
and financial institutions are those that are organized under the laws of a
foreign country, those that derive more than 50% of their revenues from
activities in foreign countries, and companies and financial institutions that
have at least 50% of their assets located abroad.
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 member state's national
currency. By July 1, 2002, the euro is expected to become the sole legal tender
of the member states. During the transition period, the Funds will treat the
euro as a separate currency from the national currency of any member state.
The adoption by the member states of the euro will eliminate the
substantial currency risk among member states and will likely affect the
investment process and considerations of the Portfolios' investment advisers. To
the extent a Portfolio holds non-U.S. dollar-denominated securities, including
those denominated in the euro, the Portfolio will still be subject to currency
risk due to fluctuations in those currencies as compared to the U.S. dollar.
The medium- to long-term impact of the introduction of the euro in member
states cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general long-term ramifications
can be expected, such as changes in economic environment and changes in behavior
of investors, all of which will impact a Portfolio's investments.
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.
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;
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(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.
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
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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.
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.
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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 (Commission)
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 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
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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 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
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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
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
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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.
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.
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
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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.
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.
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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 prompt action to
reduce the Fund's holdings in illiquid securities to no more than 15% of its net
assets as required by applicable law. Illiquid securities include repurchase
agreements which have a maturity of longer than seven days, 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 (restricted 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 systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. (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
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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 Commission 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.
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
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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 indexes 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 indexes (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 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.
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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, 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
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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 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.
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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 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
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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 INDEXES. The Total Return Bond Fund may purchase and
write call and put options on securities indexes 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 indexes 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
indexes 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.
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 INDEXES. A Fund's purchase and sale of options on
indexes will be subject to risks described above under "Risks of Options
Transactions." In addition, the distinctive characteristics of options on
indexes create certain risks that are not present with stock options.
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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 indexes 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 INDEXES. 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 indexes 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 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
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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 indexes 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 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
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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
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.
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
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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 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,
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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 each Fund's assets 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.
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
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<PAGE> 96
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 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
B-28
<PAGE> 97
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
INDEXES, 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 indexes 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 indexes 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.
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
B-29
<PAGE> 98
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% of the market value, determined daily, 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 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
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<PAGE> 99
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. No fund will purchase securities if its
borrowings exceed 5% of its total assets.
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.
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.
B-31
<PAGE> 100
(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 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. In
addition, the Large Capitalization Value and Small Capitalization Value Funds
may invest without limit in corporate and other debt obligations and the Large
Capitalization Growth Fund 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." The Small Capitalization Growth Fund experienced
higher-than-expected portfolio turnover during the fiscal period ended July 31,
2000 as a result of unexpected volatility in the market for securities of small
capitalization companies. The Total Return Bond Fund's strategy of investing in
mortgage-backed TBA (to-be-announced) securities and subsequently rolling these
positions forward into similar securities prior to their stated settlement dates
resulted in higher-than-expected portfolio turnover during the fiscal period
ended July 31, 2000. In this strategy, an investor acquires an interest in a
pool of mortgage-backed TBA securities, the specifics of which are disclosed
just prior to settlement. Before settlement, however, the investor may sell its
interest in the security and acquire an interest in another TBA security,
thereby maintaining exposure to that type of security without taking physical
delivery.
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 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.
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<PAGE> 101
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks or through dollar rolls or reverse repurchase
agreements up to 33 1/3% of the value of its total assets (calculated when the
loan is made) for temporary, extraordinary or emergency purposes, to take
advantage of investment opportunities or for the clearance of transactions and
may pledge its assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
futures contracts and options thereon and with respect to the writing of options
and obligations of the Trust to Trustees pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets or the issuance of a senior
security subject to this restriction.
4. Purchase any security (other than obligations of the U.S. government,
its agencies and instrumentalities) if, as a result, with respect to 75% of its
total assets, more than 5% of the Fund's total assets (determined at the time of
investment) would then be invested in securities of a single issuer, except as
permitted by Section 5(b)(1) of the Investment Company Act of 1940 or any
successor provision on the requirements applicable to diversified investment
companies.
5. Purchase any security (other than obligations of the U.S. government,
its agencies and instrumentalities) if as a result 25% or more of the Fund's
total assets (determined at the time of investment) would be invested in one or
more issuers having their principal business activities in the same industry.
6. Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell mortgaged-backed securities, securities
collateralized by mortgages, securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws. Each Fund may purchase restricted securities
without limit.
8. Make investments for the purpose of exercising control or management.
9. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the value of the Fund's total assets.
For purposes of this limitation on securities lending, the value of a Fund's
total assets includes the collateral received in the transactions.
10. Purchase more than 10% of all outstanding voting securities of any one
issuer.
The foregoing restrictions are fundamental policies that may not be changed
without the approval of a majority of the Fund's voting securities.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
As a matter of non-fundamental operating policy, a portfolio will not
purchase rights if as a result the Fund would then have more than 5% of its
assets (determined at the time of investment) invested in rights.
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<PAGE> 102
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(**) THE TRUST DURING PAST FIVE YEARS
---------------- ------------- ----------------------
<S> <C> <C>
Eugene C. Dorsey (72) Trustee Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now
Freedom Forum); former Publisher of four
Gannett Newspapers and Vice President of
Gannett Co., Inc.; past Chairman, Independent
Sector, Washington, D.C. (largest 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.
Saul K. Fenster Ph.D (67) Trustee President, New Jersey Institute of Technology
(since 1978); Commissioner of the Middle
States Association, Commission on Higher
Education; a member of the New Jersey
Commission on Science and Technology; and a
Director of the New Jersey State Chamber of
Commerce, the Society of Manufacturing
Engineering Education Foundation, the
Research and Development Council of New
Jersey, Prosperity New Jersey, Inc., the
Edison Partnership, National Action Council
for Minorities in Engineering, and IDT
Corporation.
*Robert F. Gunia (53) Trustee and Executive Vice President and Chief
Vice Administrative Officer (since June 1999) of
President Prudential Investments; Executive Vice
President and Treasurer (since December 1996)
of Prudential Investments Fund Management LLC
(PIFM); President (since April 1999) of
Prudential Investment Management Services LLC
(PIMS); formerly Corporate Vice President
(September 1997-March 1999) of The Prudential
Insurance Company of America (Prudential);
Senior Vice President (March 1987-May 1999)
of Prudential Securities Incorporated
(Prudential Securities); and Chief
Administrative Officer (July 1990-September
1996), Director (January 1989-September
1996), and Executive Vice President,
Treasurer and Chief Financial Officer (June
1987-September 1996) of Prudential Mutual
Fund Management, Inc.
Maurice Holmes (57) Trustee Professor (since 1989) of the Practice of
Management and Engineering at the
Massachusetts Institute of Technology; former
engineer and senior manager at Xerox
Corporation; Director of SDR, Incorporated,
Optical Dynamics Corporation and Storage
Technology Corporation; Trustee of the
Rochester Institute of Technology.
</TABLE>
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<PAGE> 103
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(**) THE TRUST DURING PAST FIVE YEARS
---------------- ------------- ----------------------
<S> <C> <C>
Robert E. LaBlanc (65) Trustee President of Robert E. LaBlanc Associates, Inc.
(telecommunications) since 1981; formerly
General Partner at Salomon Brothers; formerly
Vice Chairman of Continental Telecom;
Director of Salient 3 Communications; Storage
Technology Corporation, Titan Corporation,
TIE/communications, Inc., The Tribune Company
and Chartered Semiconductor Manufacturing,
Ltd.
Douglas H. McCorkindale (60) Trustee Chairman (since June 2000) and President (since
September 1997) and Vice Chairman (since
March 1984) of Gannett Co. Inc. (publishing
and media); formerly Vice Chairman (March
1994-May 2000) of Gannett Co. Inc.; Director
of Continental Airlines, Inc., Gannett Co.
Inc. and Global Crossing Ltd.
W. Scott McDonald, Jr. Ph.D. Trustee Vice President, Kaludis Consulting Group, Inc.
(63) (since 1995) (a Sallie Mae company serving
higher education); Chief Operating Officer,
Fairleigh Dickinson University (1991-1998);
Executive Vice President and Chief Operating
Officer, Drew University (1975-1991) and
founding director of School, College and
University Underwriters Ltd.
Thomas T. Mooney (58) Trustee President, Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager;
former Deputy Monroe County Executive;
Trustee of Center for Governmental Research,
Inc.; Director of Blue Cross of Rochester,
Executive Service Corps of Rochester and
Monroe County Water Authority.
*David R. Odenath, Jr. (42) Trustee and Officer in Charge, President, Chief Executive
Vice Officer and Chief Operating Officer (since
President June 1999), PIFM; Senior Vice President
(since June 1999), Prudential; formerly
Senior Vice President (August 1993-May 1999),
PaineWebber Group, Inc.
</TABLE>
B-35
<PAGE> 104
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(**) THE TRUST DURING PAST FIVE YEARS
---------------- ------------- ----------------------
<S> <C> <C>
Stephen Stoneburn (56) Trustee President and Chief Executive Officer, Quadrant
Media Corp. (publishing company) (since June
1996); formerly Senior Vice President and
Managing Director, Cowles Business Media
(January 1993-1995); prior thereto, Senior
Vice President (January 1991-1992) and
Publishing Vice President (May 1989-December
1990) of Gralla Publications (a division of
United Newspapers, U.K.); formerly Senior
Vice President of Fairchild Publications,
Inc.
*John R. Strangfeld, Jr. Trustee and Chief Executive Officer, Chairman, President
(45) President and Director of The Prudential Investment
Corporation (since January 1990); Executive
Vice President of the Prudential Global Asset
Management Group of Prudential (since
February 1998); Chairman of PRICOA Capital
Group (since August 1989); formerly various
positions to Chief Executive Officer of
Private Asset Management Group of Prudential
(November 1994-December 1998) and Senior Vice
President (January 1986-August 1989),
Prudential Capital Group, a unit of
Prudential.
Joseph Weber Ph.D. (76) Trustee Vice President, Finance, Interclass
(international corporate learning) since
(1991); former President, The Alliance for
Learning; Vice President, Member of the Board
of Directors, Member of the Executive and
Operating Committees, Hoffmann-LaRoche Inc.;
Member, Board of Overseers, New Jersey
Institute of Technology; and Trustee and Vice
Chairman Emeritus, Fairleigh Dickinson
University.
Clay T. Whitehead (61) Trustee President, National Exchange Inc. (new business
development firm) (since May 1983).
William V. Healey (46) Assistant Vice President and Associate General Counsel of
Secretary Prudential and Chief Legal Officer of
Prudential Investments (since August 1998);
Director, ICI Mutual Insurance Company (since
June 1999); formerly Associate General
Counsel of The Dreyfus Corporation (Dreyfus),
a subsidiary of Mellon Bank, N.A. (Mellon
Bank), and an officer and/or director of
various affiliates of Mellon Bank and
Dreyfus.
Grace C. Torres (40) Treasurer and First Vice President (since December 1996) of
Principal PIFM; First Vice President (since March 1993)
Financial and of Prudential Securities; formerly First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc.
</TABLE>
---------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential, Prudential Securities or PIFM.
** The address of the trustees and officers is Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
B-36
<PAGE> 105
The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Advisors and Distributor, decide upon matters of general
policy. The Trustees also review the actions of the Trust's officers, who
conduct and supervise the daily business operations of the Trust.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
75, except that Mr. Weber will retire by December 31, 2002.
Pursuant to the Management Agreement with the Trust, the Manager pays all
compensation of officers and employees of the Trust as well as the fees and
expenses of all Trustees of the Trust who are affiliated persons of the Manager.
The Trust currently pays each of its Trustees who is not an affiliated
person of the Manager or a Fund's Adviser annual compensation of $5,000, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Trustee may change as a result of the introduction of additional
funds upon the boards of which the Trustee may be asked to serve.
Trustees may receive their Trustee's fees pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of Trustee's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an exemptive order
from the Commission, at the daily rate of return of a Fund. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Trustee. The Trust's obligation to make payments of deferred Trustees'
fees, together with interest thereon, is a general obligation of the Trust.
The following table sets forth the aggregate compensation paid by the Trust
to the Trustees who are not affiliated with the Manager for the fiscal year
ended July 31, 2000 and the aggregate compensation paid to such Trustees for
service on the Trust's Board and the boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL 1999 COMPENSATION
COMPENSATION FROM TRUST AND FUND
NAME OF TRUSTEE FROM TRUST COMPLEX PAID TO TRUSTEES
--------------- ------------ ------------------------
<S> <C> <C>
Eugene C. Dorsey*........................................... $1,150 $ 81,000(17/48)**
Saul K. Fenster***.......................................... None None
Robert F. Gunia+............................................ None None
Maurice Holmes***........................................... None None
Robert E. LaBlanc........................................... $1,100 $ 61,250(20/39)**
Douglas H. McCorkindale*.................................... $1,100 $ 80,000(24/49)**
W. Scott McDonald, Jr.***................................... None None
Thomas T. Mooney*........................................... $1,250 $129,500(35/75)**
David R. Odenath, Jr.+...................................... None None
Stephen Stoneburn........................................... $ 475 $ 61,250(20/39)**
John R. Strangfeld, Jr.+.................................... None None
Joseph Weber***............................................. None None
Clay T. Whitehead........................................... $ 475 $ 77,000(38/66)**
</TABLE>
---------------
* Total compensation from all the Funds in the Fund Complex for the calendar
year ended December 31, 1999 includes amounts deferred at the election of
Trustees under the Funds' deferred compensation plan. Including accrued
interest, total compensation amounted to approximately $103,573 for Mr.
Dorsey, $97,915 for Mr. McCorkindale, and $135,901 for Mr. Mooney.
** Indicates number of funds/portfolios in the Fund Complex (including the
Trust) to which aggregate compensation relates.
*** Mr. Holmes joined the Board in May 2000 and Messrs. Fenster, McDonald and
Weber joined the Board in August 2000.
+ Interested Trustees do not receive compensation from the Funds or any Fund
in the Fund Complex.
B-37
<PAGE> 106
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 6, 2000, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of beneficial interest of the
Funds.
As of October 6, 2000, the owners, directly or indirectly, of more than 5%
of the outstanding shares of beneficial interest of any Fund were as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS FUND (CLASS) PERCENTAGE
---- ------------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Radiology Consultants Attn: Edward Unger Small Capitalization 49,505 (8.8%)
PS Plan DTD 06/06/86 Ingalls Memorial Hospital Growth Fund (A)
Harvey, IL 60426-3558
Cush Reinsurance Attn: Lee Toolson Small Capitalization 104,390 (27.7%)
Maclaw House Duke St. Value Fund (A)
PO Box 103
Turks & Caicos Islands
Radiology Consultants Attn: Edward Unger Small Capitalization 35,000 (9.3%)
PS Plan DTD 06/06/86 Ingalls Memorial Hospital Value Fund (A)
Harvey, IL 60426-3558
Mr. Daniel L. Thistle 319 Woods Rd. Small Capitalization 34,654 (8.0%)
and Mrs. Christine M. Thistle Glenside, PA 19038-1428 Value Fund (C)
Mr. Daniel L. Thistle 319 Woods Rd. International 35,000 (5.3%)
and Mrs. Christine M. Thistle Glenside, PA 19038-1428 Equity Fund (C)
Radiology Imaging Consultants Attn: Edward Unger Total Return 104,433 (18.2%)
PS Plan Ingalls Memorial Hospital Bond Fund (A)
Harvey, IL 60426-3558
Prudential Trust Company Attn: John Surdy Total Return 89,030 (13.4%)
30 Scranton Office Park Bond Fund (A)
Moosic, PA 18570
</TABLE>
As of October 6, 2000, Prudential Securities was record holder for
beneficial owners of the following shares of beneficial interest outstanding and
entitled to vote in each Fund:
<TABLE>
<CAPTION>
NUMBER OF SHARES AND
PORTFOLIO PERCENTAGE
--------- --------------------
<S> <C> <C>
Large Capitalization Growth Fund, Class A................... 2,598,184 (78.5%)
Large Capitalization Growth Fund, Class B................... 5,353,374 (82.4%)
Large Capitalization Growth Fund, Class C................... 11,395,285 (97.8%)
Large Capitalization Value Fund, Class B.................... 970,355 (70.0%)
Large Capitalization Value Fund, Class C.................... 1,371,534 (99.0%)
Small Capitalization Growth Fund, Class B................... 539,957 (71.8%)
Small Capitalization Growth Fund, Class C................... 626,298 (96.4%)
Small Capitalization Value Fund, Class B.................... 376,676 (70.1%)
Total Return Bond Fund, Class B............................. 862,544 (7.8%)
Total Return Bond Fund, Class C............................. 550,311 (95.8%)
</TABLE>
B-38
<PAGE> 107
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 1, 2000, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $76.4 billion. According to the
Investment Company Institute, as of June 30, 2000, the Prudential mutual funds
were the 22nd largest family of mutual funds in the United States.
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. In connection therewith, PIFM is
obligated to keep certain books and records of the Trust. The Manager is
authorized to enter into subadvisory agreements for investment advisory services
in connection with the management of the Trust and each Fund thereof. The
Manager will continue to have responsibility for all investment advisory
services furnished pursuant to any such investment advisory agreements.
The Manager will review the performance of all Advisers, and make
recommendations to the Trustees with respect to the retention and renewal of
contracts. In connection therewith, PIFM is obligated to keep certain books and
records of the Trust. PIFM also administers the Trust's business affairs and, in
connection therewith, furnishes the Trust with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company (the Custodian), the Trust's custodian,
and PMFS, the Trust's transfer and dividend disbursing agent. The management
services of PIFM for the Trust are not exclusive under the terms of the
Management Agreement and PIFM is free to, and does, render management services
to others.
The following table sets forth the annual management fee rates currently
paid by each Fund to PIFM pursuant to the Management Agreement, and the amount
of such fees retained by PIFM, each expressed as a percentage of the Fund's
average daily net assets:
<TABLE>
<CAPTION>
TOTAL AMOUNT RETAINED
FUND MANAGEMENT FEE BY MANAGER
---- -------------- ---------------
<S> <C> <C>
Large Capitalization Growth Fund..................... 0.70% 0.40%
Large Capitalization Value Fund...................... 0.70% 0.40%
Small Capitalization Growth Fund..................... 0.70% 0.30%
Small Capitalization Value Fund...................... 0.70% 0.30%
International Equity Fund............................ 0.80% 0.40%
Total Return Bond Fund............................... 0.50% 0.25%
</TABLE>
The fee is computed daily and payable monthly. The Management Agreement
also provides that, in the event the expenses of the Trust (including the fees
of PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Trust's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
B-39
<PAGE> 108
pursuant to the statutes or regulations of any jurisdiction in which the Trust's
shares are qualified for 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.
For the fiscal period from November 3, 1999 through July 31, 2000, PIFM
received the following management fees:
<TABLE>
<CAPTION>
MANAGEMENT FEE PAID
---------------------------
PERCENTAGE OF
AVERAGE NET
PORTFOLIO ASSETS AMOUNT
--------- ------------- ----------
2000 2000
<S> <C> <C>
Large Capitalization Growth Fund......................... .5183% $1,123,808
Large Capitalization Value Fund.......................... .5183 132,716
Small Capitalization Growth Fund......................... .5183 88,879
</TABLE>
B-40
<PAGE> 109
<TABLE>
<CAPTION>
MANAGEMENT FEE PAID
---------------------------
PERCENTAGE OF
AVERAGE NET
PORTFOLIO ASSETS AMOUNT
--------- ------------- ----------
2000 2000
<S> <C> <C>
Small Capitalization Value Fund.......................... .5183% $ 64,391
International Equity Fund................................ .7000 113,679
Total Return Bond Fund................................... .3743 95,287
</TABLE>
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.
The Manager and the Trust have received an exemptive order from the
Securities and Exchange Commission which permits the Manager, subject to certain
conditions, to enter into or amend advisory agreements without obtaining
shareholder approval each time. On September 17, 1999, the sole shareholder of
the Trust voted affirmatively to give the Trust this ongoing authority. With
Board approval, the Manager is permitted to employ new Advisers for the Funds,
change the terms of the Funds' advisory agreements or enter into a new advisory
agreement with an existing Adviser after events that cause an automatic
termination of the old advisory agreement with that Adviser. Shareholders of a
Fund continue to have the right to terminate an advisory agreement for the Fund
at any time by a vote of the majority of the outstanding voting securities of
the Fund. Shareholders will be notified of any Adviser changes or other material
amendments to advisory agreements that occur under these arrangements.
The Advisers have agreed to the following fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment adviser.
<TABLE>
<CAPTION>
TOTAL ANNUAL FEE PAID
MANAGEMENT BY THE MANAGER
FEE (AS % OF TO THE ADVISER(S)
AVERAGE (AS % OF AVERAGE
FUND DAILY NET ASSETS) DAILY NET ASSETS)
---- ----------------- -----------------
<S> <C> <C>
Large Capitalization Growth Fund............................ 0.70% 0.30%
Large Capitalization Value Fund............................. 0.70% 0.30%
Small Capitalization Growth Fund............................ 0.70% 0.40%
Small Capitalization Value Fund............................. 0.70% 0.40%
International Equity Fund................................... 0.80% 0.40%
Total Return Bond Fund...................................... 0.50% 0.25%
</TABLE>
The Advisers perform all administrative functions associated with serving
as Adviser to a Fund. Subject to the supervision and direction of the Manager
and, ultimately, the Trustees, each Adviser's responsibilities are limited to
managing the securities held by the portion of the Fund it serves in accordance
with the Fund's stated investment objective and policies, making investment
decisions
B-41
<PAGE> 110
for that portion of the Fund and placing orders to purchase and sell securities
on behalf of the portion of the Fund it manages.
The following sets forth certain information about each of the Advisers:
LARGE CAPITALIZATION GROWTH FUND
Columbus Circle Investors (CCI), Metro Center, One Station Place, 8th
Floor, Stamford, Connecticut 06902, serves as one of two Advisers to the Large
Capitalization Growth Fund. CCI is a Delaware general partnership with two
partners. CCIP LLP, CCI's general partner, owns over 99% of CCI. Columbus Circle
Investors Management Inc. (CCIM), the other partner, owns the rest of CCI. Both
CCIP LLP and CCIM are owned by five of the managing directors of CCI. As of
March 31, 2000, CCI had approximately $7.2 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 August 31, 2000, had more than $32 billion in
assets under management. Oak is registered as an investment adviser under the
Investment Advisers Act of 1940. It is a limited liability company organized
under the laws of the State of Ohio. James D. Oelschlager owns a controlling
interest (99%) of Oak.
LARGE CAPITALIZATION VALUE FUND
J.P. Morgan Investment Management Inc. (J.P. Morgan) serves as one of the
Advisers for the Large Capitalization Value Fund. J.P. Morgan was created in
1984 out of the Trust and Investment Division of Morgan Guaranty Trust Company
of New York. J.P. Morgan manages assets for retirement plans, endowments,
foundations, public entities, mutual funds and other institutional investors. As
of June 30, 2000, J.P. Morgan managed assets totaling approximately $369
billion. The address of J.P. Morgan is 522 Fifth Avenue, New York, NY 10036.
Mercury Advisors (formerly Hotchkis and Wiley), 725 South Figueroa Street,
Suite 4000, Los Angeles, California, 90017, is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. It offers investment advisory services
to more than 50 registered investment companies. Mercury Advisors and its
investment advisory affiliates had approximately $555 billion in investment
company and other portfolio assets under management as of June 30, 2000.
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 March 31, 2000, Sawgrass
had approximately $900 million in assets under management for corporate,
municipal, public and state retirement plans and mutual funds.
Chase Fleming Asset Management USA (Chase Fleming), 320 Park Avenue, New
York, NY 10022 serves as the other Adviser to the Fund. Chase Fleming is a
subsidiary of The Chase Manhattan Corporation. As of July 31, 2000, Chase
Fleming managed over $178 billion of assets on behalf of individual investors,
companies, institutions, governments and central banks world-wide.
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
B-42
<PAGE> 111
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
$75 billion of assets under management as of March 31, 2000. In addition to
portfolio management, Lazard Freres provides a wide variety of investment
banking, brokerage and related services.
Wood, Struthers & Winthrop Division of DLJ Asset Management, Inc. (DLJAM),
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. As of March 31, 2000, DLJAM had
approximately $6.7 billion in assets under management. DLJAM is a subsidiary of
Donaldson, Lufkin & Jenrette Securities Corporation (DLJSC), 277 Park Avenue,
New York, New York 10172. DLJSC is a wholly owned subsidiary of Donaldson Lufkin
& Jenrette Inc (DLJ Inc), 35.3% of which is owned by The Equitable Life
Assurance Society of the United States (LIFE), 787 Seventh Avenue, New York, New
York 10019, a wholly-owned subsidiary of The Equitable Companies Incorporated
(Equitable), 787 Seventh Avenue, New York, New York 10019. Equitable owns
directly an additional 42.9% of DLJ Inc. Approximately 60.8% of the outstanding
voting common stock as well as certain convertible preferred stock of Equitable
is beneficially owned by AXA, a French insurance holding company. A group of
five French mutual insurance companies, Uni Europe Assurance Mutuelle, Alpha
Assurances I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, AXA Assurances Vie
Mutuelle, and AXA Assurances I.A.R.D. Mutuelle (the "Mutuelles"), owned directly
and indirectly through two French holding companies, Finaxa and Midi
Participations, shares representing over 50% of the voting shares of AXA. The
Mutuelles are owned by approximately 1.5 million policyholders.
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 LLC (PIMCO), 840 Newport Center
Drive, Suite 30, Newport Beach, CA 92660, serves as the Adviser to the Total
Return Bond Fund. On May 5, 2000, Allianz of America, Inc., a subsidiary of
Allianz AG, completed the acquisition of approximately 70% of the outstanding
partnership interests in PIMCO Advisors L.P. ("PIMCO Advisors"), of which PIMCO
is a subsidiary. In connection with the acquisition, Allianz of America, Inc.
entered into a put/ call arrangement with Pacific Life Insurance Company, which
holds the remainder of the partnership interests in PIMCO Advisors, for the
possible disposition of Pacific Life Insurance Company's stake in PIMCO
Advisors. As a result of this transaction, PIMCO Advisors and its subsidiaries,
including PIMCO, are now controlled by Allianz AG, a leading provider of
financial services, particularly in Europe. However, PIMCO remains operationally
independent, continues to operate under its existing name, and now leads the
global fixed income investment efforts of Allianz AG. With the addition of PIMCO
Advisors, the Allianz group manages assets of approximately $650 billion,
including more than 300 mutual funds for retail and institutional clients. PIMCO
is registered as an investment advisor with the Commission and as a commodity
trading advisor with the CFTC. As of June 30, 2000, PIMCO had approximately
$199.3 billion of assets under management.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Trust. PIMS is a subsidiary of
Prudential.
B-43
<PAGE> 112
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Trust
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Funds' Class A, Class B and Class C shares, respectively.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
Under the Plans, each Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, a Fund will not
be obligated to pay any additional expenses. If the Distributor's expenses are
less than such distribution and service fees, it will retain its full fees and
realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Funds' shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, each Fund may pay the Distributor
for its distribution-related expenses with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. The Distributor has
contractually agreed to limit its distribution-related fees payable under the
Class A Plan to .25 of 1% of the average daily net assets of the Class A shares
for the fiscal year ending July 31, 2001 for each Fund.
For the fiscal period from November 3, 1999 through July 31, 2000, the
Distributor received $53,289, $7,625, $8,884, $9,409, $8,233 and $22,009 on
behalf of the Large Capitalization Growth Fund, Large Capitalization Value Fund,
Small Capitalization Growth Fund, Small Capitalization Value Fund, International
Equity Fund and Total Return Bond Fund, respectively, under the Class A Plans.
These amounts were primarily expended for payment of account servicing fees to
financial advisers and other persons who sell Class A shares of the applicable
Fund. For the fiscal period from November 3, 1999 through July 31, 2000, the
Distributor also received approximately $523,200, $130,600, $52,900, $48,800,
$116,500 and $71,600 in initial sales charges in connection with the sale of the
Large Capitalization Growth Fund's, Large Capitalization Value Fund's, Small
Capitalization Growth Fund's, Small Capitalization Value Fund's, International
Equity Fund's and Total Return Bond Fund's Class A shares.
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,
2001.
B-44
<PAGE> 113
CLASS B PLAN. For the fiscal period from November 3, 1999 through July 31,
2000, the Distributor received $437,977, $65,111, $43,544, $26,392, $44,625 and
$41,008 on behalf of the Large Capitalization Growth Fund, Large Capitalization
Value Fund, Small Capitalization Growth Fund, Small Capitalization Value Fund,
International Equity Fund and Total Return Bond Fund, respectively, under the
Class B Plan. For the fiscal period from November 3, 1999 through July 31, 2000,
the Distributor spent approximately the following amounts on behalf of each such
Fund.
<TABLE>
<CAPTION>
COMPENSATION TO APPROXIMATE
TRUSTEE FOR TOTAL AMOUNT
COMMISSION COMMISSION SPENT BY
PAYMENTS TO PAYMENTS TO DISTRIBUTOR
FINANCIAL OVERHEAD REPRESENTATIVES AND ON BEHALF OF
FUND PRINTING ADVISERS COSTS OTHER EXPENSES FUND
---- -------- ----------- ---------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Large Capitalization Growth
Fund........................ $600 $329,600 $2,044,400 $250,400 $2,625,000
Large Capitalization Value
Fund........................ $200 $ 44,600 $ 404,800 $112,900 $ 562,500
Small Capitalization Growth
Fund........................ $100 $ 38,600 $ 198,300 $ 62,500 $ 299,500
Small Capitalization Value
Fund........................ $100 $ 18,000 $ 153,200 $ 47,700 $ 219,100
International Equity Fund..... $100 $ 27,800 $ 268,800 $ 54,600 $ 351,300
Total Return Bond Fund........ $100 $ 29,100 $ 366,700 $ 75,400 $ 471,300
</TABLE>
The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. For the fiscal period from November 3, 1999 through July 31, 2000, the
Distributor received approximately $126,600, $34,200, $8,400, $3,800, $17,100
and $15,800 in contingent deferred sales charges attributable to Class B shares
of the Large Capitalization Growth Fund, Large Capitalization Value Fund, Small
Capitalization Growth Fund, Small Capitalization Value Fund, International
Equity Fund and Total Return Bond Fund, respectively.
CLASS C PLAN. For the fiscal period from November 3, 1999 through July 31,
2000, the Distributor received $954,308, $93,983, $47,890, $27,960, $64,543 and
$35,896 under the Class C Plan of the Large Capitalization Growth Fund, Large
Capitalization Value Fund, Small Capitalization Growth Fund, Small
Capitalization Value Fund, International Equity Fund and Total Return Bond Fund,
respectively. For the fiscal period from November 3, 1999 through July 31, 2000,
the Distributor spent approximately the following amounts on behalf of each such
Fund.
<TABLE>
<CAPTION>
COMPENSATION TO APPROXIMATE
TRUSTEE FOR TOTAL AMOUNT
COMMISSION COMMISSION SPENT BY
PAYMENTS TO PAYMENTS TO DISTRIBUTOR
FINANCIAL OVERHEAD REPRESENTATIVES AND ON BEHALF OF
FUND PRINTING ADVISERS COSTS OTHER EXPENSES FUND
---- -------- ----------- ---------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Large Capitalization Growth
Fund........................ $1,200 $165,500 $1,279,800 $4,500 $1,451,000
Large Capitalization Value
Fund........................ $ 200 $ 29,500 $ 190,000 $ 800 $ 220,500
Small Capitalization Growth
Fund........................ $ 100 $ 18,700 $ 75,100 $ 600 $ 94,500
Small Capitalization Value
Fund........................ $ 100 $ 7,700 $ 51,500 $ 100 $ 59,500
International Equity Fund..... $ 200 $ 14,800 $ 123,400 $ 200 $ 138,600
Total Return Bond Fund........ $ 100 $ 3,200 $ 103,500 $ 800 $ 107,600
</TABLE>
The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. For the fiscal period November 3, 1999 through July 31, 2000,
the Distributor received approximately $62,900, $21,800,
B-45
<PAGE> 114
$6,000, $3,900, $11,500 and $18,700 in contingent deferred sales charges
attributable to Class C shares of the Large Capitalization Growth Fund, Large
Capitalization Value Fund, Small Capitalization Growth Fund, Small
Capitalization Value Fund, International Equity Fund and Total Return Bond Fund,
respectively. For the fiscal period November 3, 1999 through July 31, 2000, the
Distributor also received approximately $751,300, $159,800, $66,900, $43,400,
$99,000 and $79,300 in initial sales charges in connection with the sale of
Class C shares of the Large Capitalization Growth Fund, Large Capitalization
Value Fund, Small Capitalization Growth Fund, Small Capitalization Value Fund,
International Equity Fund and Total Return Bond Fund, respectively.
Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of each Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Trustees, including a majority vote of the Trustees who are
not interested persons of the Trust and who have no direct or indirect financial
interest in the Class A, Class B and Class C Plan or in any agreement related to
the Plans (the Rule 12b-1 Trustees), cast in person at a meeting called for the
purpose of voting on such continuance. The Plans may each be terminated at any
time, without penalty, by the vote of a majority of the Rule 12b-1 Trustees or
by the vote of the holders of a majority of the outstanding shares of the
applicable class on not more than 60 days', nor less than 30 days', written
notice to any other party to the Plans. The Plans may not be amended to increase
materially the amounts to be spent for the services described therein without
approval by the shareholders of the applicable class, and all material
amendments are required to be approved by the Board of Trustees in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Funds will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Trustees will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Funds by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons who
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Funds. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for the Class A shares and, with respect to the Total Return Bond Fund, for
the Class B and Class C shares as described above. Fee waivers and subsidies
will increase a Fund's total return.
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
B-46
<PAGE> 115
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), 194 Wood Avenue, South Iselin,
New Jersey 08830, 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.
CODES OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics. In
addition, the Manager, Advisers and Distributor have each adopted a Code of
Ethics (the Codes). The Codes permit personnel subject to the Codes to invest in
securities, including securities that may be purchased or held by a Portfolio.
However, the protective provisions of the Codes prohibit certain investments and
limit such personnel from making investments during periods when a Portfolio is
making such investments. The Codes are on public file with, and are available
from, the Commission.
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
B-47
<PAGE> 116
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.
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
affiliated brokers) 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 affiliated brokers) 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
B-48
<PAGE> 117
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.
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.
The table below sets forth certain information concerning the payment of
commissions by the Trust, including the commissions paid to Prudential
Securities or any affiliate of the Trust or the Advisers for the fiscal period
from November 3, 1999 through July 31, 2000.
<TABLE>
<CAPTION>
LARGE
LARGE CAPITALIZATION CAPITALIZATION SMALL CAPITALIZATION
GROWTH FUND VALUE FUND GROWTH FUND
-------------------- --------------- --------------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED
JULY 31, JULY 31, JULY 31,
2000 2000 2000
------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage commissions
paid by the Fund........... $212,787 $ 44,083 $ 48,894
Total brokerage commissions
paid to Prudential
Securities or affiliates of
the Trust or the
Advisers................... 0 2,812 2,986
Percentage of total brokerage
commissions paid to
Prudential Securities or
affiliates of the Trust or
the Advisers............... 0% 6.38% 6.11%
Percentage of the aggregate
dollar amount of portfolio
transactions involving the
payment of commissions
through Prudential
Securities or affiliates of
the Trust or the
Advisers................... 0% 0.10% 3.68%
</TABLE>
B-49
<PAGE> 118
<TABLE>
<CAPTION>
SMALL CAPITALIZATION INTERNATIONAL
VALUE FUND EQUITY FUND
-------------------- -------------
PERIOD ENDED PERIOD ENDED
JULY 31, JULY 31,
2000 2000
------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................. $ 28,577 $ 49,077
Total brokerage commissions paid to
Prudential Securities or affiliates
of the Trust or the Advisers......... 0 0
Percentage of total brokerage
commissions paid to Prudential
Securities or affiliates of the Trust
or the Advisers...................... 0% 0%
Percentage of the aggregate dollar
amount of portfolio transactions
involving the payment of commissions
through Prudential Securities or
affiliates of the Trust or the
Advisers............................. 0% 0%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN
BOND FUND
------------
PERIOD ENDED
JULY 31,
2000
------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund................ $ 0
Total brokerage commissions paid to Prudential Securities or
affiliates of the Trust or the Advisers................... 0
Percentage of total brokerage commissions paid to Prudential
Securities or affiliates of the Trust or the Advisers..... 0%
Percentage of the aggregate dollar amount of portfolio
transactions involving the payment of commissions through
Prudential Securities or affiliates of the Trust or the
Advisers.................................................. 0%
</TABLE>
The Funds are required to disclose their holdings of securities of their
regular brokers and dealers (as defined under Rule 10b-1 under the Investment
Company Act) and their parents at July 31, 2000.
The following table shows the value of such holdings for each relevant Fund
as of July 31, 2000. The International Equity Fund did not have any such
holdings as of July 31, 2000.
<TABLE>
<CAPTION>
TYPE OF VALUE
FUND BROKER DEALER SECURITY (000'S OMITTED)
---- -------------------------- -------- ---------------
<S> <C> <C> <C>
Large Cap. Growth Morgan Stanley Dean Witter Equity $5,229
Small Cap. Growth State Street Bank Debt 567
Goldman Sachs Equity 119
Bear Stearns Equity 70
Lehman Brothers Equity 101
Merrill Lynch Equity 233
Morgan Stanley Dean Witter Equity 228
PaineWebber Equity 7
Large Cap. Value State Street Bank Debt 1,052
Small Cap. Value State Street Bank Debt 374
Total Return Bond State Street Bank Debt 221
Bear Stearns Equity 801
Lehman Brothers Equity 500
Merrill Lynch Equity 500
Morgan Stanley Dean Witter Equity 500
</TABLE>
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<PAGE> 119
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 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.
B-51
<PAGE> 120
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.
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 July 31, 2000, 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...... $13.19 $9.33 $12.62 $11.08 $ 9.95 $ 9.99
Maximum sales charge (Total
Return Bond Fund -- 4% of
offering price; Other
Funds -- 5% of offering
price)....................... .69 .49 .66 .58 .52 .42
------ ----- ------ ------ ------ ------
Maximum offering price to
public....................... $13.88 $9.82 $13.28 $11.66 $10.47 $10.41
====== ===== ====== ====== ====== ======
</TABLE>
B-52
<PAGE> 121
<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 B
Net asset value, offering price
and redemption price per
Class B share*............... $13.11 $9.28 $12.54 $11.01 $ 9.89 $ 9.99
====== ===== ====== ====== ====== ======
CLASS C
Net asset value and redemption
price per Class C share*..... $13.11 $9.28 $12.54 $11.01 $ 9.89 $ 9.99
Sales charge (1% of offering
price)....................... .13 .09 .13 .11 .10 .10
------ ----- ------ ------ ------ ------
Offering price to public....... $13.24 $9.37 $12.67 $11.12 $ 9.99 $10.09
====== ===== ====== ====== ====== ======
</TABLE>
---------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
All Funds except the Total Return Bond Fund. If you intend to hold your
investment in a Fund for less than 4 years and do not qualify for a reduced
sales charge on Class A shares, since Class A shares are subject to an initial
sales charge of 5% and Class B shares are subject to a CDSC of 5% which declines
to zero over a 6 year period, you should consider purchasing Class C shares over
either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years, but less
than 5 years, and do not qualify for a reduced sales charge on Class A shares,
you should consider purchasing Class B or Class C shares over Class A shares.
This is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual
distribution-related fees on Class A shares. This does not take into account the
time value of money, which further reduces the impact of the higher Class B or
Class C distribution-related fee on the investment, fluctuations in NAV, the
effect of the return on the investment over this period of time or redemptions
when the CDSC is applicable.
B-53
<PAGE> 122
Total Return Bond Fund. If you intend to hold your investment in the Fund
for less than four years and do not qualify for a reduced sales charge on Class
A shares, since Class A shares are subject to an initial sales charge of 4% and
Class B shares are subject to a CDSC of 5% which declines to zero over a 6 year
period, you should consider purchasing Class C shares over either Class A or
Class B shares.
If you intend to hold your investment for longer than 4 years, but less
than 5 years, and do not qualify for a reduced sales charge on Class A shares,
you should consider purchasing Class B or Class C shares over Class A shares.
This is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
If you intend to hold your investment for longer than 6 years, you should
consider purchasing Class B shares over either Class A or Class C shares. This
is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A and Class C shares would exceed the
cumulative distribution-related fee of the Class B shares after 6 years.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 6
years for the higher cumulative annual distribution-related fee on those shares
plus the 1% initial sales charge to exceed the initial sales charge plus the
cumulative annual distribution-related fees on Class A shares. This does not
take into account the time value of money, which further reduces the impact of
the higher Class C distribution-related fee on the investment, fluctuations in
the NAV, the effect of the return on the investment over this period of time or
redemptions when the CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE -- CLASS A SHARES
Benefit Plans. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge if they meet the required
minimum for amount of assets, average 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 (including the Advisers to the Funds) of the
Prudential mutual funds provided that purchases at NAV are permitted by
such person's employer,
- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries,
- Members of the Board of Directors of Prudential,
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- Real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities Incorporated, Pruco
Securities Corporation or with the Transfer Agent,
- Registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer,
- Investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of benefit plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase,
- Investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such Individual Retirement Account or with
the proceeds of a tax-free rollover of assets from a benefit plan for
which Prudential provides administrative or recordkeeping services and
further provided that such purchase is made within 60 days of receipt of
the benefit plan distribution,
- Orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services (for
example, mutual fund "wrap" or asset allocation programs), and
- Orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment
adviser or financial planner and the broker-dealer, investment adviser or
financial planner charges the clients a separate fee for its services
(for example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the Funds in connection with different pricing options for their
programs. Investors should consider carefully any separate 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 -- How to Buy -- Reducing or Waiving Class A's Initial Sales
Charge" in the Prospectus of the Funds.
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An eligible group of related Fund investors includes any combination of the
following:
- An individual,
- The individual's spouse, their children and their parents,
- The individual's and spouse's Individual Retirement Account (IRA),
- Any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners),
- A trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children,
- A Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse, and
- One or more employee benefit plans of a company controlled by an
individual.
Also, an eligible group of related Fund investors may include an employer
(or group of related employers) and one or more qualified retirement plans of
such employer or employers (an employer controlling, controlled by or under
common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
LETTER OF INTENT
Reduced sales charges also are available to investors (or an eligible group
of related investors) who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of shares of the Fund and shares
of other Prudential mutual funds (Investment Letter of Intent). Retirement and
group plans may not enter into a Letter of Intent.
For purposes of the Investment 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.
An Investment Letter of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales charge applicable to the amount represented by the goal, as if it
were a single investment. Escrowed Class A shares totaling 5% of the dollar
amount of the Letter of Intent will be held by the Transfer Agent in the name of
the purchaser. The effective date of an Investment Letter of Intent may be
back-dated up to 90 days, in order that any investments made during this 90-day
period, valued at the purchaser's cost, can be applied to the fulfillment of the
Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the 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
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<PAGE> 125
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. Investment Letters of Intent
are available to individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of Shares --
Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the 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.
RIGHTS OF ACCUMULATION
Reduced sales charges are also available through Rights of Accumulation,
under which an investor or an eligible group of related investors, as described
above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate
the value of their existing holdings of shares of the Funds and shares of other
Prudential mutual funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) to determine the reduced sales charge.
Rights of Accumulation may be applied across the classes of shares of the
Prudential mutual funds. However, the value of shares held directly with the
Transfer Agent and through your broker will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes
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of determining the reduced sales charge is calculated using the maximum offering
or price (NAV plus maximum sales charge) as of the previous business day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charges will be granted subject to confirmation of the investor's
holdings. Rights of Accumulation are not available to individual participants in
any retirement or group plans.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before a Fund computes its NAV for that day (that is,
4:15 P.M., New York time) in order to receive that day's NAV. Your broker will
be responsible for furnishing all necessary documentation to the Distributor and
may charge you for its services in connection with redeeming shares of a Fund.
If you hold shares of a Fund through Prudential Securities, you must redeem
your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for
redemption signed by you exactly as the account is registered is required. If
you hold certificates, the certificates, signed in the name(s) shown on the face
of the certificates, must be received by the Transfer Agent, the Distributor or
your broker in order for the redemption request to be processed. If redemption
is requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Trust in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
8149, Philadelphia, PA 19101, the Distributor or to your broker.
SIGNATURE GUARANTEE
If the proceeds of the redemption (1) exceed $100,000, (2) are to be paid
to a person other than the record owner, (3) are to be sent to an address other
than the address on the Transfer Agent's records, or (4) are to be paid to a
corporation, partnership, trust or fiduciary, and your shares are held directly
with the Transfer Agent, the signature(s) on the redemption request and on the
certificates, if any, or stock power must be guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker, dealer or credit union. The Transfer Agent reserves the right to request
additional information from, and make reasonable inquiries of, any eligible
guarantor institution. For clients of Prusec, a signature guarantee may be
obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred 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
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Fund fairly to determine the value of its net assets, or (4) during any other
period when the Commission, by order, so permits; provided that applicable rules
and regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.
REDEMPTION IN KIND
If the Trustees determine that it would be detrimental to the best
interests of the remaining shareholders of a Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the investment portfolio of the Fund, in
lieu of cash, in conformity with applicable rules of the Commission. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. If your shares are redeemed in kind, you would incur transaction
costs in converting the assets into cash. The Trust, however, has elected to be
governed by Rule 18f-1 under the Investment Company Act, under which each Fund
is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1%
of the NAV of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION
In order to reduce expenses of the Funds, the Trustees may redeem all of
the shares of any shareholder, other than a shareholder which is an IRA or other
tax-deferred retirement plan, whose account has a net asset value of less than
$500 due to a redemption. The Trust will give such shareholders 60 days' prior
written notice in which to purchase sufficient additional shares to avoid such
redemption. No CDSC will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE
If you redeem your shares and have not previously exercised the repurchase
privilege, you may reinvest any portion or all of the proceeds of such
redemption in shares of the same Fund at the NAV next determined after the order
is received, which must be within 90 days after the date of the redemption. Any
CDSC paid in connection with such redemption will be credited (in shares) to
your account. (If less than a full repurchase is made, the credit will be on a
pro rata basis.) You must notify the Transfer Agent, either directly or through
the Distributor or your broker, at the time the repurchase privilege is
exercised to adjust your account for the CDSC you previously paid. Thereafter,
any redemptions will be subject to the CDSC applicable at the time of the
redemption. See "Contingent Deferred Sales Charge" below. Exercise of the
repurchase privilege will generally not affect federal tax treatment of any gain
realized upon redemption. However, if the redemption was made within a 30 day
period of the repurchase and if the redemption resulted in a loss, some or all
of the loss, depending on the amount reinvested, may not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase 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
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of determining the number of years from the time of any payment for the purchase
of shares, all payments during a month will be aggregated and deemed to have
been made on the last day of the month. The CDSC will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in The Prudential Special Money Market Fund, Inc.
The following table sets forth the rates of the CDSC applicable to
redemption of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First................................................ 5.0%
Second............................................... 4.0%
Third................................................ 3.0%
Fourth............................................... 2.0%
Fifth................................................ 1.0%
Sixth................................................ 1.0%
Seventh.............................................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of Class B shares made during the preceding six years
and 18 months for Class C shares; then of amounts representing the cost of
shares held beyond the applicable CDSC period; and finally, of amounts
representing the cost of shares held for the longest period of time within the
applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decide to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain, or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
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.
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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 (a copy of
impairment which can be expected to result in the trust agreement identifying the grantor will be
death or to be of long-continued and indefinite required as well)) is permanently disabled. The
duration. letter must also indicate the date of disability.
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 1/2 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
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shares acquired through the automatic reinvestment of dividends and other
distributions)(the Eligible Shares) will be determined on each conversion date
in accordance with the following formula: (1) the ratio of (a) the amounts paid
for Class B shares purchased at least seven years prior to the conversion date
to (b) the total amount paid for all Class B shares purchased and then held in
your account (2) multiplied by the total number of Class B shares purchased and
then held in your account. Each time any Eligible Shares in your account convert
to Class A shares, all shares or amounts representing Class B shares then in
your account that were acquired through the automatic reinvestment of dividends
and other distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different NAVs per share, the number of Eligible Shares calculated
as described above will generally be either more or less than the number of
shares actually purchased approximately seven years before such conversion date.
For example, if 100 shares were initially purchased at $10 per share (for a
total of $1,000) and a second purchase of 100 shares was subsequently made at
$11 per share (for a total of $1,100), 95.24 shares would convert approximately
seven years from the initial purchase (that is, $1,000 divided by $2,100
(47.62%), multiplied by 200 shares equals 95.24 shares). The Manager reserves
the right to modify the formula for determining the number of Eligible Shares in
the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of The Prudential Special Money Market Fund,
Inc., the time period during which such shares were held in that money market
fund will be excluded. For example, Class B shares held in The Prudential
Special Money Market Fund, Inc. for one year would not convert to Class A shares
until approximately eight years from purchase. For purposes of measuring the
time period during which shares are held in The Prudential Special Money Market
Fund, Inc., exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal 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.
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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 at net asset value per share. An investor may direct the Transfer
Agent in writing not less than five full business days prior to the record date
to have subsequent dividends 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 dividend or
distribution in cash may subsequently reinvest any such dividend or distribution
at NAV by returning the check or the proceeds to the Transfer Agent within 30
days after the payment date. Such reinvestment will be made at the NAV per share
next determined after receipt of the check or proceeds by the Transfer Agent.
Shares purchased with reinvested dividends and/or distributions will not be
subject to any CDSC upon redemption.
EXCHANGE PRIVILEGE
The Trust makes available to its shareholders the privilege of exchanging
their shares of each Fund for shares of certain other Prudential mutual funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
mutual funds may also be exchanged for shares of the Funds. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. For retirement and group plans having a limited menu of Prudential
mutual funds, the exchange privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
whose shares you wish to exchange at (800) 225-1852 to execute a telephone
exchange of shares, on weekdays, except holidays, between the hours of 8:00 A.M.
and 6:00 P.M., New York time. For your protection and to prevent fraudulent
exchanges, your telephone call will be recorded and you will be asked to provide
your personal identification number. A written confirmation of the exchange
transaction will be sent to you. Neither the Trust nor its agents will be liable
for any loss, liability or cost which results from acting upon instructions
reasonably believed to be genuine under the foregoing procedures. All exchanges
will be made on the basis of the relative NAV of the two funds next determined
after the request is received in good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
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
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shares upon exchange of Class A shares may use the exchange privilege only to
acquire Class A shares of the Prudential Mutual Funds participating in the
exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of a Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and Class
C shares acquired as a result of an exchange. The applicable sales charge will
be that imposed by the fund in which shares were initially purchased and the
purchase date will be deemed to be the first day of the month after the initial
purchase, rather than the date of the exchange.
Class B and Class C shares of a Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money market
fund. In order to minimize the period of time in which shares are subject to a
CDSC, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held in
a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into a Fund from a money market fund during the
month (and are held in the Fund at the end of the month), the entire month will
be included in the CDSC holding period. Conversely, if shares are exchanged into
a money market fund prior to the last day of the month (and are held in the
money market fund on the last day of the month), the entire month will be
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.
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SPECIAL EXCHANGE PRIVILEGES
A special exchange privilege is available for shareholders who qualify to
purchase Class A shares at NAV. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Eligibility for this exchange privilege will be calculated on the business
day prior to the date of the exchange. Amounts representing Class B or Class C
shares which are not subject to a CDSC include the following: (1) amounts
representing Class B or Class C shares acquired pursuant to the automatic
reinvestment of dividends and distributions, (2) amounts representing the
increase in the NAV above the total amount of payments for the purchase of Class
B or Class C shares and (3) amounts representing Class B or Class C shares held
beyond the applicable CDSC period. Class B and Class C shareholders must notify
the Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Additional details about the exchange privilege and prospectuses for each
of the Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on 60 days' notice, and any fund, including the Trust, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
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,
1994. 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.
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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. The withdrawal plan provides for
monthly, quarterly, semi-annual or annual redemption checks in any amount,
except as provided below, up to the value of the shares in the shareholder's
account. Withdrawals of Class B or Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and 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 systematic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate a
fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently 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
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<PAGE> 135
an IRA, assuming a $2,000 annual contribution, an 8% rate of return and a 39.6%
federal income tax bracket and shows how much more retirement income can
accumulate within an IRA as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
10 years..................................... $ 26,165 $ 31,291
15 years..................................... 44,675 58,649
20 years..................................... 68,109 98,846
25 years..................................... 97,780 157,909
30 years..................................... 135,346 244,692
</TABLE>
---------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, the Funds may be included in a mutual fund program with
other Prudential mutual funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as, to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Trust may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial adviser
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Each Fund's net asset value per share or NAV is determined by subtracting
its liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Fund will compute its NAV at 4:15 P.M., New York time, on each day the New York
Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Fund shares have been received or days on which changes
in the value of the Fund's portfolio securities do not affect NAV. In the event
the New York Stock Exchange closes early on any business day, the NAV of the
Fund's shares shall be determined at a time between such closing and 4:15 P.M.,
New York time. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Under the Investment Company Act, the 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
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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.
TAXES, DIVIDENDS AND DISTRIBUTIONS
Each Fund is qualified, intends to remain qualified and has elected to be
traded 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 under the
Internal Revenue Code 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, (i) 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 (ii) 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.
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In addition, the Fund is required to distribute 98% of its ordinary income
in the same calender year in which it is earned. The 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, the Fund must distribute during the calendar year all undistributed
ordinary income and undistributed capital gain net income from the prior
calendar 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, the Fund will be subject to a non-deductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the Fund
pays income tax is treated as distributed.
Gains or losses on sales of securities by each Fund generally will be
treated as long-term capital gains or losses if the securities have been held by
it for more than one year, except in certain cases where 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.
Certain futures contracts and certain listed options, (referred to as and
Section 1256 contracts) and held by the funds 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 their fair market value on the last day
of the Fund's taxable year. Except with respect to certain foreign currency
forward contracts, sixty percent of any gain or loss recognized on such deemed
sales and on actual dispositions will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock
and on narrowly-based stock indexes 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
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shareholders, rather than as an ordinary dividend, thereby 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 () 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. In addition, dividends, and capital gains,
distributions also may be subject to the state and local 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.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B, and Class C shares. See "Net Asset Value."
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. Net 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. Foreign shareholders are advised to consult their
own tax adviser, with respect to the particular tax consequences resulting from
their investments in the Funds.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent each Fund's income is derived
from qualified dividends received by each Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts (described above), and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are eligible for the dividends-received deduction.
Each Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. Each Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
twelve months ending on October 31 of such calendar year. In addition, each Fund
must distribute during the calendar year all undistributed ordinary income and
undistributed capital gain net income from the prior year or the twelve-month
period ending on October 31 of such prior calendar year, respectively. To the
extent it does not meet these distribution requirements, each Fund will be
subject to a non-deductible 4% excise tax on the undistributed amount. For
purposes of this excise tax, income on which each Fund pays income tax is
treated as distributed.
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Each Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If a Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or on any gain from disposition of the stock (collectively, PFIC income),
plus interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. Each
Fund may make a "mark-to-market" election with respect to any marketable stock
it holds of a PFIC. If the election is in effect, at the end of a Fund's taxable
year, the Fund will recognize the amount of gains, if any, as ordinary income
with respect to PFIC stock. No loss will be recognized on PFIC stock, except to
the extend of gains recognized in prior years. Alternatively, a Fund, if it
meets certain requirements, may elect to treat any PFIC in which it invests as a
"qualified electing fund," in which case, in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the qualified electing Fund's annual ordinary earnings and
net capital gain, even if they are not distributed to the Fund; those amounts
would be subject to the distribution requirements applicable to the Fund
described above.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which a Fund will be subject, since the amount of each Fund's
assets to be invested in various countries will vary. Except in the case of the
International Equity Fund, the Funds do not expect to meet the requirements of
the Internal Revenue Code for "passing-through" to its shareholders any foreign
income taxes paid.
Dividends and distributions may also be subject to state and local taxes.
Shareholders are advised to consult their own tax adviser with respect to
the federal, state and local tax consequences resulting from their investment in
other Funds.
PERFORMANCE INFORMATION
YIELD
The Trust may from time to time advertise the yield of the Total Return
Bond Fund as calculated over a 30-day period. This yield will be computed by
dividing the Fund's net investment income per share earned during this 30-day
period by the maximum offering price per share on the last day of this period.
The average number of shares used in determining the net investment income per
share will be the average daily number of shares outstanding during the 30-day
period that were eligible to receive dividends. In accordance with regulations
of the 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
B-71
<PAGE> 140
30-day yield is then annualized on a bond-equivalent basis assuming semi-annual
reinvestment and compounding of net investment income. Yield is calculated
according to the following formula:
a-b
YIELD = 2[(-------+1)(6) - 1]
cd
<TABLE>
<S> <C> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
</TABLE>
The Fund's yield will fluctuate, and an annualized yield quotation is not a
representation by the Fund as to what an investment in the Fund will actually
yield for any given period. Yields for the Fund will vary based on a number of
factors including changes in net asset value, market conditions, the level of
interest rates and the level of income and expenses.
Below is the 30-day yield for the Total Return Bond Fund share classes for
the period ended July 31, 2000.
<TABLE>
<S> <C>
Class A..................................................... 4.45%
Class B..................................................... 4.13%
Class C..................................................... 4.09%
</TABLE>
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).
The total returns for the period since inception (November 3, 1999 for each
Fund) through July 31, 2000 are set forth in the table below, after the effect
of initial or contingent deferred sales charges.
<TABLE>
<CAPTION>
TOTAL RETURN
-------------------------
PORTFOLIO A B C
--------- ------ ------ -----
<S> <C> <C> <C>
Large Capitalization Growth Fund............................ 25.31% 26.10% 28.79%
Large Capitalization Value Fund............................. (11.10) (12.02) (8.95)
Small Capitalization Growth Fund............................ 19.89 20.40 23.15
Small Capitalization Value Fund............................. 5.26 5.10 8.00
International Equity Fund................................... (5.67) (6.30) (3.29)
Total Return Bond Fund...................................... (0.82) (2.50) 0.92
</TABLE>
B-72
<PAGE> 141
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.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total returns for each Fund since inception (November 3, 1999
for each Fund) through July 31, 2000 are set forth in the table below.
<TABLE>
<CAPTION>
AGGREGATE ANNUAL
TOTAL RETURN
-----------------------
PORTFOLIO A B C
--------- ----- ----- -----
<S> <C> <C> <C>
Large Capitalization Growth Fund............................ 31.90% 31.10 31.10
Large Capitalization Value Fund............................. (6.42) (7.02) (7.02)
Small Capitalization Growth Fund............................ 26.20 25.40 25.40
Small Capitalization Value Fund............................. 10.80 10.10 10.10
International Equity Fund................................... (.70) (1.30) (1.30)
Total Return Bond Fund...................................... 3.32 2.95 2.95
</TABLE>
ADVERTISING. Advertising materials for the Trust may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by a Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Trust also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of these
entities.
From time to time, advertising materials for the Trust may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Trust shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indexes. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed-income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
B-73
<PAGE> 142
Set forth below is a chart which compares the performance of different
types of investments over the long-term and the rate of inflation.(1)
[Bar Graph]
<TABLE>
<CAPTION>
PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS OVER THE LONG TERM
(12/31/1925-12/31/1999)
-----------------------
<S> <C>
Common Stocks 11.40
Long-Term Gov't. Bonds 5.10
Inflation 3.10
</TABLE>
Comparative performance information may be used from time to time in
advertising or marketing the Fund shares, including data from Lipper, Inc.,
Morningstar Publications, Inc., Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
---------------
(1) Source: Ibbotson Associates. All rights reserved. Common stock returns are
based on the Standard & Poor's 500 Composite Stock Index, a market-weighted,
unmanaged index of 500 common stocks in a variety of industry sectors. It is
a commonly used indicator of stock price movements. This chart is for
illustrative purposes only and is not intended to represent the performance
of any particular investment or fund. Investors cannot invest directly in an
index. Past performance is not a guarantee of future results.
B-74
<PAGE> 143
TARGET FUNDS Large Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
LONG-TERM INVESTMENTS 95.1%
COMMON STOCKS 95.1%
------------------------------------------------------------------------------------------------------
BANKS 1.5%
115,700 MBNA Corp. $ 3,861,488
------------------------------------------------------------------------------------------------------
BROADCASTING 1.6%
23,900 AMFM Inc.(a) 1,707,356
19,500 Univision Communications Inc.(a) 2,422,875
--------------
4,130,231
------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 2.1%
29,000 Omnicom Group Inc. 2,465,000
25,000 Waters Corp. 2,965,625
--------------
5,430,625
------------------------------------------------------------------------------------------------------
COMPUTERS & BUSINESS EQUIPMENT 0.7%
68,300 Compaq Computer Corp. 1,916,669
------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES 10.7%
63,000 BEA Systems, Inc. 2,712,937
23,500 Check Point Software Technologies Ltd. 2,726,000
123,750 EMC Corp.(a) 10,534,219
21,000 Foundry Networks, Inc. 1,718,063
62,100 Microsoft Corp.(a) 4,335,356
35,000 Oracle Systems Corp.(a) 2,631,562
21,000 Siebel Systems Inc.(a) 3,045,000
--------------
27,703,137
------------------------------------------------------------------------------------------------------
DRUGS & HEALTHCARE 9.6%
10,000 Affymetrix, Inc.(a) 1,365,469
100,000 HCA - The Healthcare Company 3,400,000
60,400 Medtronic, Inc. 3,084,175
47,800 Merck & Co., Inc. 3,426,662
29,000 PE Corp. 2,528,437
125,525 Pfizer, Inc. 5,413,266
</TABLE>
B-75 See Notes to Financial Statements
<PAGE> 144
TARGET FUNDS Large Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
43,000 Pharmacia Corporation $ 2,354,250
15,000 QLT Phototherapeutics(a) 988,125
38,000 Teva Pharmaceutical Industries Ltd. (ADR) (Israel) 2,308,500
--------------
24,868,884
----------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 7.8%
214,200 Applied Materials, Inc.(a) 16,252,425
129,875 Atmel Corp.(a) 3,888,133
--------------
20,140,558
----------------------------------------------------------------------------------------------
ELECTRONICS 17.4%
81,500 CIENA Corp. 11,583,188
459,100 Cisco Systems, Inc.(a) 30,042,356
52,000 Motorola, Inc. 1,719,250
48,000 Palm, Inc. 1,872,000
--------------
45,216,794
----------------------------------------------------------------------------------------------
ENTERTAINMENT 0.7%
47,000 Walt Disney Co. 1,818,313
----------------------------------------------------------------------------------------------
FINANCIAL SERVICES 6.2%
37,500 Chase Manhattan Corp. 1,863,281
104,150 Citigroup Inc. 7,349,084
57,300 Morgan Stanley Dean Witter & Co. 5,228,625
37,000 Wells Fargo & Co. 1,528,563
--------------
15,969,553
----------------------------------------------------------------------------------------------
FOOD & BEVERAGES 3.6%
42,000 Anheuser Busch Companies, Inc. 3,381,000
84,000 PepsiCo, Inc. 3,848,250
53,000 SYSCO Corp. 2,086,875
--------------
9,316,125
----------------------------------------------------------------------------------------------
INSURANCE 2.2%
46,763 American International Group, Inc. 4,100,487
15,500 CIGNA Corp. 1,548,062
--------------
5,648,549
</TABLE>
See Notes to Financial Statements B-76
<PAGE> 145
TARGET FUNDS Large Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
INTERNET SOFTWARE & SERVICES 3.3%
39,000 America Online, Inc.(a) $ 2,079,187
14,300 Ariba Inc. 1,657,906
26,700 Digex, Inc. 1,683,769
42,000 Exodus Communications, Inc.(a) 1,866,375
10,000 Yahoo Inc. (a) 1,286,875
--------------
8,574,112
-------------------------------------------------------------------------------------------------------
OIL & GAS 1.9%
29,000 Coastal Corp.(a) 1,674,750
43,000 Enron Corp. 3,165,875
--------------
4,840,625
-------------------------------------------------------------------------------------------------------
OIL FIELD / EQUIPMENT & SERVICES 1.5%
26,000 BJ Services Co.(a) 1,517,750
32,000 Schlumberger, Ltd. 2,366,000
--------------
3,883,750
-------------------------------------------------------------------------------------------------------
POLLUTION CONTROL 0.5%
77,000 Waste Management, Inc. 1,438,938
-------------------------------------------------------------------------------------------------------
RETAIL TRADE 2.3%
35,900 Home Depot, Inc. 1,857,825
36,000 Kohl's Corp.(a) 2,043,000
39,000 Wal-Mart Stores, Inc. 2,142,562
--------------
6,043,387
-------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT 17.5%
206,950 Intel Corp. 13,813,913
162,000 Linear Technology Corp. 8,950,500
152,800 Maxim Integrated Products, Inc.(a) 10,094,350
168,100 Xilinx Inc.(a) 12,618,006
--------------
45,476,769
</TABLE>
B-77 See Notes to Financial Statements
<PAGE> 146
TARGET FUNDS Large Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
TELECOMMUNICATION 1.2%
21,500 Copper Mountain Networks, Inc.(a) $ 1,695,477
11,000 VoiceStream Wireless Corp. 1,410,750
--------------
3,106,227
-------------------------------------------------------------------------------------------------------------
UTILITIES 2.8%
66,000 AES Corp.(a) 3,526,875
53,000 Calpine Corp. 3,776,250
--------------
7,303,125
--------------
Total common stocks (cost $188,397,950) 246,687,859
--------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS 4.7%
PRINCIPAL
AMOUNT
(000)
REPURCHASE AGREEMENT 4.7%
<S> <C> <C>
$12,134 State Street Bank & Trust Co.,
5.25%, 7/31/00, due 8/1/00 in the amount of
$12,135,770 (cost $12,134,000; collateralized by
$5,055,000 U.S. Treasury Bonds, 6.75%, 8/15/26,
and by $4,375,000 U.S. Treasury Bonds, 11.25%,
2/15/15, value of collateral including accrued
interest is $12,382,195) 12,134,000
--------------
TOTAL INVESTMENTS 99.8%
(COST $200,531,950; NOTE 4) 258,821,859
Other assets in excess of liabilities 0.2% 411,290
--------------
NET ASSETS 100% $ 259,233,149
==============
</TABLE>
(a) Non-income producing.
ADR--American Depository Receipt.
See Notes to Financial Statements B-78
<PAGE> 147
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
LONG-TERM INVESTMENTS 98.2%
COMMON STOCKS 97.4%
-----------------------------------------------------------------------------------------------------------------
AEROSPACE 4.3%
1,800 B.F. Goodrich Co. $ 64,238
2,100 Boeing Co. 102,900
2,900 Honeywell International, Inc. 97,512
13,430 Lockheed Martin Corp. 377,719
4,420 Northrop Grumman Corp. 314,096
5,570 TRW, Inc. 250,302
800 United Technologies Corp. 46,700
--------------
1,253,467
-----------------------------------------------------------------------------------------------------------------
AIRLINES 0.1%
100 AMR Corp.(a) 3,306
500 Southwest Airlines Co. 11,813
--------------
15,119
-----------------------------------------------------------------------------------------------------------------
APPAREL & TEXTILES 0.4%
1,400 Jones Apparel Group, Inc.(a) 32,025
4,800 Russell Corp. 94,500
--------------
126,525
-----------------------------------------------------------------------------------------------------------------
AUTO PARTS 1.9%
3,202 ArvinMeritor, Inc. 50,031
10,250 Dana Corp. 235,110
10,980 Delphi Automotive Systems Corp. 162,641
1,900 Goodyear Tire & Rubber Co. 37,881
2,120 Tenneco Automotive, Inc. 12,455
1,637 Visteon Corp. 22,918
1,000 W.W. Grainger, Inc. 31,750
--------------
552,786
-----------------------------------------------------------------------------------------------------------------
AUTOMOBILES 3.7%
12,230 Ford Motor Co. 569,459
10,532 General Motors Corp. 520,177
--------------
1,089,636
</TABLE>
B-79 See Notes to Financial Statements
<PAGE> 148
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
BANKS 6.0%
2,800 Bank America Corp. $ 132,650
10,860 Bank One Corp. 345,484
2,100 BankNorth Group, Inc. 32,156
1,800 Charter One Financial, Inc. 38,812
2,900 Dime Bancorp, Inc. 46,762
2,760 First Security Corp. 39,675
600 First Tennessee National Corp. 10,950
11,410 First Union Corp. 294,521
600 Firstar Corp. 11,850
300 Firstmerit Corp. 6,263
1,500 Fleet Boston Financial Corp. 53,719
2,300 GreenPoint Financial Corp. 54,050
2,000 Hibernia Corp. 21,875
8,970 KeyCorp 157,536
500 Marshall & Ilsley Corp. 22,625
1,300 Mercantile Bankshares Corp. 41,356
400 National Commerce Bancorp. 7,000
3,300 North Fork Bancorporation, Inc. 50,944
1,600 PNC Bank Corp. 81,400
1,100 Regions Financial Corp. 21,931
2,100 SouthTrust Corp. 51,712
2,200 Summit Bancorp. 54,037
1,300 TCF Financial Corp. 38,269
2,700 U.S. Bancorp. 51,806
4,020 UnionBanCal Corp. 76,380
300 Wells Fargo & Co. 12,394
--------------
1,756,157
-------------------------------------------------------------------------------------------------------
BUILDING & CONSTRUCTION 0.3%
3,030 Harsco Corp. 87,870
-------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 0.7%
700 Automatic Data Processing, Inc. 34,694
11,320 Xerox Corp. 168,385
--------------
203,079
-------------------------------------------------------------------------------------------------------
CHEMICALS 2.2%
1,700 Air Products & Chemicals, Inc. 56,737
8,780 Dow Chemical Co. 252,425
</TABLE>
See Notes to Financial Statements B-80
<PAGE> 149
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
4,030 Eastman Chemical Co. $ 188,906
1,500 PPG Industries, Inc. 61,031
1,000 Praxair, Inc. 39,563
1,500 Rohm & Haas Co. 39,000
--------------
637,662
------------------------------------------------------------------------------------------------------------
COMPUTERS & BUSINESS EQUIPMENT 1.2%
200 Advanced Micro Devices, Inc.(a) 14,387
1,000 Apple Computer, Inc. 50,812
900 Cisco Systems, Inc.(a) 58,894
2,300 Compaq Computer Corp. 64,544
300 EMC Corp.(a) 25,537
500 Hewlett-Packard Co. 54,594
200 Lexmark International Group, Inc.(a) 9,013
600 Seagate Technology, Inc.(a) 30,412
500 Sun Microsystems, Inc.(a) 52,719
--------------
360,912
------------------------------------------------------------------------------------------------------------
CONGLOMERATE 0.6%
1,900 General Electric Co. 97,731
1,500 ITT Industries, Inc. 49,313
600 Tyco International Ltd. 32,100
--------------
179,144
------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCT 3.4%
4,460 American General Corp. 297,426
8,100 Eastman Kodak Co. 444,488
5,150 Fortune Brands, Inc. 115,875
16,990 Pactiv Corp.(a) 157,158
--------------
1,014,947
------------------------------------------------------------------------------------------------------------
COSMETICS & TOILETRIES 0.9%
300 Estee Lauder Cos., Inc. 13,200
1,200 Gillette Co. 35,025
3,700 Procter & Gamble Co. 210,438
--------------
258,663
</TABLE>
B-81 See Notes to Financial Statements
<PAGE> 150
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
DOMESTIC OIL 1.1%
455 Anadarko Petroleum Corp. $ 21,755
100 Apache Corp. 4,975
700 Conoco, Inc. 23,063
1,000 Conoco, Inc., (Class B) 15,662
100 Devon Energy Corp. 4,575
980 Sunoco, Inc. 23,888
9,860 USX - Marathon Group 239,721
--------------
333,639
-----------------------------------------------------------------------------------------------------------------
DRUGS & HEALTHCARE 4.4%
2,400 Abbott Laboratories 99,900
800 ALZA Corp.(a) 51,800
1,400 American Home Products Corp. 74,287
1,850 Baxter International, Inc. 143,837
1,200 Becton, Dickinson & Co. 30,300
1,800 Bristol-Myers Squibb Co. 89,325
800 C.R. Bard, Inc. 40,050
200 Cardinal Health, Inc. 14,700
700 CIGNA Corp. 69,913
500 Eli Lilly & Co. 51,938
100 Genzyme Corp. 6,944
1,000 HCA-The Healthcare Corp. 34,000
100 Human Genome Sciences, Inc. 12,081
2,400 Johnson & Johnson 223,350
2,500 Merck & Co., Inc. 179,219
1,700 Pharmacia Corporation 93,075
300 St. Jude Medical, Inc.(a) 12,375
1,900 Tenet Healthcare Corp.(a) 57,831
100 Vertex Pharmaceuticals, Inc. 9,794
--------------
1,294,719
-----------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES 7.7%
600 Allegheny Energy, Inc. 18,825
700 Ameren Corp. 25,331
4,714 American Electric Power Co., Inc. 154,678
1,300 Cinergy Corp. 33,800
</TABLE>
See Notes to Financial Statements B-82
<PAGE> 151
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
4,670 CMS Energy Corp. $ 119,377
200 Consolidated Edison, Inc. 6,063
2,200 CP&L Energy, Inc. 73,563
7,090 DTE Energy Co. 222,449
4,720 Dynegy, Inc. (Class A) 332,170
4,530 Edison International 89,184
4,400 Entergy Corp. 119,350
500 FPL Group, Inc. 24,125
4,240 General Public Utilities Corp. 112,360
4,410 PECO Energy Co. 188,252
2,000 PG&E Corp. 51,750
1,600 Pinnacle West Capital Corp. 63,300
5,670 PPL Corp. 153,090
3,740 Public Service Enterprise Group, Inc. 125,758
4,973 SCANA Corp. 130,852
5,440 TXU Corp. 170,000
2,800 Wisconsin Energy Corp. 55,650
--------------
2,269,927
-----------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 0.5%
1,700 Cooper Industries, Inc. 54,506
400 Emerson Electric Co. 24,425
1,100 Johnson Controls, Inc. 57,132
--------------
136,063
-----------------------------------------------------------------------------------------------
ELECTRONICS 0.4%
3,310 Rockwell International Corp. 116,057
100 Solectron Corp.(a) 4,031
--------------
120,088
-----------------------------------------------------------------------------------------------
ENTERTAINMENT 0.6%
1,000 Fox Entertainment Group, Inc. 30,625
3,600 Walt Disney Co. (The) 139,275
--------------
169,900
-----------------------------------------------------------------------------------------------
Financial Services 10.4%
100 Ameritrade Holding Corp. 1,281
1,900 Associates First Capital Corp. 49,756
</TABLE>
B-83 See Notes to Financial Statements
<PAGE> 152
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
1,300 AXA Financial, Inc. $ 49,725
1,300 Bear Stearns Cos., Inc. 70,038
1,000 Capital One Financial 58,625
1,900 CIT Group (The)(a) 35,150
10,300 Citigroup, Inc. 726,794
700 E*Trade Group, Inc. 10,500
700 Edwards (A.G.), Inc. 37,013
900 Federal Home Loan Mortgage Corp. 35,494
8,350 Federal National Mortgage Association 416,456
1,100 Franklin Resources, Inc. 39,463
1,200 Goldman Sachs Group, Inc. 118,725
5,830 Household International, Inc. 259,799
900 Lehman Brothers Holdings, Inc. 101,137
1,200 MBIA, Inc. 66,825
1,100 MBNA Corp. 36,713
1,800 Merrill Lynch & Co., Inc. 232,650
2,500 Morgan Stanley Dean Witter & Co. 228,125
100 PaineWebber Group, Inc. 6,925
700 Providian Financial Corp. 71,356
800 Schwab (Charles) Corp. 28,900
1,000 TD Waterhouse Group, Inc. 18,250
11,570 Washington Mutual, Inc. 371,686
--------------
3,071,386
-----------------------------------------------------------------------------------------------
FOOD & BEVERAGES 2.0%
2,260 Anheuser Busch Companies, Inc. 181,930
100 Bestfoods 6,962
1,000 General Mills, Inc. 34,375
2,100 H.J. Heinz Co. 83,869
2,100 Kellogg Co. 54,469
1,900 McDonald's Corp. 59,850
1,200 Quaker Oats Co. 80,700
1,000 Ralston Purina Co. 20,187
1,500 Unilever NV (Netherlands) 66,375
--------------
588,717
</TABLE>
See Notes to Financial Statements B-84
<PAGE> 153
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
FOREST PRODUCTS 2.8%
16,220 Georgia-Pacific Corp. $ 449,869
2,000 Kimberly-Clark Corp. 114,875
5,800 Weyerhaeuser Co. 264,987
--------------
829,731
-----------------------------------------------------------------------------------------------
GAS & PIPELINE UTILITIES 0.3%
700 El Paso Energy Corp. 33,863
1,100 Williams Companies, Inc. (The) 45,925
--------------
79,788
-----------------------------------------------------------------------------------------------
HOTELS 0.3%
1,200 Marriott International, Inc. 48,000
1,300 Starwood Hotels & Resort Worldwide, Inc. 44,362
--------------
92,362
-----------------------------------------------------------------------------------------------
HOUSEHOLD APPLIANCES &
HOME FURNISHINGS 0.3%
2,300 Whirlpool Corp. 99,331
-----------------------------------------------------------------------------------------------
INDUSTRIAL MACHINERY 0.8%
1,700 Caterpillar, Inc. 57,906
200 Deere & Co. 7,713
800 Eaton Corp. 54,250
800 Ingersoll-Rand Co. 31,400
900 PACCAR, Inc. 40,106
1,200 Parker-Hannifin Corp. 42,675
--------------
234,050
-----------------------------------------------------------------------------------------------
INSURANCE 8.7%
5,100 Aetna, Inc. 283,050
400 AFLAC, Inc. 20,775
17,900 Allstate Corp. 493,369
2,850 American International Group, Inc. 249,909
1,300 Aon Corp. 46,800
1,400 Hartford Financial Services Group 89,950
900 Jefferson-Pilot Corp. 54,900
1,900 John Hancock Financial Services, Inc. 44,888
7,130 Lincoln National Corp. 311,046
9,590 Metlife, Inc. 201,390
3,720 ReliaStar Financial Corp. 197,858
</TABLE>
B-85 See Notes to Financial Statements
<PAGE> 154
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
6,550 SAFECO Corp. $ 151,059
8,250 St. Paul Companies, Inc. 366,609
2,200 Torchmark Corp. 54,725
--------------
2,566,328
-----------------------------------------------------------------------------------------------
INTERNATIONAL OIL 5.0%
2,600 Chevron Corp. 205,400
9,100 Exxon Mobil Corp. 728,000
12,070 Occidental Petroleum Corp. 244,418
2,100 Phillips Petroleum Co. 106,706
1,100 Royal Dutch Petroleum Co. 64,075
2,450 Texaco, Inc. 121,122
--------------
1,469,721
-----------------------------------------------------------------------------------------------
MACHINERY 0.5%
19,930 CNH Global NV (Netherlands) 155,703
-----------------------------------------------------------------------------------------------
MEDIA 1.6%
300 AMFM, Inc. 21,431
200 Clear Channel Communications, Inc.(a) 15,237
2,800 Comcast Corp. 95,244
1,900 Gannett Co., Inc. 102,362
1,000 Knight-Ridder, Inc. 52,125
1,200 New York Times Co. 49,425
1,500 Seagram Co., Ltd. 84,094
700 Time Warner, Inc. 53,681
--------------
473,599
-----------------------------------------------------------------------------------------------
MINING 0.4%
100 Minnesota Mining & Manufacturing Co. 9,006
2,670 Phelps Dodge Corp. 108,636
--------------
117,642
-----------------------------------------------------------------------------------------------
NON-FERROUS METALS 1.8%
400 Alcan Aluminum Ltd. 13,125
17,172 Alcoa, Inc. 519,453
--------------
532,578
-----------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT
& SERVICES 0.8%
1,600 Baker Hughes, Inc. 55,400
</TABLE>
See Notes to Financial Statements B-86
<PAGE> 155
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
300 Cooper Cameron Corp.(a) $ 19,388
1,000 Global Marine, Inc.(a) 28,312
6,070 Ultramar Diamond Shamrock 138,851
--------------
241,951
----------------------------------------------------------------------------------------------
PAPER & RELATED PRODUCTS
1.5%
100 Fort James Corp. 3,056
11,240 International Paper Co. 382,160
1,000 Smurfit-Stone Container Corp.(a) 12,437
900 Temple-Inland, Inc. 39,094
--------------
436,747
----------------------------------------------------------------------------------------------
POLLUTION CONTROL 0.5%
7,440 Waste Management, Inc. 139,035
----------------------------------------------------------------------------------------------
RAILROADS & EQUIPMENT
1.4%
2,100 Burlington Northern, Inc. 51,319
100 C H Robinson Worldwide, Inc. 6,377
2,000 CSX Corp. 49,625
12,900 Norfolk Southern Corp. 240,262
1,600 Union Pacific Corp. 69,100
--------------
416,683
----------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT
TRUST 0.5%
1,400 Crescent Real Estate Equities, Inc. 30,887
1,000 Equity Office Properties Trust 30,500
400 Equity Residential Properties Trust 19,950
100 Prologis Trust 2,331
1,100 Public Storage, Inc. 28,188
1,200 Vornado Realty Trust 46,950
--------------
158,806
----------------------------------------------------------------------------------------------
RETAILING 3.2%
200 Best Buy Co., Inc. 14,550
200 Circuit City Stores, Inc. 4,588
1,600 Federated Department Stores, Inc.(a) 38,500
500 Gap, Inc. 17,906
1,400 Kroger Co.(a) 28,962
600 Lowe's Companies, Inc. 25,313
11,350 May Department Stores Co. 269,562
</TABLE>
B-87 See Notes to Financial Statements
<PAGE> 156
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
7,100 Penney (J.C.) Co., Inc. $ 114,487
7,080 Sears, Roebuck & Co. 211,515
3,400 Target Corp. 98,600
1,400 The Limited, Inc. 28,613
2,400 TJX Companies, Inc. 40,200
700 Wal-Mart Stores, Inc. 38,456
--------------
931,252
----------------------------------------------------------------------------------------------
SEMICONDUCTORS &
EQUIPMENT 0.4%
200 Applied Materials, Inc.(a) 15,175
800 Intel Corp. 53,400
100 Lattice Semiconductor Corp.(a) 5,488
200 National Semiconductor Corp.(a) 7,237
400 Texas Instruments, Inc. 23,475
--------------
104,775
----------------------------------------------------------------------------------------------
SOFTWARE 1.0%
100 Adobe Systems, Inc. 11,450
100 BMC Software Corp.(a) 1,888
600 Citrix Systems, Inc.(a) 9,150
8,000 Computer Associates International, Inc. 198,500
200 Doubleclick, Inc.(a) 7,187
400 Electronic Data Systems Corp. 17,200
400 Microsoft Corp.(a) 27,925
100 Siebel Systems, Inc.(a) 14,500
200 Symantec Corp.(a) 10,250
--------------
298,050
----------------------------------------------------------------------------------------------
STEEL 0.6%
1,200 Allegheny Technologies, Inc. 24,825
700 Nucor Corp. 26,425
6,780 USX Corp.-U.S. Steel Group 121,616
--------------
172,866
----------------------------------------------------------------------------------------------
TELECOMMUNICATION 9.5%
300 Allegiance Telecom, Inc.(a) 16,669
4,050 ALLTEL Corp. 249,581
17,375 AT&T Corp. 537,540
6,200 AT&T Corp.-Liberty Media 137,950
2,600 BellSouth Corp. 103,512
</TABLE>
See Notes to Financial Statements B-88
<PAGE> 157
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
200 Exodus Communications, Inc.(a) $ 8,888
1,200 Global Crossing, Ltd.(a) 29,175
200 Level 3 Communications, Inc.(a) 13,688
3,200 Motorola, Inc. 105,800
300 Nortel Networks Corp. 22,313
2,675 Qwest Communications International, Inc.(a) 125,558
14,210 SBC Communications, Inc. 604,813
900 Sprint Corp. 45,800
100 Tellabs, Inc. 6,500
14,175 Verizon Communications 666,225
3,400 WorldCom, Inc. 132,812
--------------
2,806,824
---------------------------------------------------------------------------------------------------------
TOBACCO 2.4%
27,540 Philip Morris Companies, Inc. 695,385
---------------------------------------------------------------------------------------------------------
TOYS & AMUSEMENTS
1,000 Hasbro, Inc. 11,375
---------------------------------------------------------------------------------------------------------
TRUCKING & FREIGHT FORWARDING 0.3%
600 FedEx Corp. 23,775
2,500 Ryder System, Inc. 52,188
--------------
75,963
--------------
Total common stocks (cost $30,030,338) 28,660,951
--------------
</TABLE>
B-89 See Notes to Financial Statements
<PAGE> 158
TARGET FUNDS Large Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
Rights(a)
18,330 CNH Global NV
expires 8/4/00
(cost $0) $ 0
----------------------------------------------------------------------------------------------
COMMON STOCK UNIT 0.8%
1,625 S&P 500 Depository Receipts
(cost $224,088) 232,222
--------------
Total long-term investments (cost $30,254,426) 28,893,173
--------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS 1.9%
PRINCIPAL
AMOUNT
(000)
<S> <C> <C>
$ 567 Seven Seas Series Government Fund
6.24%*
(cost $567,194) 567,194
--------------
TOTAL INVESTMENTS 100.1%
(COST $30,821,620; NOTE 4) 29,460,367
Liabilities in excess of other assets (0.1%) (34,966)
--------------
NET ASSETS 100% $ 29,425,401
==============
</TABLE>
* Rate represents yield at purchase date.
(a) Non-income producing security.
NV--Naamkee Vennootachap (Dutch Corporation)
See Notes to Financial Statements B-90
<PAGE> 159
TARGET FUNDS Small Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
LONG-TERM INVESTMENTS 96.1%
COMMON STOCKS 96.1%
-----------------------------------------------------------------------------------------------------
AUDIO/VISUAL 0.9%
2,000 Polycom, Inc.(a) $ 189,719
-----------------------------------------------------------------------------------------------------
AUTOMOBILE & TRUCKS 0.3%
1,960 Oshkosh Truck Corp. 66,395
-----------------------------------------------------------------------------------------------------
BANKS 1.9%
1,400 Greater Bay Bancorp 75,337
7,600 Silicon Valley Bancshares 332,975
---------
408,312
-----------------------------------------------------------------------------------------------------
BUSINESS SERVICES 8.8%
5,640 Acxiom Corp.(a) 120,203
4,800 Affiliated Managers Group, Inc.(a) 227,700
4,820 AnswerThink Consulting Group, Inc.(a) 81,036
4,610 CSG Systems International, Inc.(a) 245,194
3,680 ChoicePoint, Inc.(a) 160,080
1,385 Critical Path, Inc.(a) 77,127
8,110 Daisytek International, Corp.(a) 53,729
5,300 Hall, Kinion & Associates, Inc.(a) 207,362
2,905 Iron Mountain, Inc.(a) 101,675
5,460 net.Genesis Corp.(a) 52,553
17,775 Pegasus Systems, Inc.(a) 181,083
1,300 Plexus Corp.(a) 146,656
3,695 ProBusiness Services, Inc.(a) 85,447
5,600 Spherion Corp.(a) 107,100
---------
1,846,945
-----------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 4.1%
7,440 ACNielsen Corp.(a) 182,280
14,270 Grubb & Ellis Co. 81,161
10,130 On Command Corp.(a) 124,093
11,688 Pfsweb, Inc.(a) 50,405
3,220 Quintiles Transnational Corp.(a) 50,514
3,930 Ritchie Bros. Auctioneers, Inc.(a) 87,443
</TABLE>
B-91 See Notes to Financial Statements
<PAGE> 160
TARGET FUNDS Small Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
8,470 Trammell Crow Co.(a) $ 87,876
4,775 Vicor Corp.(a) 199,058
---------
862,830
-----------------------------------------------------------------------------------------------------------
COMPUTERS & BUSINESS EQUIPMENT 1.6%
2,675 CDW Computer Centers, Inc.(a) 128,902
2,100 Insight Enterprises, Inc.(a) 97,125
2,370 Tech Data Corp.(a) 105,465
---------
331,492
-----------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS 1.1%
6,940 Scotts Company (The) 226,418
-----------------------------------------------------------------------------------------------------------
DRUGS & HEALTHCARE 11.3%
1,460 Abgenix, Inc.(a) 73,183
3,560 Aclara Biosciences, Inc.(a) 149,520
3,800 Alpharma Inc. 248,900
2,075 Aurora Biosciences Corp.(a) 167,037
3,500 First Health Group Corp.(a) 107,187
3,990 Genzyme Transgenics Corp.(a) 119,949
3,700 IMPATH, Inc.(a) 221,306
3,800 Lexicon Genetics, Inc.(a) 129,675
6,200 LifePoint Hospitals, Inc.(a) 165,850
1,030 Myriad Genetics, Inc.(a) 136,797
10,900 Oxford Health Plans, Inc.(a) 260,919
2,000 Quest Diagnostics, Inc.(a) 201,875
7,000 SICOR Inc.(a) 66,063
7,820 STAAR Surgical Co.(a) 109,969
3,020 Ventana Medical Systems, Inc.(a) 62,099
1,440 Vertex Pharmaceuticals, Inc.(a) 141,030
---------
2,361,359
-----------------------------------------------------------------------------------------------------------
EDUCATIONAL SERVICES 1.1%
2,900 Learning Tree International, Inc.(a) 130,863
8,270 Sylvan Learning Systems, Inc.(a) 93,554
---------
224,417
</TABLE>
B-92 See Notes to Financial Statements
<PAGE> 161
TARGET FUNDS Small Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
ELECTRICAL EQUIPMENT 6.6%
8,200 Anixter International, Inc.(a) $ 238,313
2,800 Brooks Automation, Inc.(a) 138,950
15,500 FSI International, Inc.(a) 254,781
3,100 Littelfuse Inc.(a) 109,275
500 Power-One, Inc.(a) 59,031
12,900 Silicon Valley Group, Inc.(a) 327,338
500 Technitrol, Inc. 55,125
4,100 Varian Semiconductor Equipment Associates, Inc.(a) 199,106
---------
1,381,919
-------------------------------------------------------------------------------------------------
ELECTRONICS 10.1%
8,400 Actel Corp.(a) 312,375
4,700 Cognex Corp.(a) 230,594
4,172 Cyberoptics Corp.(a) 138,197
2,900 Electro Scientific Industries, Inc.(a) 131,769
5,180 Electronics for Imaging, Inc.(a) 112,989
4,400 Integrated Silicon Solution, Inc.(a) 92,400
3,600 International Rectifier Corp.(a) 199,125
1,860 Jabil Circuit, Inc.(a) 93,116
14,240 KEMET Corp.(a) 341,760
6,700 Kent Electronics Corp.(a) 208,537
4,900 Merix Corp.(a) 245,000
---------
2,105,862
-------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 6.8%
16,220 AmeriCredit Corp.(a) 336,565
2,625 Brown & Brown, Inc.(a) 126,000
4,700 Investment Technology Group 228,537
4,400 Metris Companies, Inc. 128,975
320 M & T Bank Corp. 151,180
2,850 T. Rowe Price Associates, Inc. 116,494
5,030 Texas Regional Bancshares, Inc. 119,777
6,650 Waddell & Reed Financial, Inc. 217,787
---------
1,425,315
</TABLE>
B-93 See Notes to Financial Statements
<PAGE> 162
TARGET FUNDS Small Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
HOTELS & RESTAURANTS 1.6%
11,100 Aztar Corp.(a) $169,275
5,750 The Cheesecake Factory, Inc.(a) 174,297
--------
343,572
-----------------------------------------------------------------------------------------------------------
INDUSTRIAL MACHINERY 2.7%
6,210 APW, Inc. 245,683
1,000 DuPont Photomasks, Inc.(a) 59,875
5,500 Shaw Group, Inc.(a) 259,187
--------
564,745
-----------------------------------------------------------------------------------------------------------
INSURANCE 0.4%
4,990 Mutual Risk Management, Ltd. 77,345
-----------------------------------------------------------------------------------------------------------
MANUFACTURING 0.8%
3,960 Mettler-Toledo International, Inc.(a) 160,380
-----------------------------------------------------------------------------------------------------------
MEDICAL & DENTAL SUPPLIES 0.1%
1,710 Henry Schein, Inc.(a) 24,047
-----------------------------------------------------------------------------------------------------------
MISCELLANEOUS 0.4%
9,786 Hollywood.com, Inc.(a) 92,967
-----------------------------------------------------------------------------------------------------------
OFFICE FURNISHINGS 0.2%
4,920 Falcon Products, Inc. 47,048
-----------------------------------------------------------------------------------------------------------
OIL & GAS 3.2%
2,680 Devon Energy Corp. 122,610
10,320 Newfield Exploration Co.(a) 351,525
10,300 Vintage Petroleum, Inc. 185,400
--------
659,535
-----------------------------------------------------------------------------------------------------------
OIL FIELD/EQUIPMENT & SERVICES 2.2%
2,960 CARBO Ceramics, Inc. 102,490
2,300 FEI Company(a) 61,094
3,600 Helmerich & Payne, Inc. 115,200
6,900 Valero Energy Corp. 178,968
--------
457,752
</TABLE>
See Notes to Financial Statements B-94
<PAGE> 163
TARGET FUNDS Small Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
PUBLISHING 3.4%
6,050 Information Holdings, Inc.(a) $ 210,994
8,680 Penton Media, Inc. 300,545
9,860 Primedia, Inc.(a) 200,897
---------
712,436
-----------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST 0.8%
5,310 SL Green Realty Corp. 157,640
-----------------------------------------------------------------------------------------------------------
RECREATION 0.8%
9,540 American Classic Voyages Co. 176,490
-----------------------------------------------------------------------------------------------------------
RETAIL TRADE 5.1%
11,600 Chico's FAS, Inc.(a) 342,200
4,700 Factory 2-U Stores, Inc.(a) 195,050
5,300 Hot Topic, Inc.(a) 170,925
3,200 Stein Mart, Inc.(a) 35,200
2,900 Talbots, Inc. 146,450
5,128 Tractor Supply Co.(a) 74,997
2,880 Tweeter Home Entertainment Group, Inc.(a) 104,040
----------
1,068,862
-----------------------------------------------------------------------------------------------------------
SOFTWARE 8.7%
4,400 Advent Software, Inc.(a) 248,600
3,235 Digital Islands, Inc.(a) 92,804
4,400 Dset Corp.(a) 129,250
4,010 Kana Communications, Inc.(a) 147,367
6,185 Mcafee.com Corp.(a) 179,365
14,300 Mentor Graphics Corp.(a) 285,106
1,900 Packeteer, Inc.(a) 73,150
8,010 Rainbow Technologies, Inc.(a) 347,434
1,525 Rational Software Corp.(a) 155,169
5,529 Wind River Systems, Inc.(a) 162,069
----------
1,820,314
-----------------------------------------------------------------------------------------------------------
TELECOMMUNICATION 9.4%
6,200 Andrew Corp.(a) 174,763
9,215 Avocent Corp.(a) 411,363
</TABLE>
B-95 See Notes to Financial Statements
<PAGE> 164
TARGET FUNDS Small Capitalization Growth Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
7,600 Cable Design Technologies Corp.(a) $ 267,900
7,105 Cabletron Systems, Inc.(a) 185,618
3,820 Choice One Communications, Inc.(a) 107,915
4,200 Dycom Industries, Inc.(a) 179,550
6,630 ITC Deltacom(a) 111,467
3,280 Northeast Optic Network, Inc.(a) 137,965
5,550 Quanta Services, Inc.(a) 253,912
1,360 Stratos Lightwave, Inc.(a) 51,000
1,900 Tekelec(a) 74,575
-----------
1,956,028
-----------------------------------------------------------------------------------------------
TRANSPORTATION 1.7%
9,865 American Freightways Corp.(a) 171,096
2,080 Expeditors International of Washington, Inc. 104,520
4,880 Swift Transportation Co., Inc.(a) 78,995
-----------
354,611
-----------
Total common stocks (cost $18,608,687) 20,104,755
-----------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS 5.0%
PRINCIPAL
AMOUNT
(000)
---------
<S> <C> <C>
$1,052 Seven Seas Money Market Fund
6.33%,(b)
(cost $1,051,579) 1,051,579
-----------
TOTAL INVESTMENTS 101.1%
(COST $19,660,266; NOTE 4) 21,156,334
Liabilities in excess of other assets (1.1%) (241,962)
-----------
NET ASSETS 100% $20,914,372
===========
</TABLE>
------------------------------
(a) Non-income producing security.
(b) Rate represents yield at purchase date.
See Notes to Financial Statements B-96
<PAGE> 165
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
LONG-TERM INVESTMENTS 93.3%
COMMON STOCKS 93.3%
----------------------------------------------------------------------------------------------------
AIRLINES 0.4%
2,000 Alaska Air Group, Inc.(a) $ 54,875
----------------------------------------------------------------------------------------------------
APPAREL & TEXTILES 0.1%
2,600 Culp, Inc. 14,788
----------------------------------------------------------------------------------------------------
AUTO RELATED 3.3%
2,000 Borg Warner, Inc. 67,875
4,900 Modine Manufacturing Co. 132,300
7,400 Myers Industries, Inc. 98,975
7,300 Pennzoil-Quaker State Co. 91,250
4,300 Tower Automotive, Inc.(a) 52,406
--------
442,806
----------------------------------------------------------------------------------------------------
BANKS AND SAVINGS & LOANS 6.8%
2,710 Associated Banc-Corp. 61,822
2,400 Bank United Corp., Cl.A 87,450
1,800 Chittenden Corp. 46,688
4,800 FirstMerit Corp. 100,200
4,257 Hudson United Bancorp 101,636
7,200 Independent Bank Corp. 83,250
3,300 People's Bank 65,175
2,400 Queens County Bancorp, Inc. 55,500
1,900 Southwest Bancorporation of Texas, Inc.(a) 49,756
3,400 Staten Island Bancorp, Inc. 61,200
6,000 Susquehanna Bancshares, Inc. 89,250
3,800 Webster Financial Corp. 85,025
900 Wilmington Trust Corp. 39,431
--------
926,383
----------------------------------------------------------------------------------------------------
BREWERY 0.3%
700 Coors (Adolph) Co., Cl.B 44,100
----------------------------------------------------------------------------------------------------
BUILDING & CONSTRUCTION 2.9%
1,250 Dycom Industries, Inc. 53,437
</TABLE>
B-97 See Notes to Financial Statements
<PAGE> 166
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
1,500 Granite Construction, Inc. $ 36,188
2,400 Hughes Supply, Inc. 45,450
1,700 Insituform Technologies, Inc., Cl.A(a) 41,013
5,000 JLG Industries, Inc. 50,937
1,400 Kaufman & Broad Home Corp. 27,388
1,500 Martin Marietta Materials, Inc. 63,281
3,300 Toll Brothers, Inc.(a) 79,819
--------
397,513
-------------------------------------------------------------------------------------------------
BUSINESS SERVICES 6.6%
3,200 ACNielsen Corp.(a) 78,400
2,700 Acxiom Corp.(a) 57,544
2,400 American Management Systems, Inc.(a) 60,150
600 Bisys Group, Inc.(a) 38,100
900 Black Box Corp.(a) 40,725
6,700 Brightpoint, Inc.(a) 36,431
1,700 CDI Corp.(a) 33,788
600 ChoicePoint, Inc.(a) 26,100
3,800 Gartner Group, Inc., Cl.A 53,675
1,700 Maximus, Inc.(a) 40,588
846 MedQuist, Inc.(a) 18,189
1,700 National Data Corp. 46,750
1,400 Paradyne Networks, Inc.(a) 39,900
1,300 Pittston Brink's Group 15,600
3,600 Profit Recovery Group International, Inc.(a) 33,300
3,500 R.H. Donnelley Corp.(a) 70,219
2,300 Spherion Corp.(a) 43,987
1,100 Standard Register Co. 14,094
3,800 Tetra Tech, Inc.(a) 95,237
1,900 United Stationers, Inc.(a) 55,337
--------
898,114
-------------------------------------------------------------------------------------------------
CHEMICALS 4.4%
3,600 Cambrex Corp. 162,675
3,200 Ferro Corp. 74,400
</TABLE>
See Notes to Financial Statements B-98
<PAGE> 167
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
1,500 Fuller (H.B.) Co. $ 57,938
7,600 Hanna (M.A.) Co. 60,800
400 Minerals Technologies, Inc. 19,175
3,000 OM Group, Inc. 142,312
8,600 RPM, Inc. 80,087
--------
597,387
-----------------------------------------------------------------------------------------------------------
COMPUTERS & BUSINESS EQUIPMENT 1.4%
1,800 Diebold, Inc. 50,962
3,900 Micron Electronics, Inc.(a) 41,194
6,300 MTS Systems Corp. 41,344
1,800 Quantum Corp.-Hard Disk Drive(a) 14,850
3,100 Storage Technology Corp.(a) 39,913
--------
188,263
-----------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 1.4%
700 Affiliated Computer Services, Inc., Cl.A(a) 31,544
1,000 Answerthink, Inc.(a) 16,812
2,800 Bell & Howell Co.(a) 57,400
3,850 Metro Information Services, Inc.(a) 28,875
1,000 Radisys Corp.(a) 61,500
--------
196,131
-----------------------------------------------------------------------------------------------------------
DIVERSIFIED INDUSTRIALS 3.4%
3,600 Brady Corp., Cl.A 109,575
3,500 Carlisle Cos., Inc. 158,375
500 Circor International, Inc. 3,500
2,400 Roper Industries, Inc. 66,300
3,600 Teleflex, Inc. 130,500
--------
468,250
-----------------------------------------------------------------------------------------------------------
DRUGS & HEALTHCARE 4.7%
1,600 Amerisource Health Corp., Cl.A(a) 55,900
5,200 Apria Healthcare Group, Inc.(a) 77,675
900 Hooper Holmes, Inc. 11,025
9,900 Invacare Corp. 228,937
1,950 Jones Pharma, Inc. 63,741
</TABLE>
B-99 See Notes to Financial Statements
<PAGE> 168
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
3,100 Manor Care, Inc.(a) $ 30,613
6,000 Pharmaceutical Product Development, Inc.(a) 128,250
5,400 Steris Corp.(a) 48,600
----------
644,741
--------------------------------------------------------------------------------------------------
EDUCATIONAL SERVICES 0.2%
1,600 ITT Educational Services, Inc.(a) 30,400
--------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 3.4%
6,800 Ametek, Inc. 141,525
2,100 Anixter International, Inc.(a) 61,031
1,700 Belden, Inc. 42,713
2,400 Littelfuse, Inc. 84,600
5,800 Woodhead Industries, Inc. 125,787
----------
455,656
--------------------------------------------------------------------------------------------------
ELECTRONICS 11.0%
1,900 Allen Telecom, Inc.(a) 33,250
900 Antec Corp.(a) 34,031
2,100 Benchmark Electronics, Inc.(a) 86,363
4,100 C&D Technologies, Inc. 166,050
2,400 Dallas Semiconductor Corp. 100,500
2,400 Electro Scientific Industries, Inc.(a) 109,050
1,700 Electronics for Imaging, Inc.(a) 37,081
2,200 General Semiconductor, Inc.(a) 33,000
1,300 Harman International Industries, Inc. 82,225
1,800 Kemet Corp.(a) 43,200
4,500 Mentor Graphics Corp.(a) 89,719
2,100 Methode Eletronics, Inc., Cl.A 95,419
7,300 Pioneer-Standard Electronics, Inc. 98,550
2,400 Polaroid Corp. 43,500
4,200 Rogers Corp.(a) 150,150
4,700 Sensormatic Electronics Corp.(a) 60,806
1,200 Technitrol, Inc. 132,300
2,300 Varian, Inc.(a) 96,887
----------
1,492,081
</TABLE>
See Notes to Financial Statements B-100
<PAGE> 169
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
FINANCIAL SERVICES 0.5%
2,900 Heller Financial, Inc. $ 69,600
----------------------------------------------------------------------------------------------------
FOODS 4.2%
1,354 American Italian Pasta Co., Cl.A(a) 26,742
4,000 Flowers Industries, Inc. 85,250
2,700 Lancaster Colony Corp. 63,450
4,200 Performance Food Group Co.(a) 138,337
2,800 Ralcorp Holdings, Inc.(a) 38,675
6,400 United Natural Foods, Inc.(a) 91,200
6,400 Universal Foods Corp. 124,800
--------
568,454
----------------------------------------------------------------------------------------------------
GAS & PIPELINE UTILITIES 2.0%
2,500 Equitable Resources, Inc. 130,156
2,800 National Fuel Gas Co. 138,075
--------
268,231
----------------------------------------------------------------------------------------------------
HOTELS & RESTAURANTS 0.9%
1,500 Lone Star Steakhouse & Saloon, Inc. 13,406
6,300 Marcus Corp. 74,025
4,100 Prime Hospitality Corp.(a) 38,950
--------
126,381
----------------------------------------------------------------------------------------------------
HOUSEHOLD APPLIANCES & HOME
FURNISHINGS 2.2%
2,200 Bassett Furniture Industries, Inc. 29,700
5,500 Chromcraft Revington, Inc.(a) 60,500
2,100 Ethan Allen Interiors, Inc. 53,550
4,600 Furniture Brands International, Inc.(a) 68,137
7,300 Pier 1 Imports, Inc. 87,144
--------
299,031
----------------------------------------------------------------------------------------------------
INDUSTRIAL MACHINERY 1.6%
2,200 Crane Co. 48,400
</TABLE>
B-101 See Notes to Financial Statements
<PAGE> 170
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
5,200 Flowserve Corp. $ 80,600
2,400 Graco, Inc. 81,600
--------
210,600
----------------------------------------------------------------------------------------------------
INSURANCE 5.5%
2,700 Brown & Brown, Inc. 129,600
2,500 Everest Re Group, Ltd. 99,219
1,400 Gallagher (Arthur J.) & Co. 68,688
1,500 HCC Insurance Holdings, Inc. 30,750
6,100 Horace Mann Educators Corp. 85,019
4,200 HSB Group, Inc. 149,100
3,500 Protective Life Corp. 94,937
1,500 Radian Group, Inc. 91,312
--------
748,625
----------------------------------------------------------------------------------------------------
MANUFACTURING 2.4%
4,900 Aptargroup, Inc. 122,194
3,600 Federal Signal Corp. 71,550
700 Polaris Industries, Inc. 21,175
3,200 Regal-Beloit Corp. 51,600
1,900 Snap-on, Inc. 57,356
--------
323,875
----------------------------------------------------------------------------------------------------
MEDICAL & DENTAL SUPPLIES 5.0%
3,600 Arrow International, Inc. 122,850
1,600 Beckman Coulter, Inc. 106,600
6,050 Dentsply International, Inc. 204,566
2,100 Inamed Corp.(a) 69,037
11,500 Meridian Diagnostics, Inc. 76,187
1,500 Varian Medical Systems, Inc.(a) 64,500
2,000 Vital Signs, Inc. 32,375
--------
676,115
</TABLE>
See Notes to Financial Statements B-102
<PAGE> 171
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
OFFICE EQUIPMENT 0.5%
2,700 HON Industries, Inc. $ 72,056
--------------------------------------------------------------------------------------------------
OIL & GAS
EXPLORATION/DRILLING 2.5%
2,100 Barrett Resources Corp.(a) 58,406
1,000 Devon Energy Corp. 45,750
2,500 Helmerich & Payne, Inc. 80,000
2,600 Louis Dreyfus Natural Gas Corp.(a) 67,600
8,700 Santa Fe Snyder Corp.(a) 87,000
--------
338,756
--------------------------------------------------------------------------------------------------
OIL FIELD/EQUIPMENT
& SERVICES 0.5%
4,275 Varco International, Inc.(a) 73,744
--------------------------------------------------------------------------------------------------
PAPER & PAPER PRODUCTS 0.9%
3,000 Longview Fibre Co. 36,000
4,600 Packaging Corp. of America(a) 52,325
4,300 Wausau-Mosinee Paper Corp. 38,969
--------
127,294
--------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING 3.6%
12,000 Banta Corp. 231,750
4,300 Bowne & Co., Inc. 37,894
1,700 Houghton Mifflin Co. 80,537
3,500 Mail-Well, Inc.(a) 24,719
1,200 Pulitzer, Inc. 49,050
2,000 Valassis Communications, Inc.(a) 67,250
--------
491,200
--------------------------------------------------------------------------------------------------
REAL ESTATE 0.3%
2,500 Catellus Development Corp.(a) 43,125
</TABLE>
B-103 See Notes to Financial Statements
<PAGE> 172
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
REAL ESTATE INVESTMENT
TRUST 2.3%
1,600 Chateau Communities, Inc. $ 45,100
900 Chelsea GCA Realty, Inc. 32,625
2,900 FelCor Lodging Trust, Inc. 63,438
1,900 Kilroy Realty Corp. 50,350
2,700 Liberty Property Trust 77,625
1,600 Mack-Cali Reality Corp. 41,900
--------
311,038
-----------------------------------------------------------------------------------------------------------
RETAIL - APPAREL 2.3%
1,300 Abercrombie & Fitch Co., Cl.A(a) 20,881
2,400 Lands' End, Inc.(a) 89,850
2,200 Men's Wearhouse, Inc. 57,063
9,800 Venator Group, Inc.(a) 138,425
--------
306,219
-----------------------------------------------------------------------------------------------------------
RETAIL - GROCERY 1.7%
6,800 Ruddick Corp. 72,250
5,200 Whitman Corp. 77,675
1,700 Whole Foods Market, Inc.(a) 75,969
--------
225,894
-----------------------------------------------------------------------------------------------------------
RETAIL TRADE 0.5%
5,000 Borders Group, Inc.(a) 64,375
-----------------------------------------------------------------------------------------------------------
SOFTWARE 1.2%
300 Dendrite International, Inc.(a) 8,133
7,100 Progress Software Corp. 106,943
2,500 Transaction Systems Architects, Inc., Cl.A(a) 44,219
--------
159,295
</TABLE>
See Notes to Financial Statements B-104
<PAGE> 173
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
TRUCKING & FREIGHT FORWARDING 1.2%
2,300 CNF Transportation, Inc. $ 58,506
7,000 Werner Enterprises, Inc. 101,500
-----------
160,006
--------------------------------------------------------------------------------------------------------------
UTILITIES 1.2%
3,300 Sierra Pacific Resources 46,613
4,700 Washington Gas Light Co. 115,737
-----------
162,350
-----------
Total common stocks (cost $11,865,537) 12,677,752
-----------
</TABLE>
SHORT-TERM INVESTMENTS 8.1%
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000)
--------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
SECURITIES 5.4%
United States Treasury Bills
<S> <C> <C>
$ 45 5.51%, 8/31/00 44,795
35 5.57%, 8/31/00 34,838
25 5.65%, 8/31/00 24,884
20 5.75%, 8/31/00 19,905
65 5.795%, 8/31/00 64,687
90 5.81%, 8/31/00 89,563
10 5.83%, 8/31/00 9,952
20 5.87%, 8/31/00 19,903
90 5.90%, 8/31/00 89,564
55 5.92%, 8/31/00 54,735
20 5.94%, 8/31/00 19,903
140 5.95%, 8/31/00 139,320
15 5.98%, 8/31/00 14,927
30 5.99%, 8/31/00 29,854
45 5.96%, 10/12/00 44,467
30 5.985%, 10/12/00 29,641
-------
730,938
-------
</TABLE>
B-105 See Notes to Financial Statements
<PAGE> 174
TARGET FUNDS Small Capitalization Value Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
----- ----------- --------------
<S> <C> <C>
INVESTMENT COMPANY 2.7%
$373 Seven Seas Money Market Fund
6.33%,(b) $ 373,512
-----------
Total short-term investments (cost $1,104,406) 1,104,450
-----------
TOTAL INVESTMENTS 101.4%
(COST $12,969,943; NOTE 4) 13,782,202
Liabilities in excess of other assets (1.4%) (186,246)
-----------
NET ASSETS 100% $13,595,956
===========
</TABLE>
------------------------------
(a) Non-income producing security.
(b) Rate represents yield at purchase date.
See Notes to Financial Statements B-106
<PAGE> 175
TARGET FUNDS International Equity Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
LONG-TERM INVESTMENTS 95.6%
COMMON STOCKS 95.6
--------------------------------------------------------------------------------------------------
AUSTRALIA 1.2%
24,000 Broken Hill Proprietary Co., Ltd. $ 253,712
---------------------------------------------------------------------------------------------------
DENMARK 1.1%
3,800 Tele Danmark A.S. 233,762
---------------------------------------------------------------------------------------------------
FINLAND 0.9%
7,400 UPM-Kymmene Oyj 182,412
---------------------------------------------------------------------------------------------------
FRANCE 13.4%
5,600 Alcatel 413,086
6,225 Aventis SA 479,380
1,730 Axa SA 262,923
2,500 Banque Nationale de Paris 246,734
1,300 Compagnie de Saint-Gobain 190,946
2,300 Lagardere SCA 148,879
1,530 Suez Lyonnaise des Eaux 250,251
3,600 Total Fina SA, Ser. B 533,445
3,100 Vivendi SA 247,633
--------------
2,773,277
---------------------------------------------------------------------------------------------------
GERMANY 9.2%
1,260 Allianz AG 467,068
7,000 Bayerische Vereinsbank AG 406,404
11,400 Deutsche Lufthansa AG(a) 281,012
1,700 Deutsche Telekom AG(a) 74,059
5,900 E.On AG 329,692
1,510 Siemens AG 233,686
6,700 Thyssen Krupp AG(a) 114,989
--------------
1,906,910
</TABLE>
B-107 See Notes to Financial Statements
<PAGE> 176
TARGET FUNDS International Equity Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
ITALY 2.8%
6,748 Alleanza Assicurazioni $ 84,108
40,800 ENI SpA 228,368
15,800 Sao Paolo Imi SpA 267,946
--------------
580,422
--------------------------------------------------------------------------------------------------------
JAPAN 22.1%
900 Acom Co., Ltd.(a) 68,104
8,000 Canon, Inc. 355,928
21,000 Fuji Bank, Ltd. 135,552
10,000 Fujitsu, Ltd. 280,804
9,000 Hitachi, Ltd. 107,490
27,000 Industrial Bank of Japan, Ltd. 173,050
9,000 Kao Corp. 265,852
18,000 Nippon Paper Industries Co., Ltd. 131,285
28 Nippon Telegraph & Telephone Corp. 334,412
98,000 Nissan Motor Co., Ltd.(a) 488,727
8 NTT Mobile Communications Network, Inc. 200,574
2,200 Orix Corp. 283,813
46,000 Sakura Bank, Ltd. 266,308
8,000 Sankyo Co., Ltd.(a) 187,446
4,400 Sony Corp. 403,957
8,000 Sumitomo Electric Industries, Ltd. 129,389
39,000 Sumitomo Trust & Banking Co., Ltd. 251,028
4,000 TDK Corp. 499,613
--------------
4,563,332
--------------------------------------------------------------------------------------------------------
NETHERLANDS 7.0%
6,000 Akzo Nobel NV 266,834
12,700 Getronics NV(a) 214,197
5,100 Heineken NV 291,605
6,200 ING Groep NV 414,483
5,500 Koninklijke Philips Electronics NV 249,134
--------------
1,436,253
--------------------------------------------------------------------------------------------------------
PORTUGAL 1.5%
28,000 Portugal Telecom SA 304,884
</TABLE>
See Notes to Financial Statements B-108
<PAGE> 177
TARGET FUNDS International Equity Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
SINGAPORE 3.2%
40,000 Overseas-Chinese Banking Corp., Ltd. $ 290,716
51,896 United Overseas Bank, Ltd. 371,188
--------------
661,904
-------------------------------------------------------------------------------------------------------------
SPAIN 3.0%
19,100 Endesa SA 396,302
10,720 Telefonica de Espana SA 225,507
--------------
621,809
-------------------------------------------------------------------------------------------------------------
SWEDEN 3.6%
11,100 Electrolux AB, Ser. B 165,229
22,700 Investor AB 329,237
16,700 Svenska Handelsbanken AB 251,319
--------------
745,785
-------------------------------------------------------------------------------------------------------------
SWITZERLAND 4.4%
2,500 ABB, Ltd. 298,208
28 Roche Holdings AG 263,166
614 Zurich Allied AG 331,235
--------------
892,609
-------------------------------------------------------------------------------------------------------------
UNITED KINGDOM 22.2%
6,700 AstraZeneca Group PLC(a) 288,768
39,600 BP Amoco PLC 346,572
47,000 British Aerospace PLC 316,954
20,400 British Energy PLC 73,372
17,900 British Telecommunications PLC 236,596
36,600 Cadbury Schweppes PLC 236,810
34,900 Diageo PLC 306,485
11,700 GKN PLC 149,825
33,700 Great Universal Stores PLC 222,970
18,700 Halifax Group PLC(a) 146,565
23,600 HSBC Holdings PLC 319,541
13,800 Imperial Chemical Industries PLC 99,164
72,800 Invensys PLC 261,017
24,400 National Grid Group PLC 200,381
14,400 Prudential Corp. PLC 196,593
</TABLE>
B-109 See Notes to Financial Statements
<PAGE> 178
TARGET FUNDS International Equity Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
------ ----------- --------------
<S> <C> <C>
28,900 Reed International PLC $ 231,057
28,000 SmithKline Beecham PLC 360,863
93,200 Tesco PLC 307,273
66,800 Vodafone AirTouch PLC 295,314
--------------
4,596,120
--------------
Total common stocks (cost $19,736,924) 19,753,191
--------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS 3.2%
PRINCIPAL
AMOUNT
(000)
<S> <C> <C>
U.S. GOVERNMENT SECURITIES
United States Treasury Bills
$ 30 5.55%, 8/31/00 29,857
65 5.57%, 8/31/00 64,688
135 5.635%, 8/31/00 134,345
40 5.74%, 8/31/00 39,802
60 5.75%, 8/31/00 59,703
30 5.83%, 8/31/00 29,850
35 5.87%, 8/31/00 34,823
150 5.90%, 8/31/00 149,238
55 5.99%, 8/31/00 54,716
30 5.96%, 10/12/00 29,614
40 5.985%, 10/12/00 39,521
--------------
Total short-term investments (cost $666,281) 666,157
--------------
TOTAL INVESTMENTS 98.8% (COST $20,403,205;
NOTE 4) 20,419,348
Other assets in excess of liabilities 1.2% 243,911
--------------
NET ASSETS 100% $20,663,259
==============
</TABLE>
(a) Non-income producing security.
AB--Antiebolay (Swedish Stock Company).
AG--Aktiengesellschaft (German Stock Company).
NV--Naamkee Vennootachap (Dutch Corporation).
PLC--Public Limited Company (British Corporation).
SA--Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation).
SpA--Societa par Atione (Italian Corporation).
See Notes to Financial Statements B-110
<PAGE> 179
TARGET FUNDS International Equity Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
The industry classification of portfolio holdings and other assets in excess of
liabilities shown as a percentage of net assets as of July 31, 2000 was as
follows:
<TABLE>
<S> <C>
Banks..................................................................... 12.9%
Telecommunications........................................................ 12.2
Insurance................................................................. 8.5
Pharmaceuticals........................................................... 7.6
Electronics............................................................... 6.1
Oil & Gas Exploration/Production.......................................... 5.4
Utilities................................................................. 4.7
Financial Services........................................................ 4.2
Food & Beverages.......................................................... 4.0
Industrial Conglomerates.................................................. 3.3
U.S. Treasury Securities.................................................. 3.2
Automobiles & Trucks...................................................... 3.1
Engineering & Equipment................................................... 2.7
Retail.................................................................... 2.6
Chemicals................................................................. 1.8
Office Equipment & Supplies............................................... 1.7
Paper & Forest Products................................................... 1.5
Aerospace/Defense......................................................... 1.5
Leasing................................................................... 1.4
Computers................................................................. 1.4
Airlines.................................................................. 1.4
Diversified Consumer Products............................................. 1.3
Natural Resources......................................................... 1.2
Publishing................................................................ 1.1
Computer Services......................................................... 1.0
Containers & Packaging.................................................... 0.9
Consumer Durable Goods.................................................... 0.8
Diversified Operations.................................................... 0.7
Wire & Cable.............................................................. 0.6
-----
98.8
Other assets in excess of liabilities..................................... 1.2
-----
100.0%
=====
</TABLE>
B-111 See Notes to Financial Statements
<PAGE> 180
TARGET FUNDS Total Return Bond Fund
Portfolio of Investments as of July 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT
RATING (000) DESCRIPTION VALUE (NOTE 1)
------ ----- ----------- --------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS 131.8%
CORPORATE BONDS 40.7%
-----------------------------------------------------------------------------------------------------------------------
BANKING 7.5%
Bank Tokyo Mitsubishi Ltd.
A3 $ 400 8.40%, 4/15/10 $ 404,349
Deutsche Bank Capital Trust
A1 500 8.58%, 12/22/49 503,500
Korea Development Bank
Baa2 500 7.625%, 10/1/02 498,698
United States Bancorp M.T.N.
A3 500 7.091%, 3/6/03 500,000
---------------
1,906,547
-----------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 2.3%
Cox Enterprises, Inc.
Baa1 600 7.552%, 5/1/03 598,710
-----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 2.0%
Sprint Capital Corp. M.T.N.
Baa1 500 7.01%, 11/15/01 499,966
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 21.8%
American General Finance Corp. M.T.N.
A2 400 6.875%, 12/14/01 396,469
Bayview Financial Mortgage Loan Trust
AAA 400 7.00%, 5/1/20 400,000
Bears Stearns Cos., Inc.
A2 800 7.357%, 11/30/04 801,146
Ford Motor Credit Corp.
A2 500 6.75%, 5/15/05 481,970
A2 500 7.007%, 5/23/02 500,000
General Motors Acceptance Corp. M.T.N.
A2 500 6.27%, 11/12/02 500,312
Halifax Group Euro Finance
Aa3 300 7.627%, 12/29/49 278,817
Heller Financial Inc., M.T.N.
A3 200 6.50%, 7/22/02 196,210
</TABLE>
See Notes to Financial Statements B-112
<PAGE> 181
TARGET FUNDS Total Return Bond Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT
RATING (000) DESCRIPTION VALUE (NOTE 1)
------ ----- ----------- --------------
<S> <C> <C> <C>
Lehman Brothers Holdings, Inc.
A3 $ 500 7.35%, 12/12/02 $ 500,086
Merrill Lynch & Company, Inc.
Aa3 500 6.991%, 8/1/03, F.R.N. 499,726
Morgan Stanley Dean Witter, Inc.
Aa3 500 6.837%, 1/28/02 500,560
Protective Life Insurance Co.
A1 500 7.09%, 1/17/03 499,250
---------------
5,554,546
----------------------------------------------------------------------------------------------------------------------------
OIL & GAS EXPLORATION
/PRODUCTION 2.0%
Petroleos Mexicanos
Baa3 500 9.375%, 12/2/08 512,500
----------------------------------------------------------------------------------------------------------------------------
PAPER 2.0%
Temple Inland, Inc.
Baa2 500 9.00%, 5/1/01 503,870
----------------------------------------------------------------------------------------------------------------------------
UTILITIES-ELECTRIC
& GAS 3.1%
Carolina Power & Light Co.
A3 300 7.235%, 7/29/02 300,000
Central Power & Light Co.
Baa1 500 6.701%, 11/23/01 499,778
---------------
799,778
---------------
Total corporate bonds (cost $10,380,790) 10,375,917
---------------
----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
AGENCY MORTGAGE
BACKED SECURITIES 59.1%
Federal Home Loan Mortgage Corp.,
Aaa 500 5.50%, 12/31/99 443,201
Federal National Mortgage Assn.,
Aaa 1,400 6.00%, 12/31/99 1,284,500
Aaa 300 7.00%, 12/31/99 289,689
Aaa 400 7.50%, 12/31/99 394,124
Aaa 100 8.00%, 12/31/99 100,281
Government National Mortgage Assn.,
Aaa 1,261 6.50%, 11/20/29 1,253,982
Aaa 6,700 7.50%, 12/15/99 - 12/31/99 6,638,353
</TABLE>
B-113 See Notes to Financial Statements
<PAGE> 182
TARGET FUNDS Total Return Bond Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT
RATING (000) DESCRIPTION VALUE (NOTE 1)
------ ----- ----------- --------------
<S> <C> <C> <C>
Aaa $3,400 8.00%, 12/31/99 $ 3,425,098
Aaa 1,200 8.50%, 12/31/99 1,225,128
---------------
Total U.S. government agency mortgage
backed securities
(cost $15,041,241) 15,054,356
---------------
COLLATERALIZED MORTGAGE
OBLIGATIONS 6.5%
----------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 1.8%
Norwest Asset Securities Corp.
AAA# 491 6.75%, 10/25/28 454,866
----------------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT
TRUST 4.7%
Countrywide Mortgage Backed Security
Aaa 769 7.50%, 4/25/27 750,186
Starwood Commercial Mortgage Trust
Aaa 451 6.60%, 2/3/09 438,955
---------------
1,189,141
Total collateralized mortgage
obligations
(cost $1,645,162) 1,644,007
---------------
----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
SECURITIES 23.3%
United States Treasury Bonds,
Aaa 2,500 8.00%, 11/15/21 3,057,425
Aaa 300 8.75%, 8/15/20 389,952
United States Treasury Notes,
Aaa 749 3.625%, 7/15/02 745,891
Aaa 1,060 3.625%, 1/15/08 1,031,799
Aaa 700 6.50%, 10/15/06 710,171
---------------
Total U.S. Government Securities (cost
$5,819,483) 5,935,238
---------------
----------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT
OBLIGATIONS 2.2%
German Government Bonds,
Aaa 20 6.25%, 1/4/24 20,322
Aaa 70 6.25%, 1/4/30 72,944
</TABLE>
See Notes to Financial Statements B-114
<PAGE> 183
TARGET FUNDS Total Return Bond Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT
RATING (000) DESCRIPTION VALUE (NOTE 1)
------ ----- ----------- --------------
<S> <C> <C> <C>
Poland Government Bonds,
Baa1 $ 70 3.50%, 10/27/24 $ 43,519
Republic of Philippines
Ba1 500 6.50%, 12/1/17 422,428
---------------
Total foreign government obligations
(cost $572,741) 559,213
---------------
Total long-term investments
(cost $33,459,417) 33,568,731
---------------
SHORT-TERM INVESTMENTS 24.9%
CORPORATE BONDS
----------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES 3.8%
Daimlerchrysler
P1 1,000 6.51%, 11/1/00 983,363
----------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 1.2%
Dominion Resources
P2 300 6.195%, 1/26/01 300,021
----------------------------------------------------------------------------------------------------------------------------
COMPUTERS & BUSINESS
EQUIPMENT 2.7%
International Business Machines Corp.
P1 700 6.51%, 11/1/00 688,354
----------------------------------------------------------------------------------------------------------------------------
ELECTRICAL UTILITIES 1.6%
Edison Mission Midwest Hldg.
P2 400 6.79%, 8/8/00 399,472
----------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 11.6%
American Express Co.
P1 1,000 6.61%, 11/15/00 980,537
CBA Finance, Inc. (Delaware)
P1 1,000 6.53%, 10/23/00 984,945
General Electric Capital Corp.
P1 900 6.52%, 10/25/00 886,145
P1 100 6.55%, 9/13/00 99,218
---------------
2,950,845
----------------------------------------------------------------------------------------------------------------------------
FOODS 0.4%
Conagra, Inc.
P2 100 6.91%, 8/23/00 99,578
----------------------------------------------------------------------------------------------------------------------------
LEISURE 1.1%
ITT Corp.,
Ba1 300 6.25%, 11/15/00 297,669
</TABLE>
B-115 See Notes to Financial Statements
<PAGE> 184
TARGET FUNDS Total Return Bond Fund
Portfolio of Investments as of July 31, 2000 Cont'd.
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT
RATING (000) DESCRIPTION VALUE (NOTE 1)
------ ----- ----------- --------------
<S> <C> <C> <C>
MACHINERY 0.8%
Ingersoll Rand Company
P2 $ 200 6.74%, 8/18/00 $ 199,364
----------------------------------------------------------------------------------------------------------------------------
OIL & GAS-PRODUCTION
/PIPELINE 0.8%
Williams Cos, Inc.
P2 200 7.231%, 4/10/01 200,067
----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 0.9%
State Street Bank & Trust Co.,
Repurchase Agreement, 2.00%, dated 7/31/00, due
8/1/00 in the amount of $221,000 (cost
$221,000 collateralized by $220,000 U.S.
Treasury notes 7.00%, 7/15/06, value of
collateral including accrued
221 interest is $228,954) 221,000
---------------
Total short-term investments
(cost $6,340,699) 6,339,733
---------------
TOTAL INVESTMENTS 156.7%
(COST US$39,800,116; NOTE 4) 39,908,464
Liabilities in excess of other
assets (56.7%) (14,446,030)
---------------
NET ASSETS 100% $ 25,462,434
===============
</TABLE>
------------------------------
# Standard & Poor's Rating.
F.R.N.--Floating Rate Note.
M.T.N.--Medium-Term Notes.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements B-116
<PAGE> 185
TARGET FUNDS As of July 31, 2000
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
LARGE
CAPITALIZATION
GROWTH FUND
-----------
<S> <C>
ASSETS
Investments, at value (cost $200,531,950) $258,821,859
Cash 1,408
Receivable for investments sold 1,619,191
Receivable for Fund shares sold 987,601
Dividends and interest receivable 18,409
Deferred offering expenses and other assets 73,693
------------
TOTAL ASSETS 261,522,161
------------
LIABILITIES
Payable for investments purchased 1,555,403
Payable for Fund shares repurchased 312,737
Distribution fee payable 199,598
Management fee payable 157,079
Accrued expenses and other liabilities 64,195
------------
TOTAL LIABILITIES 2,289,012
------------
NET ASSETS $259,233,149
============
Net assets were comprised of:
Shares of beneficial interest, at par $ 19,756
Paid-in capital, in excess of par 208,334,766
------------
208,354,522
Net realized loss (7,411,282)
Net unrealized appreciation 58,289,909
------------
Net assets, July 31, 2000 $259,233,149
============
</TABLE>
B-117 See Notes to Financial Statements
<PAGE> 186
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
LARGE
CAPITALIZATION
GROWTH FUND
-----------
<S> <C>
Class A:
Net assets $ 38,227,092
Shares of beneficial interest issued and outstanding 2,898,715
Net asset value and redemption price per share $13.19
Maximum sales charge (5% of offering price) .69
------------
Maximum offering price to public $13.88
============
Class B:
Net Assets $ 75,819,321
Shares of beneficial interest issued and outstanding 5,783,021
Net asset value, offering price and redemption price per share $13.11
============
Class C:
Net Assets $145,186,736
Shares of beneficial interest issued and outstanding 11,074,587
Net asset value and redemption price per share $13.11
Sales charge (1% of offering price) .13
------------
Offering price to public $13.24
============
</TABLE>
See Notes to Financial Statements B-118
<PAGE> 187
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
LARGE
CAPITALIZATION
VALUE FUND
-----------
<S> <C>
ASSETS
Investments, at value (cost $30,821,620) $ 29,460,367
Receivable for Fund shares sold 226,713
Receivable for investments sold 62,061
Dividends and interest receivable 45,773
Deferred offering expenses and other assets 12,979
------------
TOTAL ASSETS 29,807,893
------------
LIABILITIES
Payable to Custodian 5,078
Payable for investments purchased 217,201
Accrued expenses 98,043
Payable for Fund shares repurchased 22,812
Distribution fee payable 21,810
Management fee payable 17,548
------------
TOTAL LIABILITIES 382,492
------------
NET ASSETS $ 29,425,401
============
Net assets were comprised of:
Shares of beneficial interest, at par $ 3,169
Paid-in capital, in excess of par 31,184,259
------------
31,187,428
Undistributed net investment income 21,669
Net realized loss on investments (422,443)
Net unrealized depreciation (1,361,253)
------------
Net assets, July 31, 2000 $ 29,425,401
============
</TABLE>
B-119 See Notes to Financial Statements
<PAGE> 188
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
LARGE
CAPITALIZATION
VALUE FUND
-----------
<S> <C>
Class A:
Net assets $ 5,161,543
Shares of beneficial interest issued and outstanding 553,234
Net asset value and redemption price per share $9.33
Maximum sales charge (5% of offering price) .49
------------
Maximum offering price to public $9.82
============
Class B:
Net Assets $ 11,418,395
Shares of beneficial interest issued and outstanding 1,230,999
------------
Net asset value, offering price and redemption price per share $9.28
============
Class C:
Net Assets $ 12,845,463
Shares of beneficial interest issued and outstanding 1,384,859
Net asset value and redemption price per share $9.28
Sales charge (1% of offering price) .09
------------
Offering price to public $9.37
============
</TABLE>
See Notes to Financial Statements B-120
<PAGE> 189
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION
GROWTH FUND
-----------
<S> <C>
ASSETS
Investments, at value (cost $19,660,266) $ 21,156,334
Cash 66
Receivable for investments sold 298,178
Receivable for Fund shares sold 93,523
Dividends and interest receivable 5,872
Deferred offering expenses and other assets 14,605
------------
TOTAL ASSETS 21,568,578
------------
LIABILITIES
Payable for investments purchased 550,242
Payable for Fund shares repurchased 11,328
Distribution fee payable 15,528
Management fee payable 12,876
Accrued expenses and other liabilities 64,232
------------
TOTAL LIABILITIES 654,206
------------
NET ASSETS $ 20,914,372
============
Net assets were comprised of:
Shares of beneficial interest, at par $ 1,665
Paid-in capital, in excess of par 17,626,787
------------
17,628,452
Net realized gain on investments 1,789,852
Net unrealized appreciation on investments 1,496,068
------------
Net assets, July 31, 2000 $ 20,914,372
============
</TABLE>
B-121 See Notes to Financial Statements
<PAGE> 190
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION
GROWTH FUND
-----------
<S> <C>
Class A:
Net assets $ 4,666,941
Shares of beneficial interest issued and outstanding 369,696
Net asset value and redemption price per share $12.62
Maximum sales charge (5% of offering price) .66
------------
Maximum offering price to public $13.28
============
Class B:
Net Assets $ 8,588,146
Shares of beneficial interest issued and outstanding 684,757
Net asset value, offering price and redemption price per share $12.54
============
Class C:
Net Assets $ 7,659,285
Shares of beneficial interest issued and outstanding 610,671
Net asset value and redemption price per share $12.54
Sales charge (1% of offering price) .13
------------
Offering price to public $12.67
============
</TABLE>
See Notes to Financial Statements B-122
<PAGE> 191
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION
VALUE FUND
-----------
<S> <C>
ASSETS
Investments, at value (cost $12,969,943) $ 13,782,202
Cash 1,067
Receivable for investments sold 69,095
Receivable for Fund shares sold 56,049
Deferred offering expenses and other assets 12,979
Dividends and interest receivable 12,949
------------
TOTAL ASSETS 13,934,341
------------
LIABILITIES
Payable for investments purchased 249,635
Accrued expenses and other liabilities 71,544
Distribution fee payable 8,469
Management fee payable 8,219
Payable for Fund shares repurchased 518
------------
TOTAL LIABILITIES 338,385
------------
NET ASSETS $ 13,595,956
============
Net assets were comprised of:
Shares of beneficial interest, at par $ 1,232
Paid-in capital, in excess of par 12,295,968
------------
12,297,200
Net realized gain on investments 486,497
Net unrealized appreciation on investments 812,259
------------
Net assets, July 31, 2000 $ 13,595,956
============
</TABLE>
B-123 See Notes to Financial Statements
<PAGE> 192
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION
VALUE FUND
-----------
<S> <C>
Class A:
Net assets $ 3,863,121
Shares of beneficial interest issued and outstanding 348,679
Net asset value and redemption price per share $11.08
Maximum sales charge (5% of offering price) .58
------------
Maximum offering price to public $11.66
============
Class B:
Net Assets $ 5,378,438
Shares of beneficial interest issued and outstanding 488,380
Net asset value, offering price and redemption price per share $11.01
============
Class C:
Net Assets $ 4,354,397
Shares of beneficial interest issued and outstanding 395,395
Net asset value and redemption price per share $11.01
Sales charge (1% of offering price) .11
------------
Offering price to public $11.12
============
</TABLE>
See Notes to Financial Statements B-124
<PAGE> 193
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY FUND
-----------
<S> <C>
ASSETS
Investments, at value (cost $20,403,205) $20,419,348
Foreign currency, at value (cost $99,577) 97,923
Cash 1,007
Receivable for Fund shares sold 56,303
Receivable for investments sold 324,613
Dividends and interest receivable 43,619
Deferred offering expenses and other assets 12,980
-----------
TOTAL ASSETS 20,955,793
-----------
LIABILITIES
Payable for investments purchased 158,189
Accrued expenses and other liabilities 93,120
Payable for Fund shares repurchased 9,988
Distribution fee payable 14,744
Management fee payable 14,205
Withholding tax payable 2,288
-----------
TOTAL LIABILITIES 292,534
-----------
NET ASSETS $20,663,259
============
Net assets were comprised of:
Shares of beneficial interest, at par $ 2,086
Paid-in capital, in excess of par 20,841,489
-----------
20,843,575
Net investment loss (90,642)
Net realized loss (101,277)
Net unrealized appreciation on investment and foreign currency
transactions 11,603
-----------
Net assets, July 31, 2000 $20,663,259
============
</TABLE>
B-125 See Notes to Financial Statements
<PAGE> 194
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY FUND
-----------
<S> <C>
Class A:
Net assets $ 4,688,606
Shares of beneficial interest issued and outstanding 471,233
Net asset value and redemption price per share $9.95
Maximum sales charge (5% of offering price) .52
------------
Maximum offering price to public $10.47
============
Class B:
Net Assets $ 7,020,077
Shares of beneficial interest issued and outstanding 709,828
Net asset value, offering price and redemption price per share $9.89
============
Class C:
Net Assets $ 8,954,576
Shares of beneficial interest issued and outstanding 905,350
Net asset value and redemption price per share $9.89
Sales charge (1% of offering price) .10
------------
Offering price to public $9.99
============
</TABLE>
See Notes to Financial Statements B-126
<PAGE> 195
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
TOTAL RETURN
BOND FUND
-----------
<S> <C>
ASSETS
Investments, at value (cost $39,800,116) $ 39,908,464
Foreign currency, at value (cost $80) 79
Cash 144
Interest receivable 251,038
Receivable for Fund shares sold 230,564
Deferred expenses and other assets 12,819
Unrealized appreciation on swap 5,042
Unrealized appreciation on forward currency contracts 4,976
------------
TOTAL ASSETS 40,413,126
------------
LIABILITIES
Payable for investments purchased 14,769,163
Accrued expenses 113,523
Dividends payable 34,990
Distribution fee payable 11,896
Management fee payable 11,033
Payable for Fund shares reacquired 10,087
------------
TOTAL LIABILITIES 14,950,692
------------
NET ASSETS $ 25,462,434
============
Net assets were comprised of:
Shares of beneficial interest, at par $ 2,548
Paid-in capital, in excess of par 25,442,464
------------
25,445,012
Distribution in excess of net investment income (7,574)
Net realized loss (100,829)
Net unrealized appreciation on investments and foreign
currency transaction 125,825
------------
Net assets, July 31, 2000 $ 25,462,434
============
</TABLE>
B-127 See Notes to Financial Statements
<PAGE> 196
TARGET FUNDS As of July 31, 2000 Cont'd.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
TOTAL RETURN
BOND FUND
-----------
<S> <C>
Class A:
Net assets $ 9,874,731
Shares of beneficial interest issued and outstanding 988,356
Net asset value and redemption price per share $9.99
Maximum sales charge (4% of offering price) .42
------------
Maximum offering price to public $10.41
============
Class B:
Net assets $ 9,738,899
Shares of beneficial interest issued and outstanding 974,598
Net asset value, offering price and redemption price per share $9.99
============
Class C:
Net assets $ 5,848,804
Shares of beneficial interest issued and outstanding 585,338
Net asset value and redemption price per share $9.99
Sales charge (1% of offering price) .10
------------
Offering price to public $10.09
============
</TABLE>
See Notes to Financial Statements B-128
<PAGE> 197
TARGET FUNDS November 3, 1999(a) through July 31, 2000
Statements of Operations
<TABLE>
<CAPTION>
LARGE
CAPITALIZATION
GROWTH FUND
-----------
<S> <C>
NET INVESTMENT INCOME (LOSS)
Income
Interest $ 440,561
Dividends 488,611
Less: Foreign withholding taxes (1,219)
------------
TOTAL INCOME 927,953
------------
Expenses
Management fee 1,123,808
Distribution fee--Class A 53,289
Distribution fee--Class B 437,977
Distribution fee--Class C 954,308
Legal fees and expenses 4,000
Custodian's fees and expenses 78,000
Transfer agent's fees and expenses 90,000
Reports to shareholders 18,000
Registration fees 54,000
Trustees' fees and expenses 9,000
Amortization of offering expenses 78,721
Audit fees 14,000
Miscellaneous 300
------------
TOTAL EXPENSES 2,915,403
------------
NET INVESTMENT INCOME (LOSS) (1,987,450)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Investment transactions (7,411,282)
Foreign currency transactions --
Swaps --
------------
(7,411,282)
------------
Net unrealized appreciation (depreciation) on:
Investments 58,289,909
Foreign currency transactions --
Swaps --
------------
58,289,909
------------
NET GAIN (LOSS) 50,878,627
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 48,891,177
============
</TABLE>
------------------------------
(a) Commencement of investment operations
B-129 See Notes to Financial Statements
<PAGE> 198
TARGET FUNDS November 3, 1999(a) through July 31, 2000 Cont'd.
Statements of Operations
<TABLE>
<CAPTION>
LARGE SMALL SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL TOTAL RETURN
VALUE FUND GROWTH FUND VALUE FUND EQUITY FUND BOND FUND
---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
$ 71,084 $ 47,756 $ 36,928 $ 46,416 $ 1,256,523
505,702 19,860 132,217 300,843 --
(1,952) -- -- (40,389) --
------------ ------------ ------------ ------------ ------------
574,834 67,616 169,145 306,870 1,256,523
------------ ------------ ------------ ------------ ------------
132,716 88,879 64,391 113,679 95,287
7,625 8,884 9,409 8,233 22,009
65,111 43,544 26,392 44,625 41,008
93,983 47,890 27,960 64,543 35,896
12,000 12,000 5,000 12,000 12,000
103,000 81,000 93,500 120,000 72,000
24,000 15,000 13,000 18,000 33,000
32,000 32,000 26,000 31,000 35,000
36,000 20,000 12,000 14,000 12,000
8,000 7,000 8,100 9,000 11,000
37,021 37,021 37,021 37,021 37,021
14,000 14,000 14,000 20,000 14,000
401 2,350 2,400 1,148 2,000
------------ ------------ ------------ ------------ ------------
565,857 409,568 339,173 493,249 422,221
------------ ------------ ------------ ------------ ------------
8,977 (341,952) (170,028) (186,379) 834,302
------------ ------------ ------------ ------------ ------------
(422,443) 2,085,580 612,051 (100,650) (107,130)
-- -- -- (19,617) (38,012)
-- -- -- -- 7,215
------------ ------------ ------------ ------------ ------------
(422,443) 2,085,580 612,051 (120,267) (137,927)
------------ ------------ ------------ ------------ ------------
(1,361,253) 1,496,068 812,259 16,143 115,807
-- -- -- (4,540) 4,976
-- -- -- -- 5,042
------------ ------------ ------------ ------------ ------------
(1,361,253) 1,496,068 812,259 11,603 125,825
------------ ------------ ------------ ------------ ------------
(1,783,696) 3,581,648 1,424,310 (108,664) (12,102)
------------ ------------ ------------ ------------ ------------
$ (1,774,719) $ 3,239,696 $ 1,254,282 $ (295,043) $ 822,200
============ ============ ============ ============ ============
</TABLE>
See Notes to Financial Statements B-130
<PAGE> 199
TARGET FUNDS November 3, 1999(a) through July 31, 2000
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
LARGE
CAPITALIZATION
GROWTH FUND
-----------
<S> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (1,987,450)
Net realized gain (loss) on investment and foreign currency
transactions (7,411,282)
Net unrealized appreciation (depreciation) of investments 58,289,909
-------------
Net increase (decrease) in net assets resulting from
operations 48,891,177
-------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income
Class A --
Class B --
Class C --
-------------
Total dividends --
-------------
Distributions in excess of net investment income
Class A --
Class B --
Class C --
-------------
Total distributions --
-------------
FUND SHARE TRANSACTIONS (NET OF SHARE CONVERSIONS; NOTE 5)
Net proceeds from shares sold 245,996,764
Net asset value of shares issued in reinvestment of dividends
and distributions --
Cost of shares reacquired (35,672,792)
-------------
Net increase in net assets from Fund share transactions 210,323,972
-------------
Total increase 259,215,149
NET ASSETS
Beginning of period 18,000
-------------
End of period $ 259,233,149
=============
</TABLE>
------------------------------
(a) Commencement of investment operations.
B-131 See Notes to Financial Statements
<PAGE> 200
TARGET FUNDS November 3, 1999(a) through July 31, 2000
Statements of Changes in Net Assets Cont'd.
<TABLE>
<CAPTION>
LARGE SMALL SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL TOTAL RETURN
VALUE FUND GROWTH FUND VALUE FUND EQUITY FUND BOND FUND
---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
$ 8,977 $ (341,952) $ (170,028) $ (186,379) $ 834,302
(422,443) 2,085,580 612,051 (120,267) (137,927)
(1,361,253) 1,496,068 812,259 11,603 125,825
------------- ------------- ------------- ------------- -------------
(1,774,719) 3,239,696 1,254,282 (295,043) 822,200
------------- ------------- ------------- ------------- -------------
(8,977) -- -- -- (407,199)
-- -- -- -- (229,611)
-- -- -- -- (197,492)
------------- ------------- ------------- ------------- -------------
(8,977) -- -- -- (834,302)
------------- ------------- ------------- ------------- -------------
(393) -- -- -- (9,630)
(13,063) -- -- -- (4,481)
(23,337) -- -- -- (4,857)
------------- ------------- ------------- ------------- -------------
(36,793) -- -- -- (18,968)
------------- ------------- ------------- ------------- -------------
40,139,297 25,578,512 18,398,192 35,128,516 37,908,566
42,947 -- -- -- 721,940
(8,954,354) (7,921,836) (6,074,518) (14,188,214) (13,147,002)
------------- ------------- ------------- ------------- -------------
31,227,890 17,656,676 12,323,674 20,940,302 25,483,504
------------- ------------- ------------- ------------- -------------
29,407,401 20,896,372 13,577,956 20,645,259 25,452,434
18,000 18,000 18,000 18,000 10,000
------------- ------------- ------------- ------------- -------------
$ 29,425,401 $ 20,914,372 $ 13,595,956 $ 20,663,259 $ 25,462,434
============= ============= ============= ============= =============
</TABLE>
See Notes to Financial Statements B-132
<PAGE> 201
TARGET FUNDS November 3, 1999(a) through July 31, 2000
Financial Highlights
<TABLE>
<CAPTION>
LARGE CAPITALIZATION GROWTH FUND
-----------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(d):
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.06) (0.12) (0.12)
Net realized and unrealized gain on
investment transactions 3.25 3.23 3.23
-------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 3.19 3.11 3.11
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.19 $ 13.11 $ 13.11
======== ======== ========
TOTAL RETURN(b) 31.90% 31.10% 31.10%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 38,227 $ 75,819 $145,187
Average net assets (000) $ 28,788 $ 59,151 $128,884
Ratios to average net assets (c):
Expenses, including distribution and
service (12b-1) fees 1.17% 1.92% 1.92%
Expenses, excluding distribution and
service (12b-1) fees .92% .92% .92%
Net investment loss (0.62)% (1.36)% (1.32)%
Portfolio turnover rate 39% 39% 39%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods less than one full year are not
annualized.
(c) Annualized.
(d) Calculated based upon average shares outstanding during the period.
B-133 See Notes to Financial Statements
<PAGE> 202
TARGET FUNDS November 3, 1999(a) through July 31, 2000 Cont'd.
Financial Highlights
<TABLE>
<CAPTION>
LARGE CAPITALIZATION VALUE FUND
------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.05 --(d) --(d)
Net realized and unrealized loss on
investment transactions (0.69) (0.70) (0.70)
-------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS (0.64) (0.70) (0.70)
-------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.03) -- --
Dividends in excess of net investment
income -- (.02) (.02)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.33 $ 9.28 $ 9.28
======== ======== ========
TOTAL RETURN(b) (6.42)% (7.02)% (7.02)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 5,162 $ 11,418 $ 12,845
Average net assets (000) $ 4,119 $ 8,794 $ 12,693
Ratios to average net assets (c):
Expenses, including distribution and
service (12b-1) fees 2.36% 3.11% 3.11%
Expenses, excluding distribution and
service (12b-1) fees 2.11% 2.11% 2.11%
Net investment income .63% (.13)% (.02)%
Portfolio turnover rate 58% 58% 58%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods less than one full year are not
annualized.
(c) Annualized.
(d) Less than $.005 per share.
See Notes to Financial Statements B-134
<PAGE> 203
TARGET FUNDS November 3, 1999(a) through July 31, 2000 Cont'd.
Financial Highlights
<TABLE>
<CAPTION>
SMALL CAPITALIZATION GROWTH FUND
---------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (.20) (.19) (.23)
Net realized and unrealized gain on
investment transactions 2.82 2.73 2.77
------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 2.62 2.54 2.54
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 12.62 $ 12.54 $ 12.54
======= ======= =======
TOTAL RETURN(b) 26.20% 25.40% 25.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 4,667 $ 8,588 $ 7,659
Average net assets (000) $ 4,799 $ 5,881 $ 6,468
Ratios to average net assets (c):
Expenses, including distribution and
service (12b-1) fees 2.69% 3.44% 3.44%
Expenses, excluding distribution and
service (12b-1) fees 2.44% 2.44% 2.44%
Net investment loss (2.10)% (2.94)% (2.90)%
Portfolio turnover rate 112% 112% 112%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods less than one full year are not
annualized.
(c) Annualized.
B-135 See Notes to Financial Statements
<PAGE> 204
TARGET FUNDS November 3, 1999(a) through July 31, 2000 Cont'd.
Financial Highlights
<TABLE>
<CAPTION>
SMALL CAPITALIZATION VALUE FUND
-----------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss(d) (.11) (.16) (.17)
Net realized and unrealized gain on
investment transactions 1.19 1.17 1.18
-------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 1.08 1.01 1.01
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 11.08 $ 11.01 $ 11.01
======== ======== ========
TOTAL RETURN(b) 10.80% 10.10% 10.10%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 3,863 $ 5,379 $ 4,354
Average net assets (000) $ 5,083 $ 3,564 $ 3,776
Ratios to average net assets (c):
Expenses, including distribution and
service (12b-1) fees 3.24% 3.99% 3.99%
Expenses, excluding distribution and
service (12b-1) fees 2.99% 2.99% 2.99%
Net investment loss (1.37)% (2.20)% (2.16)%
Portfolio turnover rate 34% 34% 34%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than one full year are not
annualized.
(c) Annualized.
(d) Calculated based upon average shares outstanding during the period.
See Notes to Financial Statements B-136
<PAGE> 205
TARGET FUNDS November 3, 1999(a) through July 31, 2000 Cont'd.
Financial Highlights
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss(e) (0.05) (0.11) (0.11)
Net realized and unrealized loss on
investment and foreign currency
transactions --(d) --(d) --(d)
-------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS (0.05) (0.11) (0.11)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 9.89 $ 9.89
======== ======== ========
TOTAL RETURN(b) (0.50)% (1.10)% (1.10)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 4,689 $ 7,020 $ 8,955
Average net assets (000) $ 4,447 $ 6,027 $ 8,717
Ratios to average net assets (c):
Expenses, including distribution and
service (12b-1) fees 2.89% 3.64% 3.64%
Expenses, excluding distribution and
service (12b-1) fees 2.64% 2.64% 2.64%
Net investment loss (0.74)% (1.45)% (1.50)%
Portfolio turnover rate 40% 40% 40%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods less than one full year are not
annualized.
(c) Annualized.
(d) Less than $.005 per share.
(e) Calculation based upon average shares outstanding during the period.
B-137 See Notes to Financial Statements
<PAGE> 206
TARGET FUNDS November 3, 1999(a) through July 31, 2000 Cont'd.
Financial Highlights
<TABLE>
<CAPTION>
TOTAL RETURN BOND FUND
------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.33 0.29 0.29
Net realized and unrealized loss on
investment transactions --(d) --(d) --(d)
-------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 0.33 0.29 0.29
-------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.33) (0.29) (0.29)
Dividends in excess of net investment
income (0.01) (0.01) (0.01)
-------- -------- --------
TOTAL DISTRIBUTIONS (0.34) (0.30) (0.30)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.99 $ 9.99 $ 9.99
======== ======== ========
TOTAL RETURN(b) 3.32% 2.95% 2.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 9,875 $ 9,739 $ 5,849
Average net assets (000) $ 11,760 $ 7,304 $ 6,393
Ratios to average net assets (c):
Expenses, including distribution and
service (12b-1) 1.96% 2.46% 2.46%
Expenses, excluding distribution and
service (12b-1) 1.71% 1.71% 1.71%
Net investment income 4.66% 4.23% 4.16%
Portfolio turnover rate 423% 423% 423%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods less than one full year are not
annualized.
(c) Annualized.
(d) Less than $.005 per share.
See Notes to Financial Statements B-138
<PAGE> 207
TARGET FUNDS
Notes to Financial Statements
Target Funds is an open-end management investment company. The Trust
consists of six separate funds (the "Fund" or "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. The Trust was established as a Delaware business trust on July 8, 1999 and
did not have any activity until September 2, 1999 when it issued Prudential
Investment Fund Management ("PIFM"), for $100,000, 600 Class A, Class B and
Class C shares of Large Capitalization Growth Fund, Large Capitalization Value
Fund, Small Capitalization Growth Fund, Small Capitalization Value Fund,
International Equity Fund and 334 Class A shares and 333 Class B and Class C
shares of Total Return Bond Fund. The Fund's investment operations commenced on
November 3, 1999.
The Funds' investment objectives are as follows: Large Capitalization
Growth Fund--long-term capital appreciation through investment primarily in
common stocks that, in the investment adviser's opinion, should have growth
faster than that of the S&P 500; Large Capitalization Value Fund--total return
of capital appreciation and dividend income through investment primarily in
common stocks that, in the adviser's opinion, are undervalued; Small
Capitalization Growth Fund--maximum capital appreciation through investment
primarily in small company common stocks that, in the investment adviser's
opinion, have growth faster than that of the U.S. economy in general; Small
Capitalization Value Fund--above average capital appreciation through investment
in small company common stocks that, in the investment adviser's opinion, are
undervalued or overlooked in the marketplace; International Equity Fund--capital
appreciation through investment primarily in stocks of companies domiciled
outside the United States; Total Return Bond Fund--total return of current
income and capital appreciation through investment primarily in fixed-income
securities of varying maturities with a dollar-weighted average portfolio
maturity of more than four years but not more than fifteen years.
The ability of issuers of debt securities (other than those issued or
guaranteed by the U.S. Government) held by the Funds to meet their obligations
may be affected by economic or political developments in a specific industry,
region or country.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Funds in the preparation of its financial statements.
Securities Valuations: Securities, including options, futures contracts
and options thereon, for which the primary market is on a national securities
exchange, commodities exchange or board of trade are valued at the last sale
price on such
B-139
<PAGE> 208
TARGET FUNDS
Notes to Financial Statements Cont'd.
exchange or board of trade, on the date of valuation or, if there was no sale on
such day, at the average of readily available closing bid and asked prices on
such day.
Securities, including options, that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed 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 or
dealer.
U.S. Government securities for which market quotations are available are
valued at a price provided by an independent broker/dealer or pricing service.
Quotations of foreign securities in a foreign currency are converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer.
Securities for which market quotations are not available, are valued in
good faith under procedures adopted by the Trustees.
Short-term securities which mature in sixty days or less are valued at
amortized cost which approximates market value. The amortized cost method
involves valuing a security at its cost on the date of purchase and thereafter
assuming a constant amortization to maturity of the difference between the
principal amount due at maturity and cost. Short-term securities which mature in
more than sixty days are valued at current market quotations.
Repurchase Agreements: In connection with transactions in repurchase
agreements, it is the Fund's policy that its custodian take possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction, including accrued interest. To the extent
that any repurchase transaction exceeds one business day the value of collateral
is marked to market on a daily basis to ensure the adequacy of collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Funds may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
Securities Transactions and Net Investment Income: Securities transactions
are recorded on the trade date. Realized gains and losses on sales of securities
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. The Funds
amortize premiums and discounts paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management. Such estimates could
differ from actuals.
B-140
<PAGE> 209
TARGET FUNDS
Notes to Financial Statements Cont'd.
Foreign Currency Translation: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and
liabilities--at the closing rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal period. Similarly, the
Funds do not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal period. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of short-term
securities, holding of foreign currencies, currency gains or losses realized
between the trade and settlement dates of securities transactions, and the
difference between the amounts of dividends, interest and foreign taxes recorded
on the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at period-end exchange rates are reflected as a component
of net unrealized appreciation (depreciation) on investments and foreign
currencies.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, the level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.
Options: The International Equity and the Total Return Bond Funds may
either purchase or write options in order to hedge against adverse market
movements or fluctuations in value caused by changes in prevailing interest
rates or foreign currency exchange rates with respect to securities or
currencies which the Funds currently own or intend to purchase. When a Fund
purchases an option, it pays a premium and an amount equal to that premium is
recorded as an investment. When a Fund writes an option, it receives a premium
and an amount equal to that premium is recorded as a liability. The investment
or liability is adjusted daily to reflect the current market value of the
option. If an option expires unexercised, a Fund realizes a gain or
B-141
<PAGE> 210
TARGET FUNDS
Notes to Financial Statements Cont'd.
loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether a Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as writer of an option, has no control over whether the
underlying securities or currencies may be sold (called) or purchased (put). As
a result, a Fund bears the market risk of an unfavorable change in the price of
the security or currency underlying the written option. The Fund, as purchaser
of an option, bears the risk of the potential inability of the counterparties to
meet the terms of their contracts.
Foreign Currency Forward Contracts: The International Equity and the Total
Return Bond Funds may enter into foreign currency forward contracts in order to
hedge their exposure to changes in foreign currency exchange rates on their
foreign portfolio holdings or on specific receivables and payables denominated
in a foreign currency. A foreign currency forward contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
Interest Rate Swaps: The Target Total Return Bond Fund may enter into
interest rate swaps. In a simple interest rate swap, one investor pays a
floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. Interest rate swaps were conceived as asset/liability management tools. In
more complex swaps, the notional principal amount may decline (or amortize) over
time.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by "marking-to-market" to reflect the
market value of the swap. When the swap is terminated, the Fund will record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Fund's basis in the contract, if any.
B-142
<PAGE> 211
TARGET FUNDS
Notes to Financial Statements Cont'd.
The Fund is exposed to credit loss in the event of non-performance by the
other party to the interest rate swap. However, the Fund does not anticipate
non-performance by any counterparty.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. For the period ended
July 31, 2000, the application of this statement resulted in the following
reclassifications:
<TABLE>
<CAPTION>
UNDISTRIBUTED PAID-IN
NET ACCUMULATED CAPITAL IN
INVESTMENT NET REALIZED EXCESS OF
FUND REF. INCOME GAIN/LOSS PAR
---- ---- ------ --------- ---
<S> <C> <C> <C> <C>
Large Capitalization
Growth.................... (b),(c) $ 1,987,450 $ -- $(1,987,450)
Large Capitalization
Value..................... (b) 58,462 -- (58,462)
Small Capitalization
Growth.................... (b),(c) 341,952 (295,728) (46,224)
Small Capitalization
Value..................... (b),(c) 170,028 (125,554) (44,474)
International Equity........ (a),(b),(c) 95,737 18,990 (114,727)
Total Return Bond........... (a),(b) 11,394 37,098 (48,492)
</TABLE>
------------------------------
(a) Reclass of net foreign currency gains/losses.
(b) Expenses not deductible for tax purposes.
(c) Reclass of net operating loss.
Net investment income, net realized gains and net assets were not affected
by this change.
Dividends and Distributions: The Total Return Bond Fund declares dividends
from net investment income daily and pays such dividends monthly. All other
Funds declare and pay a dividend from net investment income, if any, at least
annually. Each Fund declares and pays its net capital gains, if any, at least
annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Taxes: For federal income tax purposes, each Fund is treated as a separate
tax-paying entity. It is the intent of each Fund to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required.
B-143
<PAGE> 212
TARGET FUNDS
Notes to Financial Statements Cont'd.
Withholding taxes on foreign interest and dividends have been provided for
in accordance with the Trust's understanding of the applicable country's tax
rules and rates.
Deferred Organizational and Offering Expenses: Certain costs incurred in
connection with the initial offering of shares of the Fund, which were initially
estimated at $300,000, were approximately $402,000. These have been deferred and
are being amortized over a 12 month period from the date the Funds' commenced
operations. Estimated organizational expenses of the Fund in the amount of
approximately $18,000 incurred prior to the offering of the Funds' shares have
been reimbursed by PIFM.
NOTE 2. AGREEMENTS
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
manages the investment operations of the Funds, administers the Funds' affairs
and is responsible for the selection, subject to review and approval of the
Trustees, of the advisers. PIFM supervises the advisers' performance of advisory
services and makes recommendations to the Trustees as to whether the advisers'
contracts should be renewed, modified or terminated. PIFM pays for the costs
pursuant to the advisory agreements, the cost of compensation of officers of the
Fund, occupancy and certain clerical and accounting costs of the Fund. The Fund
bears all other costs and expenses.
The advisers noted below each furnished investment advisory services in
connection with the management of the Fund. Effective May 24, 2000, J.P. Morgan
Investment Management, Inc. became the subadviser of the Large Capitalization
Value Fund and will serve this fund under the same terms and conditions as under
the agreement with INVESCO Capital Management, Inc. Effective July 1, 2000,
Hotchkis and Wiley, the subadviser from the Large Capitalization Value Fund,
changed their name to Mercury Advisors. Each of the two advisers of the domestic
equity Funds--the Large Capitalization Growth Fund, Large Capitalization Value
Fund, Small Capitalization Growth Fund and Small Capitalization Value
Fund--manages approximately 50% of the assets of the respective Fund. In
general, in order to maintain an approximately equal division of assets between
the two advisers, all daily cash inflows (i.e., subscriptions and reinvested
distributions) and outflows (i.e., redemptions and expenses items) are divided
between the two advisers as PIFM deems appropriate. In addition, there is a
periodic rebalancing of each Fund's assets to take account of market
fluctuations in order to maintain the approximately equal allocation. As a
consequence, each Fund will allocate assets from the better performing of the
two advisers to the other.
B-144
<PAGE> 213
TARGET FUNDS
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
FUND ADVISER
---- -------
<S> <C>
Large Capitalization Growth............... Oak Associates, Ltd., and
Columbus Circle Investors
Large Capitalization Value................ J.P. Morgan Investment Management, Inc.
and Mercury Advisors
Small Capitalization Growth............... SawGrass Asset Management, L.L.C. and
Chase Fleming Asset Management USA
Small Capitalization Value................ Wood, Struthers & Winthrop and Lazard
Asset Management
International Equity...................... Lazard Asset Management
Total Return Bond......................... Pacific Investment Management Company
(PIMCO)
</TABLE>
The management fee paid to PIFM is computed daily and payable monthly, at
an annual rate of the average daily net assets of the Funds as specified below
and PIFM, in turn, pays each adviser the following fees for its services.
<TABLE>
<CAPTION>
TOTAL
FUND MANAGEMENT FEE ADVISER FEE
---- -------------- -----------
<S> <C> <C>
Large Capitalization Growth......................... .70% .30%
Large Capitalization Value.......................... .70% .30%
Small Capitalization Growth......................... .70% .40%
Small Capitalization Value.......................... .70% .40%
International Equity................................ .80% .40%
Total Return Bond................................... .50% .25%
</TABLE>
The Fund has entered into a distribution agreement with Prudential
Investment Management Services LLC (the Distributor or PIMS) for distribution of
the Funds' 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 Funds' 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 Incorporated ("PSI") 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 PSI 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 compensates the Distributor for
its expenses with respect to Class A shares at an annual rate of up to .30 of 1%
of the
B-145
<PAGE> 214
TARGET FUNDS
Notes to Financial Statements Cont'd.
average daily net asset value of the Class A shares. Such expenses under the
Class A Plan were .25% of the average daily net assets of Class A shares for the
period ended July 31, 2000.
Pursuant to the Class B and Class C Plans, each Fund compensates 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, such expenses
under the Class B and Class C Plans were .75 of 1% of the average daily net
assets of the Total Return Bond Fund's Class B and Class C shares for the period
ending July 31, 2000.
PIMS has advised the Fund of its receipt of front-end sales charges
resulting from sales of Class A and Class C shares during the period ended July
31, 2000 as follows:
<TABLE>
<CAPTION>
FUND CLASS A CLASS C
---- ------- -------
<S> <C> <C>
Large Capitalization Growth................................. $523,200 $751,300
Large Capitalization Value.................................. 130,600 159,800
Small Capitalization Growth................................. 52,900 66,900
Small Capitalization Value.................................. 48,800 43,400
International Equity........................................ 116,500 99,000
Total Return Bond........................................... 71,600 79,300
</TABLE>
From these fees, PIMS paid such sales charges to affiliated
broker-dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.
PIMS has advised the Fund that for the period ended July 31, 2000, it
received the following amounts in contingent deferred sales charges imposed upon
certain redemptions by certain Class B and Class C shareholders:
<TABLE>
<CAPTION>
FUND CLASS B CLASS C
---- ------- -------
<S> <C> <C>
Large Capitalization Growth.................................. $126,600 $62,900
Large Capitalization Value................................... 34,200 21,800
Small Capitalization Growth.................................. 8,400 6,000
Small Capitalization Value................................... 3,800 3,900
International Equity......................................... 17,100 11,500
Total Return Bond............................................ 15,800 18,700
</TABLE>
B-146
<PAGE> 215
TARGET FUNDS
Notes to Financial Statements Cont'd.
PIFM, PIMS and PSI are wholly owned subsidiaries of The Prudential
Insurance Company of America. ("Prudential")
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Funds' transfer agent. The following amounts represent the fees
PMFS charged for the period ended July 31, 2000 as well as the fees due to PMFS
as of July 31, 2000.
<TABLE>
<CAPTION>
AMOUNT INCURRED
FOR THE AMOUNT DUE
PERIOD ENDED AS OF
JULY 31, JULY 31,
FUND 2000 2000
---- ---- ----
<S> <C> <C>
Large Capitalization Growth......................... $ 82,100 $ 12,000
Large Capitalization Value.......................... 21,000 3,000
Small Capitalization Growth......................... 15,000 2,300
Small Capitalization Value.......................... 11,200 1,700
International Equity................................ 16,000 2,200
Total Return Bond................................... 11,400 1,700
</TABLE>
For the period ended July 31, 2000, PSI earned approximately $2,800 and
$3,000 in brokerage commissions on behalf of certain portfolio transactions
executed with the Large Capitalization Value Fund and Small Capitalization
Growth Fund, respectively.
NOTE 4. FUND SECURITIES
Purchases and sales of portfolio securities, excluding short-term investments
and written options, for the period ended July 31, 2000 were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
---- --------- -----
<S> <C> <C>
Large Capitalization Growth.......................... $278,519,382 $ 82,710,150
Large Capitalization Value........................... 45,170,128 14,492,790
Small Capitalization Growth.......................... 35,244,008 18,719,537
Small Capitalization Value........................... 15,312,435 4,055,372
International Equity................................. 27,250,809 7,411,786
Total Return Bond.................................... 164,015,993 130,117,351
</TABLE>
B-147
<PAGE> 216
TARGET FUNDS
Notes to Financial Statements Cont'd.
The federal income tax basis and unrealized appreciation (depreciation) of
each of the Funds' investments, excluding written options as of July 31, 2000,
were as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIATION GROSS UNREALIZED
FUND BASIS (DEPRECIATION) APPRECIATION DEPRECIATION
---- ----- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Large Capitalization
Growth................ $200,723,819 $58,098,040 $ 63,387,842 $ 5,289,802
Large Capitalization
Value................. 30,932,275 (1,471,908) 1,721,777 3,193,685
Small Capitalization
Growth................ 19,673,773 1,482,561 2,940,731 1,458,170
Small Capitalization
Value................. 12,976,257 805,945 1,929,883 1,123,938
International Equity.... 20,504,829 (85,481) 1,436,549 1,522,030
Total Return Bond....... 39,800,116 108,348 174,538 66,190
</TABLE>
<TABLE>
<CAPTION>
POST OCTOBER POST OCTOBER
CURRENCY CAPITAL
LOSSES DEFERRED LOSSES DEFERRED
NINE MONTH PERIOD NINE MONTH PERIOD
ENDED ENDED
JULY 31, 2000 JULY 31, 2000
------------- -------------
<S> <C> <C>
Large Capitalization
Growth Fund................................... $ -- $ 7,219,400
International Equity............................ 19,600 70,700
Total Return
Bond Fund..................................... 32,100 100,800
</TABLE>
At July 31, 2000, the Total Return Bond Fund, had outstanding forward
currency contracts to sell foreign currencies, as follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE VALUE AT
SALE CONTRACT RECEIVABLE JULY 31, 2000 APPRECIATION
------------- ---------- ------------- ------------
<S> <C> <C> <C>
Eurodollar,
expiring 8/14/00........................ $ 298,133 $ 293,157 $ 4,976
</TABLE>
B-148
<PAGE> 217
TARGET FUNDS
Notes to Financial Statements Cont'd.
The Total Return Bond Portfolio entered into interest rate swap
agreements. Under the agreements the Fund receives the excess, if any, of a
floating rate over a fixed rate. The Fund paid a transaction fee for the
agreements. Details of the swaps at July 31, 2000 are as follows:
<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
AMOUNT FIXED FLOATING OPEN TERMINATION APPRECIATION
TYPE COUNTERPARTY (000) RATE RATE DATE DATE (DEPRECIATION)
---- ------------ ----- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest 6 month
rate Goldman Sachs $ 80 6.175% LIBOR 5/18/00 5/22/30 $(1,479)
Interest 6 month
rate J.P. Morgan 20 6.25% LIBOR 5/19/00 1/24/24 21
Interest 3 month
rate Goldman Sachs 2,600 7.75% LIBOR 5/31/00 9/13/00 6,500
-------
$ 5,042
=======
</TABLE>
NOTE 5. CAPITAL
The Funds offer Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5% for each of the Funds except Class A
shares of Total Return Bond Fund which are sold with a front-end sales charge of
up to 4%. Class B shares are sold with a contingent deferred sales charge which
declines from 5% to zero depending upon the period of time the shares are held.
Class C shares are sold with a front-end sales charge of 1% and a contingent
deferred sales charge of 1% during the first 18 months. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value. The
Trust has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share. Of the shares outstanding at July 31, 2000,
Prudential owns 412,016 Class A shares of Total Return Bond Fund.
B-149
<PAGE> 218
TARGET FUNDS
Notes to Financial Statements Cont'd.
Transactions in shares of beneficial interest during the period November
3, 1999 (commencement of investment operations) through July 31, 2000 were as
follows:
<TABLE>
<CAPTION>
SHARES
ISSUED/
REACQUIRED
SHARES UPON
ISSUED IN CONVERSION NET INCREASE
SHARES REINVESTMENT SHARES FROM IN SHARES
FUND SOLD OF DIVIDENDS REACQUIRED CLASS B OUTSTANDING
------ ---- ------------ ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
SHARES
Large
Capitalization
Growth Fund
Class A 4,450,664 -- (1,762,780) 210,231 2,898,115
Class B 6,438,685 -- (445,235) (211,029) 5,782,421
Class C 11,894,580 -- (820,593) -- 11,073,987
Large
Capitalization
Value Fund
Class A 949,085 930 (403,292) 5,911 552,634
Class B 1,389,470 1,330 (154,469) (5,932) 1,230,399
Class C 1,782,911 2,265 (400,917) -- 1,384,259
Small
Capitalization
Growth Fund
Class A 897,431 -- (537,134) 8,799 369,096
Class B 737,708 -- (44,722) (8,829) 684,157
Class C 701,538 -- (91,467) 610,071
Small
Capitalization
Value Fund
Class A 816,794 -- (472,425) 3,710 348,079
Class B 534,302 -- (42,801) (3,721) 487,780
Class C 460,602 -- (65,807) -- 394,795
International
Equity Fund
Class A 1,576,885 -- (1,111,418) 5,166 470,633
Class B 841,721 -- (127,305) (5,188) 709,228
Class C 1,052,347 -- (147,597) -- 904,750
Total Return Bond
Fund
Class A 1,874,379 37,524 (930,165) 6,284 988,022
Class B 1,117,403 19,090 (155,944) (6,284) 974,265
Class C 812,573 16,547 (244,115) -- 585,005
</TABLE>
B-150
<PAGE> 219
TARGET FUNDS
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
SHARES
NET ASSET ISSUED/ NET INCREASE
VALUE REACQUIRED IN NET
OF SHARES UPON ASSETS
NET PROCEEDS ISSUED IN COST OF CONVERSION FROM FUND
FROM SHARES REINVESTMENT SHARES FROM SHARE
FUND SOLD OF DIVIDENDS REACQUIRED CLASS B TRANSACTIONS
---- ---- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C>
AMOUNT
------
Large
Capitalization
Growth Fund
Class A $ 49,385,097 $ -- $ (19,857,242) $ 2,845,914 $ 32,373,769
Class B 71,707,297 -- (5,420,514) (2,845,914) 63,440,869
Class C 124,904,370 -- (10,395,036) -- 114,509,334
Large
Capitalization
Value Fund
Class A 9,189,979 8,830 (3,872,010) 55,601 5,382,400
Class B 13,412,052 12,619 (1,432,316) (55,601) 11,936,754
Class C 17,537,266 21,498 (3,650,028) -- 13,908,736
Small
Capitalization
Growth Fund
Class A 9,546,394 -- (6,296,098) 116,159 3,366,455
Class B 8,443,129 -- (532,825) (116,159) 7,794,145
Class C 7,588,989 -- (1,092,913) -- 6,496,076
Small
Capitalization
Value Fund
Class A 8,251,869 -- (4,948,450) 37,842 3,341,261
Class B 5,480,622 -- (444,194) (37,842) 4,998,586
Class C 4,665,701 -- (681,874) -- 3,983,827
International
Equity Fund
Class A 16,095,501 -- (11,436,452) 52,176 4,711,225
Class B 8,470,898 -- (1,265,561) (52,176) 7,153,161
Class C 10,562,117 -- (1,486,201) -- 9,075,916
Total Return Bond
Fund
Class A 18,691,963 370,194 (9,198,517) 62,205 9,925,845
Class B 11,109,119 188,477 (1,537,075) (62,205) 9,698,316
Class C 8,107,484 163,269 (2,411,410) -- 5,859,343
</TABLE>
B-151
<PAGE> 220
TARGET FUNDS
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Target Funds
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial 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
(constituting Target Funds, hereafter referred to as the "Fund") at July 31,
2000, and the results of each of their operations, the changes in each of their
net assets and each of their financial highlights for the period November 3,
1999 (commencement of operations) through July 31, 2000, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with auditing
standards generally accepted in the United States, 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 audit, which included confirmation of securities at July 31,
2000 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 22, 2000
B-152
<PAGE> 221
TARGET FUNDS
Federal Tax Information (unaudited)
As required by the Internal Revenue Code, we wish to advise you as to the
federal tax status of dividends and distributions paid by the Fund during its
fiscal year ended July 31, 2000. Further, we wish to advise you of the
percentage of the ordinary income dividends paid in 2000 that qualify for the
corporate dividends received deduction available to corporate taxpayers.
Detailed below, please find the aggregate dividends and distributions, per
share, paid by each portfolio during the year ended July 31, 2000 as well as the
corporate dividend received deduction percentage:
<TABLE>
<CAPTION>
ORDINARY DIVIDENDS*
------------------------------
INCOME DIVIDEND
------------------------------ RECEIVED
PORTFOLIO A B C DEDUCTION
--------- - - - ---------
<S> <C> <C> <C> <C>
Large Capitalization Growth $ -- $ -- $ -- 0%
Large Capitalization Value .03 .02 .02 100%
Small Capitalization Growth -- -- -- 0%
Small Capitalization Value -- -- -- 0%
International Equity -- -- -- 0%
Total Return Bond 0.34 0.30 0.30 0%
</TABLE>
* For federal income tax purposes, ordinary income dividends are taxable as
ordinary income.
The International Equity Fund has elected to give the benefit of foreign
tax credit to its shareholders. Accordingly, shareholders who must report their
gross income dividends and distributions in a federal income tax return will be
entitled to a foreign tax credit, or an itemized deduction in computing the
income tax liability. It is generally more advantageous to claim rather than
take a deduction. For the fiscal year ended July 31, 2000, the International
Equity Portfolio intends on passing through $38,003 of ordinary income
distributions as a foreign tax credit.
B-153
<PAGE> 222
TARGET FUNDS
Important Notice For Certain Shareholders (unaudited)
Many states do not tax the portion of mutual fund dividends attributed to
interest from U.S. Government obligations. Listed below is the percent interest
earned by the following Target funds from U.S. Government obligations for the
calendar year 2000.
To determine the amount of your dividends which may be exempt from state
and local tax, simply multiply the amount in Box 1 of your 1099-Div (Ordinary
Dividends) by the percentage listed below. These percentages do not apply to
taxable capital gain distributions paid by the portfolios.
<TABLE>
<CAPTION>
PERCENTAGE OF INTEREST FROM
U.S. GOVERNMENT
PORTFOLIO* OBLIGATIONS
---------- -----------
<S> <C>
Large Capitalization Growth 0%
Large Capitalization Value 0%
Small Capitalization Growth 0%
Small Capitalization Value 8.5%
International Equity 8.10%
Total Return Bond 19.45%
</TABLE>
* Due to certain minimum portfolio holding requirements in California,
Connecticut and New York, residents of those states will not be able to exclude
U.S. interest income from state and local taxes.
Please consult your tax adviser or state/local authorities to properly
report this information on your tax return. If you have any questions concerning
amounts listed above, please call your Prudential Securities Financial Adviser.
B-154
<PAGE> 223
APPENDIX I -- 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.
I-1
<PAGE> 224
APPENDIX II -- HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart illustrates that large pension plans use the methods listed in
the percentages indicated for the period December 1977 through December 1987.
HOW YOU ALLOCATE YOUR ASSETS
MAINLY DETERMINES YOUR RETURN
(BASED ON A STUDY OF LARGE PENSION PLANS)
[PIE CHART]
<TABLE>
<S> <C>
Market Timing 1.80
Security Selection/Other 6.70
Asset Allocation 91.50
</TABLE>
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 Fund.
II-1
<PAGE> 225
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 12/31/99)
<TABLE>
<C> <S>
$6,640 Small Stock
$2,845 Common Stock
$ 40 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 Fund.
Generally, stock returns are due to capital appreciation and reinvesting
any gains. Bond returns are due mainly to reinvesting interest. Also, stock
prices usually are more volatile than bond prices over the long-term.
SMALL STOCK returns for 1926-1980 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. 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).
II-2
<PAGE> 226
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 THROUGH 12/31/99
[BAR GRAPH]
<TABLE>
<C> <S>
$47.41 Common Stocks
$52.61 Small Stocks
$33.41 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 1981-1999, 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 1999. 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 Fund.
II-3
<PAGE> 227
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,
1999 through December 31, 1999.
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: 4.44%...................................... 444
Tax paid on interest (assumes 31% tax rate)................. -176
-------------
Net interest income......................................... 268
Adjust for 3% inflation..................................... -300
-------------
Net investment.............................................. $ 9,968
</TABLE>
THE INVESTOR'S NET RETURN WAS -0.30%!
1999 Salomon Smith Barney Brothers 30-day T-bill return used for short-term
interest rate. Federal tax rate of 31% and 1999 inflation rate (CPI) were used.
Short-term rates can fluctuate.
Past performance is no guarantee of future results. This hypothetical
example is provided for informational purposes only. It is not intended to
represent any specific investment and is not indicative of past, present, or
future performance of any Fund.
II-4
<PAGE> 228
Each bar shows the best
and worst annualized return for
the specified holding periods
through 1999. For example, the
best one-year return occurred
in 1933 and the worst 10-year
annualized return occurred from
1929-1938. The first holding
period started on 12/31/25 and
the first 20-year period ended
on 12/31/45.
Common stock returns are
based on the S&P 500 Composite
Index, a market-weighted,
unmanaged index of 500 stocks
(currently) in a variety of
industries. It is often used as
a broad measure of stock market
performance.
This chart is for
illustrative purposes only and
is not indicative of the past,
present, or future performance
of any Fund.
Source: Ibbotson Associates
TIME REDUCES YOUR RISK
BEST AND WORST ANNUALIZED RETURNS OF THE S&P
[BAR GRAPH]
II-5
<PAGE> 229
APPENDIX III
GLOSSARY OF INDEXES
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.
III-1
<PAGE> 230
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.
III-2
<PAGE> 231
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.
III-3
