<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1997
SECURITIES ACT REGISTRATION NOS. 33-50476
INVESTMENT COMPANY ACT REGISTRATION NO. 811-7064
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 7 [X]
AND/OR REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 8
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
THE TARGET PORTFOLIO TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
PAUL H. DYKSTRA, ESQ.
GARDNER, CARTON & DOUGLAS
321 N. CLARK STREET
CHICAGO, ILLINOIS 60610
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the Registration Statement.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
THE REGISTRANT HAS ELECTED, PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT
COMPANY ACT OF 1940, TO REGISTER AN INDEFINITE NUMBER OF SHARES. IN ACCORDANCE
WITH RULE 24F-2, THE REGISTRANT FILED A NOTICE UNDER SUCH RULE FOR ITS FISCAL
YEAR ENDED DECEMBER 31, 1996, ON FEBRUARY 26, 1997.
================================================================================
<PAGE> 2
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A
ITEM NO. CAPTION IN PART A PROSPECTUS
--------- -----------------------------------------
<S> <C> <C>
Item 1. Cover Page............................... Front Cover Page
Item 2. Synopsis................................. Trust Expenses
Item 3. Condensed Financial Information.......... Trust Expenses; Financial Highlights;
General Information
Item 4. General Description of Registrant........ Description of the Portfolios; General
Information
Item 5. Management of the Fund................... Financial Highlights; Management of the
Trust; General Information
Item 5A. Management's Discussion of Fund
Performance............................ Financial Highlights
Item 6. Capital Stock and Other Securities....... Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered..... Purchase and Redemption of Shares; Net
Asset Value; Management of the Trust
Item 8. Redemption or Repurchase................. Purchase and Redemption of Shares;
General Information
Item 9. Pending Legal Proceedings................ Not Applicable
</TABLE>
<TABLE>
<CAPTION>
CAPTION IN PART B STATEMENT OF
ADDITIONAL INFORMATION
-----------------------------------------
<S> <C> <C>
Item 10. Cover Page............................... Cover Page
Item 11. Table of Contents........................ Table of Contents
Item 12. General Information and History.......... General Information
Item 13. Investment Objectives and Policies....... Investment Objectives and Policies;
Additional Investment Policies;
Investment Restrictions
Item 14. Management of the Fund................... Trustees and Officers; Manager;
Distributor
Item 15. Control Person and Principal Holders of
Securities............................. Not Applicable
Item 16. Investment Advisory and Other Services... Manager; Distributor; Custodian, Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other
Practices.............................. Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities....... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being....................... Purchase and Redemption of Shares;
Shareholder Investment Account; Net
Asset Value
Item 20. Tax Status............................... Taxes, Dividends and Distributions
Item 21. Underwriters............................. Distributor
Item 22. Calculation of Performance Data.......... Performance Information
Item 23. Financial Statements..................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
LOGO
TARGET:
PERSONALIZED INVESTING FOR THOSE
FOCUSED ON SUCCESS
THIS MATERIAL CONSISTS OF A DESCRIPTION OF THE PRUDENTIAL SECURITIES TARGET
PROGRAM AND A PROSPECTUS OF THE TARGET PORTFOLIO TRUST. A TABLE LISTING THE
COSTS AND EXPENSES ASSOCIATED WITH AN INVESTMENT IN THE FUND APPEARS ON PAGE 6
OF THE PROSPECTUS. READ THE DESCRIPTION AND THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
March , 1997
<TABLE>
<S> <C>
THIS BROCHURE INCLUDES A PROSPECTUS WHICH
DESCRIBES IN DETAIL THE FUND'S OBJECTIVES,
INVESTMENT POLICIES, RISKS, SALES CHARGES, FEES
AND OTHER MATTERS OF INTEREST. PLEASE READ THE
PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND
MONEY.
</TABLE>
<PAGE> 4
"Tis the part of a wise man to keep himself today for tomorrow, and not
venture all his eggs in one basket."
--Miguel de Cervantes, Don Quixote, 1605
Diversification. True then. True today. After nearly 400 years, this
principle remains a hallmark of prudent financial management. It is also often
an integral part of a successful investment program.
The Prudential Securities TARGET program seeks to apply today's "modern"
investment techniques and history's tried and true principles. We invite you to
read more about this exciting opportunity.
WELCOME TO TARGET
Having the proper investment program based on your personal financial goals
is more important than ever. To retire comfortably, purchase a home, or build a
nest egg, investors no longer can rely solely on traditional savings vehicles.
Instead, they must look to other investments, and that's how TARGET can help.
IT IS EASY TO DEVELOP YOUR PROGRAM
TARGET is a comprehensive investment program that provides personalized
asset allocation, money management, and performance reporting services. Offered
only by Prudential Securities and its affiliates, TARGET is convenient and
designed to help you achieve your investment goals more easily.
Developing a rational and effective investment program is not difficult if
you receive the proper guidance. With TARGET, you benefit from the services of
your Financial Advisor, agent and those of independent investment advisers
(commonly called "money managers") who manage the portfolios that underlie the
TARGET program. The services of many of these advisers are normally available
only to institutional investors such as pension funds, endowments and Fortune
500 companies. Few other investment programs provide this level of service as
conveniently as TARGET.
As with any investment program, the TARGET program and the underlying
portfolios entail certain risks. Certain risks inherent in the portfolios are
described in the accompanying prospectus. There can be no assurances that an
investor's participation in TARGET will achieve the intended investment result
or that the value of an investor's investment in TARGET will appreciate.
TARGET USES A FOUR STEP PROCESS
TARGET helps you manage your money and plan for your future. You and your
Financial Advisor should revisit the following process regularly:
I) DEFINE YOUR GOALS
You and your Financial Advisor will discuss your investment objectives,
time horizon, income requirements and risk tolerance. Together, you will attempt
to paint a clear picture of your financial goals and expectations.
II) DEVELOP YOUR PLAN
A personalized investment plan will be developed for you. It will recommend
that you diversify your assets by investing in a precise blend of stock, bond
and money market mutual fund portfolios.
THIS BROCHURE IS NOT PART OF THE PROSPECTUS
ii
<PAGE> 5
You may adopt this blend, called your "recommended allocation," or choose your
own. TARGET is non-discretionary, so all investment decisions ultimately remain
with you.
III) MANAGE YOUR MONEY
TARGET provides you with an opportunity to invest with advisers whose
account minimums in some cases exceed $5 million. Each adviser manages a
portfolio (or a portion of a portfolio) that focuses on a specific market sector
like small company stocks, bonds, and foreign securities.
IV) MONITOR YOUR PROGRESS
You'll receive a personal review called your "Quarterly Account Monitor."
It will show your portfolios' performance and include commentaries from the
advisers and sections on transactions, distributions and taxes.
1) DEFINE YOUR GOALS
A personally tailored investment program should account for each investor's
unique situation. Investing is a very personal process since no two investors
have exactly the same goals and tolerance for risk. TARGET attempts to recommend
the right investment program based upon your unique situation through its
Questionnaire.
TARGET STARTS WITH YOU
Without a thorough understanding of an investor's goals and specific
situation, no program truly can be personalized. As a result, there is a higher
chance that an investor will not as easily achieve his or her investment goals.
Your responses to the Questionnaire provide TARGET with your investment
profile. You will be asked about your financial goals, current investments,
attitudes towards risk, investment amount, and time frame. Each question will
have a direct bearing on the allocation of mutual fund portfolios that TARGET
recommends for you. This will help you and your Financial Advisor keep up to
date with your personal situation and remain focused on helping you attempt to
achieve your goals.
2) DEVELOP YOUR PLAN
TARGET considers several factors before developing your personal investment
plan. These factors include the historical returns of different investments and
asset allocation strategies.
YOUR ALLOCATION IS DESIGNED SPECIFICALLY FOR YOU
There are risks to all investments, including TARGET. Your goal, however,
should not be to avoid risk, but to manage it.
You can reduce most risk by investing in safe, short-term securities, such
as U.S. Treasury-bills. Your return, though, may be limited. By contrast, if you
take some risk, history has shown that over time, you may be rewarded. One way
you can attempt to manage risk is to diversify your assets both within security
type by using mutual funds, and among types (by using stocks, bonds and
short-term investments).
TARGET helps you diversify by using several mutual fund portfolios. Each
one focuses on a particular type of investment. This approach may help reduce
the chance that poor performance by one investment type (stocks or bonds or
money market securities), sector (industry or geographic) as well as any
particular security, will have a major impact on your overall TARGET account.
THIS BROCHURE IS NOT PART OF THE PROSPECTUS
iii
<PAGE> 6
Different types of investments perform relatively better at different
times. For example, the returns of stocks historically beat those of bonds over
the long-term, but not every year. Advising you on how the returns of different
investments relate to each other is an integral element of TARGET. Your
recommended allocation will suggest that you invest specific amounts in several
TARGET portfolios. Each allocation has unique potential risk and return
characteristics and TARGET recommends one that appears right for you based on
the information in your Questionnaire. Complex studies of long-term investment
returns are among the factors used to construct the allocation. As a result,
TARGET seeks to provide you with a rational financial foundation to help keep
your investments consistent with your goals.
TARGET'S PORTFOLIOS
<TABLE>
<CAPTION>
STOCK BOND
<S> <C>
Large Cap Growth Portfolio International Bond Portfolio
Large Cap Value Portfolio Total Return Portfolio
Small Cap Growth Portfolio Intermediate-Term Portfolio
Small Cap Value Portfolio Mortgage Backed Portfolio
International Equity Portfolio US Gov't Money Market Portfolio
</TABLE>
The portfolios are described in greater detail in the accompanying
prospectus. Portfolios may be added to or removed from TARGET from time to time
pursuant to applicable regulations.
3) MANAGE YOUR MONEY
Managing your money can be an overwhelming job for an individual, so many
people look to mutual funds for help. Their efforts may often be frustrated,
however, because there are more than 7,000 funds to choose from. TARGET is a
solution to this dilemma.
EVERY INVESTMENT ADVISER IS UNIQUE
Each TARGET adviser, also known as a "sub-adviser," specializes in a
certain sector. Prudential Securities initially conducted a six-month search to
identify advisers for TARGET. Risk-adjusted performance, adherence to investment
style, continuity of personnel, and other factors, were considered. Of course,
an adviser's past investment record is no guarantee of future results.
Though the advisers are independent of Prudential Securities, they have
been selected and are monitored by Prudential Mutual Fund Management LLC and the
Trustees of the TARGET Portfolio Trust. TARGET provides you with access to these
independent advisers in one convenient program.
4) MONITOR YOUR PROGRESS
TARGET has been structured as a personalized, ongoing program. Thus, you
should monitor your progress and, when necessary, make adjustments. As always,
your Financial Advisor will attempt to provide solid guidance.
YOU WILL RECEIVE QUARTERLY REPORTS
You'll receive quarterly reports that describe how your portfolios
performed and how they are being managed. This is a service that supplements
your account statement and TARGET'S semi-annual reports. The QUARTERLY ACCOUNT
MONITOR provides a comprehensive review of your invest-
THIS BROCHURE IS NOT PART OF THE PROSPECTUS
iv
<PAGE> 7
ment performance. It also includes market commentaries from the TARGET advisers
and sections on dividends, distributions, and portfolio transactions.
The COST BASIS REPORT in the Monitor should lessen your paperwork when it
comes time to file your tax returns. It calculates your per-share cost basis and
realized gains and losses.
YOU CAN FINE-TUNE TARGET ALONG THE WAY
As time passes, your goals may change, as will the financial markets. You
can fine-tune TARGET and your Financial Advisor will assist you in this
"rebalancing."
Rebalancing can be done easily by directing assets from one portfolio to
another. Rebalancing may be necessary because your portfolios will perform
differently, causing their relative values to differ from your recommended
allocation percentages. You can change your recommended percentages as your
goals or circumstances change or as a result of the addition of a new portfolio
to, or removal of an existing portfolio from, the Trust. Also there may be
differences between your TARGET portfolio holdings and the Prudential Securities
recommended allocation as a result of your decision to select an allocation
different from Prudential Securities' recommended allocation. As always you can
revise the percentages at any time due to changing market conditions.
GETTING STARTED IS EASY
Designing an allocation to achieve your goals more easily is the objective
of the TARGET program. Few other programs can provide you, as conveniently, with
this level of personalized investment service. Here's how it works:
Schedule a meeting with a Prudential Securities Financial Advisor or Pruco
Securities Corporation (Prusec) registered representative who will assist you in
completing the TARGET Questionnaire. Alternatively, you can complete the
Questionnaire on your own and mail it back to your Financial Advisor.
Prudential Securities will analyze your responses to the Questionnaire and
then provide you and your Financial Advisor with an Evaluation. An important
part of the Evaluation is the personalized asset allocation recommendation. This
recommendation will suggest that you invest specific amounts in several TARGET
portfolios. Normally, between five and nine portfolios are recommended. Ibbotson
Associates, of Chicago, assists in constructing the recommended allocations.
Ibbotson is an investment consulting, data, and software products company that
specializes in applying investment theories and empirical findings to current
business practice. You and your Financial Advisor will review the recommended
allocation and, since TARGET is a non-discretionary program, you may accept the
recommendation, or adopt your own.
When you receive the Evaluation, your Financial Advisor also will provide
you with a TARGET Investment Advisory Agreement. This document requires your
signature and describes important aspects of participating in the TARGET
program. You also will receive other materials, such as a Disclosure Statement
(which details more information about TARGET and Prudential Securities) and,
depending on the type of account, other documents. Once you review the material,
sign the Investment Advisory Agreement and agree upon an asset allocation, your
money will be invested in TARGET and you'll be on your way. Of course, you will
receive trade confirmations.
THIS BROCHURE IS NOT PART OF THE PROSPECTUS
v
<PAGE> 8
Adding or withdrawing money also is easy. Shares of portfolios can be
purchased, redeemed or exchanged daily at the net asset value next determined
without imposition of any sales or redemption charge.
As described below, participation in TARGET is subject to the payment of a
quarterly advisory fee.
FEES, AND INVESTMENT MINIMUMS AND OTHER TERMS
ANNUAL FEE
For all accounts, other than Individual Retirement Accounts (IRA's) and
qualified employee benefit plans (collectively, the Plans), the quarterly
advisory fee is charged at the maximum annual rate of 1.5% of assets held in a
TARGET Program account invested in equity portfolios and 1.0% of assets held in
a TARGET Program account invested in income portfolios. For Plan accounts, the
quarterly advisory fee is charged at the maximum rate of 1.25% and 1.35%,
respectively. The fee may be subject to negotiation under certain circumstances.
Financial Advisors and Prusec registered representatives receive a portion of
the advisory fee paid by TARGET Program clients. As the quarterly fee paid by
non-Plan investors for investments in an equity portfolio is greater than the
fee paid for investments in an income portfolio, Prudential Securities, when
making asset allocation recommendations for non-Plan TARGET Program clients will
be presented with a conflict of interest as to the specific portfolios
recommended for investment. As a shareholder in the portfolios, you will also
bear a proportionate share of the portfolios' fees and expenses, which are
described in detail in the accompanying prospectus.
Accounts may have their fee automatically debited from their securities
account or billed to them quarterly. For accounts that are billed, the initial
fee is payable by check within forty-five calendar days after the trade date.
The initial fee is based on the value of your shares and the mix of TARGET
portfolios on the initial trade date. The initial fee covers the period from the
initial trade date through the last day of the calendar quarter, and is
pro-rated accordingly. Thereafter, quarterly fees cover the current calendar
quarter. The quarterly fee is payable on the sixth business day of the current
quarter or, for accounts that are billed quarterly, forty-five calendar days
after the end of the previous calendar quarter, by check.
The Quarterly Account Monitor sent to you will indicate the amount of the
TARGET Program annual fee. You should consult with your Financial Advisor to
estimate the amount of the annual fee and ensure that, if the fee is paid by a
debit from your securities account, there are sufficient funds in the account to
cover the debit. If there are insufficient funds, the fee will be paid by an
automatic redemption by Prudential Securities of an appropriate number of shares
(i) for non-Plan accounts, from your largest TARGET portfolio and (ii) for Plan
accounts, from all of your TARGET portfolios on a pro-rata basis. If you choose
to maintain a cash balance in your securities account or pay by check, any idle
funds in your account may be invested in shares of a Prudential Securities money
market fund designated by you until the specified payment date.
If you add assets to your TARGET Program account during a calendar quarter,
the applicable fee will be payable one business day after settlement date (or on
the forty-fifth calendar day after the trade date for accounts that elect to be
billed for their TARGET Program fee), after the day that these investments
aggregate $10,000 or more and will be based on the proportion of the current
quarter
THIS BROCHURE IS NOT PART OF THE PROSPECTUS
vi
<PAGE> 9
then remaining. If the fee is paid by a debit from your securities account and
if there are insufficient funds in your securities account, the fee will be paid
by an automatic redemption, by Prudential Securities, of an appropriate number
of shares (1) for non-Plan accounts, from your largest TARGET portfolio and (2)
for Plan accounts, from all of your TARGET portfolios on a pro-rata basis.
Trustees of the TARGET Trust, employees of Prudential Securities and
Prudential Mutual Fund Management LLC and their subsidiaries, and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities may participate in the TARGET Program without the
imposition of the annual program fee. In addition, the annual program fee may be
waived in whole or in part for certain banks, trust companies or unaffiliated
investment advisers who maintain securities accounts with Prudential Securities,
personal trusts which are part of The Prudential Bank Personal Trust Program
administered by Prudential Bank & Trust (as trustee) or affiliates thereof, and
certain fee based programs sponsored by Prudential Securities and its affiliates
which include mutual funds as investment options and for which the Portfolios
are an available option without payment of the program fee.
MINIMUM INITIAL INVESTMENT
The minimum initial investment for non-Plan accounts is $25,000 and for
Plan accounts, $10,000. The minimum initial investment is $10,000 for custodial
accounts established under the Uniform Gift to Minors Act and for Trustees of
the TARGET Trust. The minimum initial investment may be waived, in whole or in
part, for certain start-up qualified employee benefit plans and for a transfer
of assets from an asset allocation program of investments in registered
investment companies. From time to time, the minimum initial investment
requirement may otherwise be reduced for Plan and non-Plan accounts in the
discretion of Prudential Securities.
TERMINATION
You may terminate your participation in the TARGET Program at any time upon
five business days notice. Prudential Securities reserves the right to reject
any investor's participation in the TARGET Program.
Termination of the TARGET Program account must be accompanied by a
redemption order for all portfolio shares held in the account. The TARGET Trust
may redeem shares when their aggregate value falls below $10,000 by reason other
than fluctuations in the portfolios' net asset values or redemptions to pay
TARGET Program fees if the investor does not restore the share value to in
excess of that amount within 30 days after written notice by the Trust. Proceeds
of any involuntary redemption will be credited to your securities account or
paid by check mailed to you if you so instruct. You should be aware that
involuntary redemptions may result in the liquidation of portfolio holdings at a
time when the value of these holdings is higher or lower than your cost,
resulting in a realized taxable gain or loss, respectively.
THIS BROCHURE IS NOT PART OF THE PROSPECTUS
vii
<PAGE> 10
THE TARGET PORTFOLIO TRUST(SM)
PROSPECTUS DATED MARCH , 1997
- --------------------------------------------------------------------------------
The Target Portfolio Trust(SM) (the Trust), is an open-end, management
investment company currently composed of ten separate investment portfolios (the
Portfolios) professionally managed by Prudential Mutual Fund Management LLC.
(PMF or the Manager). Each Portfolio benefits from discretionary advisory
services provided by one or more investment advisers (each, an Adviser,
collectively, the Advisers) identified, retained, supervised and compensated by
the Manager. The Trust consists of the following Portfolios:
Equity Portfolios
- Large Capitalization Growth Portfolio
- Large Capitalization Value Portfolio
- Small Capitalization Growth Portfolio
- Small Capitalization Value Portfolio
- International Equity Portfolio
Income Portfolios
- International Bond Portfolio
- Total Return Bond Portfolio
- Intermediate-Term Bond Portfolio
- Mortgage Backed Securities Portfolio
- U.S. Government Money Market Portfolio
The U.S. Government Money Market Portfolio seeks to maintain a stable net
asset value of $1.00 per share. Shares of the U.S. Government Money Market
Portfolio are not guaranteed or insured by the U.S. Government. There can be no
assurance that the U.S. Government Money Market Portfolio will be able to
maintain a stable net asset value of $1.00 per share.
Shares of the Portfolios are offered to participants in the Prudential
Securities Target Program (the Target Program), an investment advisory service
that provides to investors asset allocation recommendations with respect to the
Portfolios based on an evaluation of an investor's investment objectives and
risk tolerances. Participation in the Target Program is subject to payment of a
separate investment advisory or program fee. For all accounts other than
Individual Retirement Accounts (IRAs) and qualified employee benefit plans
(collectively, Plans) the quarterly advisory fee is charged at a maximum annual
rate of 1.5% of assets invested in equity portfolios and 1.0% of assets invested
in income portfolios. For Plan accounts, the quarterly advisory fee is charged
at the maximum annual rate of 1.25% of assets invested in equity portfolios and
1.35% of assets invested in income portfolios. Certain clients may be eligible
for a reduction or waiver of the advisory fee. See "Purchase and Redemption of
Shares." The operating expenses of the Portfolios, when combined with any
investment advisory fees separately paid, will involve greater fees and expenses
than other investment companies whose shares are purchased without the benefit
of professional asset allocation recommendations. The Target Program or shares
of the Trust are also available (without participation in the Target Program) to
banks, trust companies and other investment advisory services which maintain
securities accounts with Prudential Securities and to certain fee based programs
sponsored by Prudential Securities and its affiliates which include mutual funds
as investment options and for which the Portfolios are an available option
without payment of the Target Program fee.
PROSPECTIVE INVESTORS SHOULD NOTE THAT THE MORTGAGE BACKED SECURITIES
PORTFOLIO MAY SELL A SECURITY THAT IT DOES NOT OWN (I.E., ENGAGE IN SHORT
SALES). ALL OF THE PORTFOLIOS RESERVE THE RIGHT TO BORROW MONEY FOR TEMPORARY
AND EXTRAORDINARY PURPOSES WHILE THE MORTGAGE BACKED SECURITIES PORTFOLIO, THE
INTERMEDIATE-TERM BOND PORTFOLIO, THE TOTAL RETURN BOND PORTFOLIO AND THE
INTERNATIONAL BOND PORTFOLIO MAY ALSO BORROW FOR INVESTMENT PURPOSES WHICH MAY
ENTAIL ADDITIONAL RISK TO THOSE PORTFOLIOS. ALL OF THE PORTFOLIOS MAY INVEST IN
EXCESS OF 5% OF THEIR ASSETS IN RESTRICTED SECURITIES. THESE TECHNIQUES MAY BE
CONSIDERED SPECULATIVE AND MAY INVOLVE A GREATER RISK OF LOSS TO THOSE
PORTFOLIOS THAT UTILIZE THESE TECHNIQUES. THE INTERNATIONAL BOND PORTFOLIO MAY
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN NON-INVESTMENT GRADE SECURITIES,
WHICH MAY ENTAIL ADDITIONAL RISKS. ADDITIONALLY, THE PORTFOLIOS MAY EXPERIENCE
HIGH ANNUAL PORTFOLIO TURNOVER WHICH MAY INVOLVE CORRESPONDINGLY GREATER
BROKERAGE COMMISSIONS AND OTHER TRANSACTION COSTS. See "Description of the
Portfolios--Investment Objectives and Policies" and "Description of the
Portfolios--Other Investments and Policies."
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 Prospectus sets forth concisely the information about the Trust that a
prospective investor ought to know before investing. Additional information
about the Trust has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated March , 1997, which information is
incorporated herein by reference and is available without charge upon request to
the Trust at the address or telephone number noted above.
Investors are advised to read this Prospectus and retain it for future
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 11
SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus.
THE TRUST. The Trust is a management investment company providing a
convenient means of investing in separate professionally managed Portfolios. The
assets of each of the Portfolios are managed on a discretionary basis by one or
more separate Advisers. See "Management of the Trust." The Trust is a series
company currently consisting of ten Portfolios. As with an investment in any
mutual fund, an investment in a Portfolio can decrease in value and you can lose
money. Except for the International Bond Portfolio, each of these Portfolios is
a diversified portfolio within the meaning of the Investment Company Act of
1940, as amended (the Investment Company Act). There are certain risks
associated with an investment in a non-diversified portfolio. See "Description
of the Portfolios--International Bond Portfolio."
EQUITY PORTFOLIOS
LARGE CAPITALIZATION GROWTH PORTFOLIO -- seeks to achieve long-term capital
appreciation by investing primarily in a portfolio of common stocks of companies
that, in the Adviser's opinion, are characterized by a growth of earnings at a
rate faster than that of the Standard & Poor's 500 Composite Stock Price Index
(S&P 500). Dividend income is an incidental consideration in the selection of
investments. The Portfolio may also invest in money market instruments and
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities and may engage in repurchase agreement transactions. See
"Description of the Portfolios--Other Investments and Policies." The stocks of
the companies in which the Portfolio may invest are subject to industry,
economic and market risks and therefore may not perform as the Adviser expects.
The Advisers to the Portfolio are Columbus Circle Investors, a subpartnership of
PIMCO Advisors L.P., and Oak Associates, Ltd.
LARGE CAPITALIZATION VALUE PORTFOLIO -- seeks to achieve total return
consisting of capital appreciation and dividend income by investing primarily in
a portfolio of common stocks that, in the Adviser's opinion, have above average
price appreciation potential at the time of purchase. The Portfolio may also
invest in other equity securities, including preferred stock, corporate and
other debt obligations and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. See "Description of the
Portfolios--Other Investments and Policies." The stocks of the companies in
which the Portfolio may invest are subject to industry, economic and market
risks and therefore may not perform as the Adviser expects. The Advisers to the
Portfolio are INVESCO Capital Management, Inc. and Hotchkis and Wiley.
SMALL CAPITALIZATION GROWTH PORTFOLIO -- seeks to achieve maximum capital
appreciation by investing primarily in a portfolio of common stocks of "emerging
growth" companies. The securities of the companies in which the Portfolio will
invest may have limited marketability and may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the markets in general. The Portfolio may also invest in preferred stock,
obligations issued or guaranteed by the U.S. Government and money market
instruments. See "Description of the Portfolios--Other Investments and
Policies." The Advisers to the Portfolio are Nicholas-Applegate Capital
Management and Investment Advisers, Inc.
SMALL CAPITALIZATION VALUE PORTFOLIO -- seeks to achieve above average
capital appreciation by investing primarily in a portfolio of common stocks of
companies with a total market capitalization of less than $1.5 billion that, in
the Adviser's opinion, are undervalued or overlooked in the marketplace
2
<PAGE> 12
at the time of purchase. The Portfolio may also invest in securities convertible
into common stock, preferred stock, debt obligations with capital appreciation
potential and money market instruments. See "Description of the
Portfolios--Other Investments and Policies." The securities of the companies in
which the Portfolio will invest may have limited marketability and may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or the markets in general. The Advisers to the
Portfolio are Lazard Freres Asset Management, a division of Lazard Freres & Co.,
and Wood, Struthers & Winthrop Management Corp., a subsidiary of Donaldson,
Lufkin & Jenrette Securities Corporation.
INTERNATIONAL EQUITY PORTFOLIO -- seeks to achieve capital appreciation by
investing primarily in a portfolio of equity securities of companies domiciled
outside the United States. The Portfolio will invest in companies in developed
as well as developing countries. Investing in international equity securities
involves risks not associated with investment in the securities of U.S.
companies, including exposure to less diverse and mature economies, greater
market volatility and changes in currency exchange rates. Investments in
developing countries involve additional risks. See "Description of the
Portfolios--International Equity Portfolio." The Portfolio may engage in forward
currency transactions, purchase and write put and call options on foreign
currencies and trade currency futures contracts and options thereon. The
Portfolio may also invest in closed-end country or regional funds and money
market instruments. See "Description of the Portfolios--Other Investments and
Policies." The Adviser to the Portfolio is Lazard Freres Asset Management, a
division of Lazard Freres & Co.
INCOME PORTFOLIOS
INTERNATIONAL BOND PORTFOLIO -- seeks to achieve high total return by
investing primarily in high quality foreign debt securities denominated
primarily in foreign currencies. The Portfolio may invest in debt obligations
issued or guaranteed by foreign governments, their agencies and
instrumentalities, by supranational organizations and entities and by foreign
corporations or financial institutions. Under normal market circumstances, the
Portfolio will invest at least 65% of its total assets in high quality debt
securities denominated in foreign currencies of issuers located in at least
three countries outside the United States. The Portfolio may also invest in debt
obligations issued or guaranteed by the United States Government and its
agencies and instrumentalities and in corporations and financial institutions
domiciled in the United States. The Portfolio may also invest in debt securities
denominated in the European Currency Unit (ECU), a multinational currency unit
which represents specified amounts of currencies of certain member states of the
European Economic Community. Under normal circumstances, the Portfolio will
invest at least 75% of its assets in debt securities rated A or better by
Standard & Poor's Ratings Group (S&P) or Moody's Investors Service, Inc.
(Moody's), or if unrated, determined by the Adviser to be of comparable quality.
Under normal circumstances, up to 25% of the Portfolio's total assets may be
invested in debt securities rated below investment grade but rated at least B by
S&P or Moody's or, if unrated, determined by the Adviser to be of comparable
quality. See "Description of the Portfolios--Other Investments and Policies."
The Portfolio is non-diversified and may be subject to greater risks than a
portfolio that is diversified. See "Description of the Portfolios--International
Bond Portfolio." The Adviser to the Portfolio is Fiduciary International, Inc.
TOTAL RETURN BOND PORTFOLIO -- seeks to achieve total return consisting of
current income and appreciation of capital by investing primarily in a portfolio
of 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
Portfolio may invest in obligations issued or guaranteed by the U.S.
3
<PAGE> 13
Government, its agencies and instrumentalities, corporate and other debt
obligations, convertible securities, mortgage-backed securities, asset backed
securities, obligations of foreign governments or their subdivisions, agencies
or instrumentalities, obligations of supranational and quasi-governmental
entities, commercial paper, certificates of deposit, money market instruments
and foreign currency exchange-related securities. All of the securities in the
Portfolio will be investment grade or determined by the Adviser to be of
comparable quality, except the Portfolio may invest up to 10% of its total
assets in securities rated below investment grade but rated at least B by
Moody's or S&P, or determined by the Adviser to be of comparable quality. See
"Other Investments and Policies--Medium and Lower Rated Securities." The
Portfolio may also invest in repurchase agreements and reverse repurchase
agreements and purchase and write put and call options, purchase and sell
futures contracts, purchase securities on a when-issued or delayed-delivery
basis, engage in interest rate swap transactions and lend its portfolio
securities. Investing in bonds involves risks related to interest rate changes,
the ability of the issuer to repay its obligations, and in the case of medium
and lower-rated securities, greater price volatility and the risk of default.
The Adviser to the Portfolio is Pacific Investment Management Company.
INTERMEDIATE-TERM BOND PORTFOLIO -- seeks to achieve current income and
reasonable stability of principal by investing primarily in a portfolio of high
quality fixed-income securities of varying maturities with a dollar-weighted
average portfolio maturity of more than three years but not more than ten years.
The Portfolio may invest in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, corporate and other debt
obligations, convertible securities, mortgage-backed securities, asset backed
securities, obligations of foreign governments or their subdivisions, agencies
or instrumentalities, obligations of supranational and quasi-governmental
entities, commercial paper, certificates of deposit, money market instruments
and foreign currency exchange-related securities. All of the securities in the
Portfolio will be investment grade or determined by the Adviser to be of
comparable quality, except the Portfolio may invest up to 10% of its total
assets in securities rated below investment grade but rated at least B by
Moody's or S&P, or determined by the Adviser to be of comparable quality. See
"Other Investments and Policies--Medium and Lower Rated Securities." The
Portfolio may also invest in repurchase agreements and reverse repurchase
agreements and purchase and write put and call options, purchase and sell
futures contracts, purchase securities on a when-issued or delayed-delivery
basis, engage in interest rate swap transactions and lend its portfolio
securities. Investing in bonds involves risks related to interest rate changes,
the ability of the issuer to repay its obligations, and in the case of medium
and lower-rated securities, greater price volatility and the risk of default.
The Adviser to the Portfolio is Pacific Investment Management Company.
MORTGAGE BACKED SECURITIES PORTFOLIO -- seeks to achieve high current
income as its primary objective with a secondary objective of capital
appreciation, each to the extent consistent with the protection of capital. The
Portfolio seeks to achieve these objectives by investing, under normal
circumstances, at least 65% of its assets in mortgage related securities. The
Portfolio may also invest in non-mortgage related securities, including
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, corporate and other debt obligations, asset-backed
securities, money market instruments and repurchase and reverse repurchase
agreements. In addition, the Portfolio may purchase and write put and call
options, purchase and sell futures contracts, purchase securities on a
when-issued or delayed-delivery basis, engage in interest rate swap
transactions, make short sales of securities and lend its portfolio securities.
See "Description of the Portfolios--Other Investments and Policies." Investing
in mortgage backed securities involves risks related to interest rate movements,
prepayment of principal faster or slower than
4
<PAGE> 14
expected and the liquidity and creditworthiness of the various mortgage related
securities purchased by the Portfolio. The Adviser to the Portfolio is
Wellington Management Company, LLP.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO -- seeks to achieve maximum current
income consistent with the maintenance of liquidity and the preservation of
capital. The Portfolio invests exclusively in short-term securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (U.S.
Government securities) and repurchase agreements with respect to those
securities. The Portfolio may also purchase securities on a when-issued or
delayed-delivery basis. While the U.S. Government Money Market Portfolio seeks
to maintain a stable net asset value of $1.00 per share, there is no assurance
that it will be able to do so on a continuing basis. See "Description of the
Portfolios--Other Investments and Policies." The Adviser to the Portfolio is
Wellington Management Company, LLP.
MANAGEMENT. Prudential Mutual Fund Management LLC acts as the Portfolios'
Manager. Each Portfolio is advised by one or more Advisers identified, retained,
supervised and compensated by the Manager. Investors should be aware that the
Manager will be subject to a conflict of interest when making decisions
regarding the retention and compensation of particular Advisers. The Manager
receives a fee from each Portfolio, and retains a portion of the fee that varies
based on the Portfolio involved. The Manager's decisions, including the identity
of an Adviser and the specific amount of the Manager's compensation to be paid
to the Adviser, are subject to review and approval by a majority of the Trustees
including a majority of the Trustees who are not "interested" persons as defined
in the Investment Company Act. See "Management of the Trust."
PURCHASE AND REDEMPTION OF SHARES. Shares of the Portfolios are offered for
purchase and redemption at their respective next determined net asset values.
Investors purchasing shares through participation in the Target Program will pay
a quarterly advisory fee. For all non-Plan accounts, the quarterly advisory fee
is charged at the maximum annual rate of 1.5% of assets held in a Target Program
account invested in equity portfolios and 1.0% of assets held in a Target
Program account invested in income portfolios. For Plan accounts, the quarterly
advisory fee is charged at the maximum annual rate of 1.25% of assets held in a
Target Program account invested in equity portfolios and 1.35% of assets held in
a Target Program account invested in income portfolios. The fee may be subject
to negotiation when assets in the Target Program exceed $100,000, based on a
number of factors including, but not limited to, the size of the account and
other accounts with Prudential Securities. The minimum initial investment in the
Target Program for non-Plan accounts is $25,000 and for Plan accounts is
$10,000. Certain accounts may be aggregated for purposes of satisfying the
minimum initial investment requirement. The minimum initial investment
requirement may be reduced or waived in certain instances and the advisory fee
may be waived or reduced for certain clients. See "Purchase and Redemption of
Shares."
5
<PAGE> 15
TRUST EXPENSES
The following table lists the costs and expenses, including the Target
Program advisory fee paid separately, that an investor will incur directly and
indirectly as a shareholder of each of the Portfolios based on expenses from the
last fiscal year. The operating expenses of the Portfolios, when combined with
any investment advisory fees separately paid, will involve greater fees and
expenses than other investment companies whose shares are purchased without the
benefit of professional asset allocation recommendations.
<TABLE>
<CAPTION>
U.S.
LARGE LARGE SMALL SMALL INTER- GOVERN-
CAPITALI- CAPITALI- CAPITALI- CAPITALI- INTER- INTER- TOTAL MEDIATE- MORTGAGE MENT
ZATION ZATION ZATION ZATION NATIONAL NATIONAL RETURN TERM BACKED MONEY
GROWTH VALUE GROWTH VALUE EQUITY BOND BOND BOND SECURITIES MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES... None None None None None None None None None None
Maximum
Annual
Target
Program
Fee
applicable
to non
Plan
investors
(as a
percentage
of
average
daily
value of
Portfolio
shares
held)*... 1.50% 1.50% 1.50% 1.50% 1.50% 1.00% 1.00% 1.00% 1.00% 1.00%
========= ========= ========= ========= ========= ========= ========= ========= =========== =========
ANNUAL PORTFOLIO OPERATING EXPENSES**
(AS A
PERCENTAGE
OF
AVERAGE
NET
ASSETS)
Management
Fees... 0.60% 0.60% 0.60% 0.60% 0.70% 0.50% 0.45% 0.45% 0.45% 0.25%
12b-1
Fees... None None None None None None None None None None
Other
Expenses... .22% .17% .29% .32% .29% .84% .49% .28% .46% .64%
--------- --------- --------- --------- --------- --------- --------- --------- ----- ---------
Total
Portfolio
Operating
Expenses... .82% .77% .89% .92% .99% 1.34% .94% .73% .91% .89%
========= ========= ========= ========= ========= ========= ========= ========= =========== =========
Maximum
Total
Portfolio
Operating
Expenses
(After
Reduction)+... N/A N/A N/A N/A N/A N/A 0.95% N/A N/A N/A
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(i) a 5% annual return and (ii) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Large Capitalization Growth Portfolio................................................. $ 24 $72 $ 124 $266
Large Capitalization Value Portfolio.................................................. $ 23 $71 $ 122 $261
Small Capitalization Growth Portfolio................................................. $ 24 $75 $ 128 $273
Small Capitalization Value Portfolio.................................................. $ 25 $75 $ 129 $276
International Equity Portfolio........................................................ $ 25 $78 $ 133 $283
International Bond Portfolio.......................................................... $ 24 $73 $ 125 $268
Total Return Bond Portfolio........................................................... $ 20 $61 $ 105 $226
Intermediate-Term Bond Portfolio...................................................... $ 18 $54 $ 94 $204
Mortgage Backed Securities Portfolio.................................................. $ 19 $60 $ 103 $223
U.S. Government Money Market Portfolio................................................ $ 19 $59 $ 102 $221
</TABLE>
The above example is based on data for the Trust's fiscal year ended
December 31, 1996. The Total Return Bond Portfolio was subject to an annual
expense cap of .95% for the fiscal year ended December 31, 1996. The above
example includes the fees for the Target Program applicable to non-Plan
investors. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. Actual expenses may be greater or less than those shown. The
purpose of this table is to assist investors in understanding the various costs
and expenses that an investor in a Portfolio will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Management of the Trust." "Other Expenses" includes operating expenses of
each Portfolio, such as trustees' and professional fees, registration fees,
reports to shareholders and transfer agency ($35 per Target Program participant)
and custodian fees (foreign and domestic) (but exclude foreign withholding
taxes). In addition, the Trust may pay fees for recordkeeping services in
respect of certain eligible defined benefit plan investors. See
6
<PAGE> 16
"Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants"
in the Statement of Additional Information.
- ---------------
* Plan investors are subject to a maximum Annual Target Program fee (as a
percentage of average daily value of Portfolio shares held) of 1.25% for
assets invested in Equity Portfolios and 1.35% for assets invested in Income
Portfolios.
** Not including the Target Program fee.
+ PMF may, from time to time, agree to waive all or a portion of its management
fee and subsidize certain operating expenses with respect to each Portfolio.
Fee waivers and expense subsidies lower the overall expenses of a Portfolio.
See notes in "Financial Highlights." For the year ending December 31, 1997,
PMF has agreed to cap operating expenses for the Total Return Bond Portfolio
at .95%. See "Management of the Trust--Manager."
7
<PAGE> 17
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIODS)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"General Information -- Performance Information."
<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION
GROWTH PORTFOLIO(e) VALUE PORTFOLIO(e)
--------------------------------------------- ------------------------------------------------
JANUARY 5, JANUARY 5,
YEAR ENDED 1993(a) YEAR ENDED 1993(a)
DECEMBER 31, THROUGH DECEMBER 31, THROUGH
------------------------------ DECEMBER 31, --------------------------------- DECEMBER 31,
1996 1995 1994 1993 1996 1995 1994 1993
-------- -------- -------- ------------ ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 12.13 $ 9.74 $ 9.91 $ 10.00 $ 12.57 $ 10.02 $ 10.11 $ 10.00
======== ======== ======== ======== ======== ======== ======== ========
Income from investment
operations
Net investment income
(loss)....................... .02 .10 .10 .07(c) .31 .33 .26 .21(c)
Net realized and unrealized
gains (losses) on investment
transactions................. 2.33 2.41 (.16) (.12) 2.07 2.89 (.04) .02
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations................ 2.35 2.51 (.06) (.05) 2.38 3.22 .22 .23
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.02) (.10) (.10) (.04) (.31) (.30) (.25) (.11)
Distributions in excess of net
investment income............ -- (.01) (.01) -- (.03) -- -- --
Distributions from net
realized gains............... (1.49) (.01) -- -- (.64) (.37) (.06) (.01)
Distributions in excess of net
realized gains............... -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions........ (1.51) (.12) (.11) (.04) (.98) (.67) (.31) (.12)
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period....................... $ 12.97 $ 12.13 $ 9.74 $ 9.91 $ 13.97 $ 12.57 $ 10.02 $ 10.11
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(d):.............. 21.09% 25.76% (.68)% (0.46)% 19.17% 32.08% 2.18% 2.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $220,782 $180,077 $142,072 $ 98,089 $227,706 $187,596 $142,219 $96,074
Average net assets (000)...... $202,736 $162,982 $129,687 $ 48,033 $208,898 $163,124 $128,865 $46,623
Ratios to average net assets
Expenses..................... .82% .78% .81% 1.05%() (c) .77% .76% .81% 1.05%(b)(c)
Net investment income
(loss)..................... .19% .88% 1.08% .84%() (c) 2.33% 2.83% 2.66% 2.12%(b)(c)
Portfolio turnover rate....... 65% 154% 24% 4% 22% 59% 6% 3%
Average commission rate paid
per share.................... $ .0572 $ .0578 N/A N/A $ .0509 $ .0514 N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidies. For the period January 5, 1993 through December
31, 1993, had the Manager not reimbursed expenses for the Portfolios, net
investment income (loss) per share and the ratios of expenses and net
investment income (loss) to average net assets would have been $.06, 1.10%
and .79% for the Large Capitalization Growth Portfolio, and $.20, 1.16% and
2.01% for the Large Capitalization Value Portfolio, respectively.
(d) 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 return for periods of less than a full
year are not annualized.
(e) Calculated based upon average shares outstanding during the period.
8
<PAGE> 18
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIODS)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"General Information -- Performance Information."
<TABLE>
<CAPTION>
SMALL CAPITALIZATION
GROWTH PORTFOLIO
-------------------------------------------------------- ---------------------------
JANUARY 5,
YEAR ENDED 1993(a) YEAR ENDED
DECEMBER 31, THROUGH DECEMBER 31,
----------------------------------------- DECEMBER 31, ---------------------------
1996 1995(e) 1994(e) 1993(e) 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 14.15 $ 11.59 $ 11.86 $ 10.00 $ 13.07 $ 11.07
========== ========== ========== ======== ========== ==========
Income from investment operations
Net investment income (loss)..... (.02) .02 .01 .01(c) .11 .14
Net realized and unrealized gains
(losses) on investment
transactions.................... 2.63 2.84 (.27) 1.86 2.71 2.00
---------- ---------- ---------- -------- ---------- ----------
Total from investment
operations................... 2.61 2.86 (.26) 1.87 2.82 2.14
---------- ---------- ---------- -------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment
income.......................... -- (.02) (.01) (.01) (.11) (14)
Distributions in excess of net
investment income............... -- -- -- -- -- --
Distributions from net realized
gains........................... (1.83) (.28) -- -- (.56) --
Distributions in excess of net
realized gains.................. -- -- -- -- -- --
---------- ---------- ---------- -------- ---------- ----------
Total distributions........... (1.83) (.30) (.01) (.01) (.67) (.14)
---------- ---------- ---------- -------- ---------- ----------
Net asset value, end of period... $ 14.93 $ 14.15 $ 11.59 $ 11.86 $ 15.22 $ 13.07
========== ========== ========== ======== ========== ==========
TOTAL RETURN(d):................. 18.88% 24.62% (2.19)% 18.66% 21.75% 19.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................... $ 147,469 $ 121,533 $ 96,462 $ 63,917 $ 126,672 $ 97,594
Average net assets (000)......... $ 141,496 $ 107,649 $ 87,403 $ 29,313 $ 110,564 $ 88,085
Ratios to average net assets
Expenses........................ .89% .85% .93% 1.05%(b)(c) .92% 1.00%
Net investment income (loss).... (.32)% .12% .10% .11%(b)(c) .77% 1.14%
Portfolio turnover rate.......... 108% 120% 97% 72% 60% 110%
Average commission rate paid per
share........................... $ .0590 $ .0586 N/A N/A $ .0610 $ .0561
<CAPTION>
SMALL JANUARY 5,
CAPITALIZATION 1993(a)
VALUE THROUGH
PORTFOLIO(e) DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 12.72 $ 10.00
========== ========
Income from investment operations
Net investment income (loss)..... .11 (.01)(c)
Net realized and unrealized gains
(losses) on investment
transactions.................... (1.49) 3.19
---------- --------
Total from investment
operations................... (1.38) 3.18
---------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income.......................... -- --
Distributions in excess of net
investment income............... -- --
Distributions from net realized
gains........................... (.27) (.46)
Distributions in excess of net
realized gains.................. -- --
---------- --------
Total distributions........... (.27) (.46)
---------- --------
Net asset value, end of period... $ 11.07 $ 12.72
========== ========
TOTAL RETURN(d):................. (11.03)% 31.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................... $ 84,163 $ 64,430
Average net assets (000)......... $ 83,891 $ 29,039
Ratios to average net assets
Expenses........................ .93% 1.05%(b)(c)
Net investment income (loss).... .88% (.11)%(b)(c)
Portfolio turnover rate.......... 97% 112%
Average commission rate paid per
share........................... N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidies. For the period January 5, 1993 through December
31, 1993, had the Manager not reimbursed expenses for the Portfolios, net
investment income (loss) per share and the ratios of expenses and net
investment income (loss) to average net assets would have been ($.03), 1.46%
and (.30%) for the Small Capitalization Growth Portfolio and ($.04), 1.33%
and (.39%) for the Small Capitalization Value Portfolio, respectively.
(d) 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 return for periods of less than a full
year are not annualized.
(e) Calculated based upon average shares outstanding during the period.
9
<PAGE> 19
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIODS)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"General Information -- Performance Information."
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY INTERNATIONAL BOND
PORTFOLIO PORTFOLIO
----------------------------------------------- ---------------------------------------
JANUARY 5, MAY 17,
YEAR ENDED 1993(a) YEAR ENDED 1994(a)
DECEMBER 31, THROUGH DECEMBER 31, THROUGH
------------------------------- DECEMBER ----------------------- DECEMBER 31,
1996 1995(e) 1994(e) 31, 1993(e) 1996 1995 1994
-------- -------- -------- ----------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period.................. $ 13.64 $ 11.95 $ 13.09 $ 10.00 $ 10.19 $ 9.57 $ 10.00
======== ======== ======== ========= ======= ======== ========
Income from investment
operations
Net investment income
(loss)..................... .25 .17 .06 .07 .51 .57(c) .27(c)
Net realized and unrealized
gains (losses) on
investment transactions.... 1.79 1.67 (.01) 3.16 (.08) .82 (.19)
-------- -------- -------- --------- ------- -------- --------
Total from investment
operations.............. 2.04 1.84 .05 3.23 .43 1.39 .08
-------- -------- -------- --------- ------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income.......... (.22) (.11) (.01) (.01) (.21) (.57) (.27)
Distributions in excess of
net investment income...... -- -- -- -- -- -- (.24)
Distributions from net
realized gains............. (.64) (.04) (1.07) (.05) (.24) (.20) --
Distributions in excess of
net realized gains......... -- -- (.11) (.08) -- -- --
-------- -------- -------- --------- ------- -------- --------
Total distributions...... (.86) (.15) (1.19) (.14) (.45) (.77) (.51)
-------- -------- -------- --------- ------- -------- --------
Net asset value, end of
period..................... $ 14.82 $ 13.64 $ 11.95 $ 13.09 $ 10.17 $ 10.19 $ 9.57
======== ======== ======== ========= ======= ======== ========
TOTAL RETURN(d):............ 15.25% 15.38% .18% 32.38% 4.45% 14.66% .71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)...................... $240,563 $191,598 $188,025 $ 127,121 $41,780 $ 34,660 $ 21,447
Average net assets (000).... $221,626 $183,414 $179,614 $ 49,769 $38,788 $ 29,510 $ 15,366
Ratios to average net assets
Expenses................... .99% 1.02% 1.07% 1.40%(b) 1.34% 1.00%(c) 1.00%(b)(c)
Net investment income
(loss)................... 1.77% 1.32% .47% .64%(b) 5.02% 5.56%(c) 4.64%(b)(c)
Portfolio turnover rate..... 39% 76% 116% 65% 226% 456% 361%
Average commission rate paid
per share.................. $ .0240 $ .0250 N/A N/A N/A N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidies. For the period May 17, 1994 through December 31,
1994, had the Manager not reimbursed expenses for the International Bond
Portfolio, net investment income per share and the ratios of expenses and
net investment income to average net assets would have been $.21, 1.90% and
3.94%, respectively. For the year ended December 31, 1995, had the Manager
not reimbursed expenses for the Portfolio, net investment income per share
and the ratios of expenses and net investment income to average net assets
would have been $.55, 1.15% and 5.4% for the International Bond Portfolio.
(d) 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 return for periods of less than a full
year are not annualized.
(e) Calculated based upon average shares outstanding during the period.
10
<PAGE> 20
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIODS)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"General Information -- Performance Information."
<TABLE>
<CAPTION>
INTERMEDIATE-TERM
TOTAL RETURN BOND PORTFOLIO BOND PORTFOLIO
-------------------------------------------------------------- ---------------------------
JANUARY 5,
YEAR ENDED 1993(a) YEAR ENDED
DECEMBER 31, THROUGH DECEMBER 31,
---------------------------------------------- DECEMBER 31, ---------------------------
1996 1995 1994 1993 1996 1995
-------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 10.62 $ 9.48 $ 10.28 $ 10.00 $ 10.51 $ 9.56
======== ========= ========= ========= ========= ========
Income from investment operations
Net investment income............. .57 .62(c) .47(c) .44(c) .59 .63
Net realized and unrealized gains
(losses) on investment
transactions..................... (.09) 1.18 (.82) .56 (.07) .94
-------- --------- --------- --------- --------- --------
Total from investment
operations.................... .48 1.80 (.35) 1.00 .52 1.57
-------- --------- --------- --------- --------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (.56) (.58) (.45) (.44) (.59) (.60)
Distributions in excess of net
investment income................ -- -- -- (.02) -- --
Distributions from net realized
gains............................ (.26) (.08) -- (.19) (.14) (.02)
Distributions in excess of net
realized gains................... -- -- -- (.07) -- --
-------- --------- --------- --------- --------- --------
Total distributions............ (.82) (.66) (.45) (.72) (.73) (.62)
-------- --------- --------- --------- --------- --------
Net asset value, end of period.... $ 10.28 $ 10.62 $ 9.48 $ 10.28 $ 10.30 $ 10.51
======== ========= ========= ========= ========= ========
TOTAL RETURN(d)................... 5.02% 19.63% (3.54)% 10.18% 5.22% 16.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $ 49,218 $ 45,118 $ 31,191 $ 25,917 $ 100,392 $ 77,125
Average net assets (000).......... $ 47,246 $ 37,023 $ 31,141 $ 12,594 $ 81,723 $ 68,628
Ratios to average net assets
Expenses......................... .94% .85%(c) .85%(c) .85%(b)(c) .73% .79%
Net investment income............ 5.67% 6.21%(c) 4.90%(c) 3.87%(b)(c) 5.69% 6.09%
Portfolio turnover rate........... 340% 141% 121% 171% 311% 93%
<CAPTION>
JANUARY 5,
INTERMEDIATE-TERM 1993(a)
BOND THROUGH
PORTFOLIO DECEMBER 31,
1994 1993
------------ -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 10.26 $ 10.00
======== =========
Income from investment operations
Net investment income............. .49 .46(c)
Net realized and unrealized gains
(losses) on investment
transactions..................... (.71) .46
-------- ---------
Total from investment
operations.................... (.22) .92
-------- ---------
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (.48) (.45)
Distributions in excess of net
investment income................ -- --
Distributions from net realized
gains............................ -- (.18)
Distributions in excess of net
realized gains................... -- (.03)
-------- ---------
Total distributions............ (.48) (.66)
-------- ---------
Net asset value, end of period.... $ 9.56 $ 10.26
======== =========
TOTAL RETURN(d)................... (2.23)% 9.33%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $ 62,924 $ 60,651
Average net assets (000).......... $ 69,602 $ 32,441
Ratios to average net assets
Expenses......................... .80% .85%(b)(c)
Net investment income............ 5.06% 4.27%(b)(c)
Portfolio turnover rate........... 77% 129%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidies. For the period January 5, 1993 through December
31, 1993, had the Manager not reimbursed expenses for the Portfolios, net
investment income per share and the ratios of expenses and net investment
income to average net assets would have been $.38, 2.04% and 2.68% for the
Total Return Bond Portfolio and $.44, 1.10% and 4.02% for the
Intermediate-Term Bond Portfolio, respectively. For the year ended December
31, 1994, had the Manager not reimbursed expenses for the Portfolio, net
investment income per share and the ratios of expenses and net investment
income to average net assets would have been $1.44, 1.18% and 4.57% for the
Total Return Bond Portfolio. For the year ended December 31, 1995, had the
Manager not reimbursed expenses for the Portfolio, net investment income per
share and the ratios of expenses and net investment income to average net
assets would have been $.60, 1.04% and 6.02% for the Total Return Bond
Portfolio.
(d) 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 return for periods of less than a full
year are not annualized.
11
<PAGE> 21
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIODS)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"General Information -- Performance Information."
<TABLE>
<CAPTION>
MORTGAGE BACKED U.S. GOVERNMENT
SECURITIES PORTFOLIO MONEY MARKET PORTFOLIO
-------------------------------------------------------- -------------------------------------------------------
JANUARY 5, JANUARY 5,
YEAR ENDED 1993(a) YEAR ENDED 1993(a)
DECEMBER 31, THROUGH DECEMBER 31, THROUGH
----------------------------------------- DECEMBER 31, ---------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning
of
period.... $ 10.31 $ 9.51 $ 10.18 $ 10.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== =========
Income from
investment
operations
Net
investment
income.... .65 .68(c) .61(c) .57(c) .045 .051(c) .037(c) .025(c)
Net
realized
and
unrealized
gains
(losses)
on
investment
transactions... (.12) .83 (.66) .28 -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Total
from
investment
operations... .53 1.51 (.05) .85 .045 .051 .037 .025
-------- -------- -------- -------- -------- -------- ---------
LESS
DISTRIBUTIONS
Dividends
from net
investment
income.... (.63) (.68) (.61) (.57) (.045) (.051) (.037) (.025)
Distributions
in excess of
net
investment
income.... -- (.03) (.01) (.02) -- -- -- --
Distributions
from net
realized
gains..... -- -- -- (.08) -- -- -- --
Distributions
in excess of
net
realized
gains..... -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Total
distributions (.63) (.71) (.62) (.67) (.045) (.051) (.037) (.025)
-------- -------- -------- -------- -------- -------- ---------
Net asset
value, end
of
period.... $ 10.21 $ 10.31 $ 9.51 $ 10.18 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== =========
TOTAL
RETURN(d)... 5.56% 16.18% (.51)% 8.56% 4.53% 5.25% 3.79% 2.56%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000)..... $ 73,867 $ 69,759 $ 61,971 $ 60,100 $ 27,397 $ 18,855 $ 21,438 $2,997
Average net
assets
(000)..... $ 72,214 $ 65,149 $ 66,276 $ 29,710 $ 19,132 $ 20,173 $ 15,048 $1,407
Ratios to
average
net assets
Expenses... .91% .85%(c) .85%(c) .85%(b)(c) .89% .75%(c) .50%(c) .50%(b)(c)
Net
investment
income... 6.44% 6.79%(c) 6.19%(c) 5.30%(b)(c) 4.49% 5.18%(c) 4.03%(c) 2.51%(b)(c)
Portfolio
turnover
rate...... 102% 154% 380% 134% -- -- -- --
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidies. For the period January 5, 1993 through December
31, 1993, had the Manager not reimbursed expenses for the Portfolios, net
investment income per share and the ratios of expenses and net investment
income to average net assets would have been $.54, 1.45% and 4.70% for the
Mortgage Backed Securities Portfolio and ($.079), 10.94% and (7.93%) for the
U.S. Government Money Market Portfolio, respectively. For the year ended
December 31, 1994, had the Manager not reimbursed expenses for the
Portfolios, net investment income per share and the ratios of expenses and
net investment income to average net assets would have been $.60, .99% and
6.05% for the Mortgage Backed Securities Portfolio and $.031, 1.14% and
3.39% for the U.S. Government Money Market Portfolio, respectively. For the
year ended December 31, 1995, had the Manager not reimbursed expenses for
the Portfolios, net investment income per share and the ratios of expenses
and net investment income to average net assets would have been $.67, .92%
and 6.72% for the Mortgage Backed Securities Portfolio and $.050, .80% and
5.13% for the U.S. Government Money Market Portfolio, respectively.
(d) 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 return for periods of less than a full
year are not annualized.
12
<PAGE> 22
- --------------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
Set forth below is a description of the investment objective and policies
of each Portfolio. There can be no assurance that a Portfolio will achieve its
investment objective. As with an investment in any mutual fund, an investment in
a Portfolio can decrease in value and you can lose money. The Portfolios'
investment objectives are fundamental and may be changed only with the approval
of the holders of a majority of a Portfolio's outstanding voting securities.
Further information about the investment policies of each Portfolio appears in
the Statement of Additional Information.
EQUITY PORTFOLIOS
LARGE CAPITALIZATION GROWTH PORTFOLIO
The Large Capitalization Growth Portfolio is advised by Columbus Circle
Investors, a subpartnership of PIMCO Advisors, L.P., and Oak Associates, Ltd.
The Portfolio's investment objective is long-term capital appreciation. The
Portfolio seeks to achieve its investment objective by investing primarily in a
diversified portfolio of common stocks of companies with total market
capitalization of $1.5 billion or greater that, in each Adviser's opinion, are
characterized by a growth of earnings at a rate faster than that of the S&P 500.
Dividend income is an incidental consideration in the selection of investments.
The securities held by the Portfolio can be expected to experience greater
volatility than those of the Large Capitalization Value Portfolio. In selecting
securities for the Portfolio, the Advisers evaluate factors believed to be
favorable to long-term growth of capital, such as the business outlook for the
issuer's industry and the issuer's position in that industry, as well as the
issuer's background, historical profit margins on equity and experience and
qualifications of the issuer's management. Under normal conditions, at least 80%
of the Portfolio's total assets will be invested in common stocks and at least
65% of the Portfolio's total assets will be invested in common stocks of
companies with total market capitalization of $1.5 billion or greater at the
time of purchase. The Portfolio may also invest in money market instruments and
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities and may engage in repurchase agreement transactions. When
market or economic conditions indicate, in the view of an Adviser, that a
temporary defensive investment strategy is appropriate or pending investment in
portfolio securities, the Adviser may invest its portion of the Portfolio
without limit in money market instruments and obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities and may engage in
repurchase agreement transactions. See "Other Investments and Policies."
LARGE CAPITALIZATION VALUE PORTFOLIO
The Large Capitalization Value Portfolio is advised by INVESCO Capital
Management, Inc. and Hotchkis and Wiley. The Portfolio's investment objective is
total return consisting of capital appreciation and dividend income. The
Portfolio seeks to achieve its investment objective by investing primarily in a
diversified portfolio of common stocks of companies with total market
capitalization of $1.5 billion or greater that, in each Adviser's opinion, have
above average price appreciation potential at the time of purchase. In general,
these securities are characterized as
13
<PAGE> 23
having above average dividend yields and below average price earnings ratios
relative to the stock market in general, as measured by the S&P 500. Under
normal conditions, at least 80% of the Portfolio's total assets will be invested
in common stocks and securities convertible into common stocks and at least 65%
of the Portfolio's total assets will be invested in common stocks that, at the
time of investment, will be expected to pay regular dividends. At least 65% of
the Portfolio's total assets will be invested in common stocks of companies with
total market capitalization of $1.5 billion or greater at the time of purchase.
The Portfolio may also invest in other equity securities including securities
convertible into common stock and preferred stock, corporate and other debt
obligations and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. When market or economic conditions indicate, in
the view of an Adviser, that a temporary defensive investment strategy is
appropriate, the Adviser may invest its portion of the Portfolio without limit
in obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, corporate and other debt obligations and high quality money
market instruments. See "Other Investments and Policies."
SMALL CAPITALIZATION GROWTH PORTFOLIO
The Small Capitalization Growth Portfolio is advised by Nicholas-Applegate
Capital Management and Investment Advisers, Inc. The Portfolio's investment
objective is maximum capital appreciation. The Portfolio seeks to achieve its
investment objective by investing primarily in the common stock of "emerging
growth" companies with total market capitalization of less than $1.5 billion.
Under normal conditions, at least 65% of the Portfolio's total assets will be
invested in common stocks of issuers with total market capitalization of less
than $1.5 billion. Dividend income is not a consideration in the selection of
investments. In selecting investments for the Portfolio, the Advisers seek small
capitalization companies that they believe are undervalued in the marketplace,
or have earnings that may be expected to grow faster than the U.S. economy in
general. These companies typically possess a relatively high rate of return on
invested capital so that future growth can be financed from internal sources.
The Portfolio may also invest in companies that offer the possibility of
accelerating earnings growth because of management changes, new products or
structural changes in the economy. Companies in which the Portfolio is likely to
invest may have limited product lines, markets or financial resources and may
lack management depth. The securities of these companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. The Portfolio may also invest in preferred stock, obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities and money
market instruments. When market or economic conditions indicate, in the view of
an Adviser, that a temporary defensive investment strategy is appropriate or
pending investment in portfolio securities, the Adviser may invest its portion
of the Portfolio without limit in money market instruments and obligations
issued or guaranteed by the U.S. Government, its agencies and instrumentalities.
See "Other Investments and Policies."
SMALL CAPITALIZATION VALUE PORTFOLIO
The Small Capitalization Value Portfolio is advised by Lazard Freres Asset
Management, a division of Lazard Freres & Co. LLC, and Wood, Struthers &
Winthrop Management Corp., a subsidiary of Donaldson, Lufkin & Jenrette
Securities Corporation. The Portfolio's investment objective is above average
capital appreciation. The Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of common stocks of companies
with total
14
<PAGE> 24
market capitalization of less than $1.5 billion that, in an Adviser's opinion,
are undervalued or overlooked in the marketplace at the time of purchase. In
general, these securities are characterized as having below average price
earnings ratios and a smaller number of shares outstanding relative to the stock
market in general and enjoy little industry analyst coverage. The securities may
also (i) be undervalued relative to their cash flow, and/or asset values; (ii)
have an attractive price/value relationship, i.e., have high returns on equity
and/or assets with correspondingly low price-to-book and/or price-to-asset value
as compared to the market generally or the companies' industry groups in
particular, with expectations that some catalyst will cause the perception of
value to change within two years; (iii) have experienced significant relative
underperformance and are out of favor due to a set of circumstances which are
unlikely to harm a company's franchise or earnings power over the longer term;
(iv) have low projected price-to-earnings or price-to-cash-flow multiples
relative to their industry peer group and/or the market in general; (v) have the
prospect, or the industry in which the company operates has the prospect, to
allow it to become a larger factor in the business and receive a higher
valuation as such; (vi) have significant financial leverage but have high levels
of free cash flow used to reduce leverage and enhance shareholder value; and
(vii) have a relatively short corporate history with the expectation that the
business may grow to generate meaningful cash flow and earnings over a
reasonable investment horizon. Other factors, such as earnings and dividend
growth prospects as well as industry outlook and market share, also are
considered. Current dividend income is only an incidental consideration in the
selection of investments. Under normal conditions, at least 80% of the
Portfolio's total assets will be invested in common stock, and at least 65% of
the Portfolio's total assets will be invested in common stocks of issuers with
total market capitalization of less than $1.5 billion. The Portfolio may also
invest in securities convertible into common stock, preferred stock, debt
obligations with capital appreciation potential and money market instruments.
When market or economic conditions indicate, in the view of an Adviser, that a
temporary defensive investment strategy is appropriate, the Adviser may invest
its portion of the Portfolio without limit in obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, corporate and other
debt obligations and high quality money market instruments. See "Other
Investments and Policies."
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio is advised by Lazard Freres Asset
Management. The Portfolio's investment objective is capital appreciation. The
Portfolio seeks to achieve its objective by investment in equity securities of
companies domiciled outside the U.S. Under normal market conditions, at least
65% of the Portfolio's total assets will be invested in securities of issuers
domiciled in at least three foreign countries, not including the United States.
Investments may be made in companies in developed as well as developing
countries. Investing in the equity markets of developing countries involves
exposure to economies that are generally less diverse and mature, and to
political systems that can be expected to have less stability than those of
developed countries. The Adviser attempts to limit exposure to investments in
developing countries where both liquidity and sovereign risks are high. Although
there is no established definition, a developing country is generally considered
to be a country that is in the initial stages of its industrialization cycle
with per capita gross national product of less than $5,000. Experience indicates
that the markets of developing countries have been more volatile than the
markets of developed countries, although securities traded in the markets of
developing countries have provided higher rates of return to
15
<PAGE> 25
investors. For a discussion of the risks associated with investing in foreign
securities, see "Other Investments and Policies--Foreign Securities."
The Portfolio intends to invest in non-U.S. companies whose securities are
traded on exchanges located in the countries in which the issuers are
principally based. The Portfolio may invest in securities of foreign issuers in
the form of American Depositary Receipts (ADRs), which are U.S.
dollar-denominated receipts typically issued by domestic banks or trust
companies that represent the deposit with those entities of securities of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in the
United States. Global Depositary Receipts (GDRs) may also be purchased by the
Portfolios. GDRs are generally issued by foreign banks and evidence ownership of
either foreign or domestic securities.
The Portfolio may invest in shares of closed-end investment companies
organized in the United States or outside the United States which are "country"
or "regional" funds. Investment in closed-end country or regional funds is
subject to limitations under the Investment Company Act and market availability
and may involve the payment of substantial premiums above the value of such
funds' portfolio securities. In addition, investment in shares of other
investment companies will result in the payment of duplicate management fees and
expenses.
The Portfolio may attempt to hedge against unfavorable changes in currency
exchange rates by engaging in forward currency transactions, purchasing and
writing put and call options on foreign currencies and trading currency futures
contracts and options thereon. When market or economic conditions indicate, in
the view of the Adviser, that a temporary defensive investment strategy is
appropriate or pending investment in portfolio securities, the Portfolio may
invest without limit in money market instruments and obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. See
"Other Investments and Policies." The Portfolio may, but is not required to,
employ any of the hedging techniques described above and there can be no
assurance that any techniques or strategy will be successful. The use of these
techniques and strategies entails certain risks. See "Other Investments and
Policies--Special Risks of Hedging and Income Enhancement Strategies" and "Other
Investments and Policies--Foreign Securities."
INCOME PORTFOLIOS
INTERNATIONAL BOND PORTFOLIO
The International Bond Portfolio is advised by Fiduciary International,
Inc. The Portfolio's investment objective is high total return. The Portfolio
seeks to achieve its objective through investment in high quality debt
securities denominated primarily in foreign currencies. Under normal conditions,
at least 65% of the Portfolio's total assets will be invested in high quality
debt securities denominated in foreign currencies of issuers located in at least
three countries outside the United States.
The Portfolio is non-diversified. Investment in a non-diversified portfolio
involves greater risk than investment in a diversified portfolio because the
higher percentage of assets invested among fewer issuers may result in greater
fluctuations in the market value of the Portfolio and because any economic,
political or regulatory development affecting the value of the securities in the
Portfolio will have a greater impact on the total value of the Portfolio than
would be the case if the Portfolio were diversified among more issuers.
16
<PAGE> 26
Under normal circumstances, the Portfolio will invest at least 75% of its
total assets in debt securities rated A or better by S&P or Moody's or the
equivalent by another nationally recognized statistical ratings organization
(NRSRO) or, if unrated, in debt securities determined to be of comparable
quality by the Adviser. Under normal circumstances, up to 25% of the Portfolio's
total assets may be invested in debt securities rated below investment grade but
rated at least B by S&P or Moody's or the equivalent by another NRSRO or, if
unrated, determined by the Adviser to be of comparable quality. Securities rated
Baa or lower by Moody's or BBB or lower by S&P have speculative characteristics
and are subject to greater risks. See "Other Investments and Policies--Medium
and Lower Rated Securities" below and Appendix A--"Description of S&P and
Moody's Ratings."
The Portfolio may invest in issuers in developed as well as developing
countries. Investing in the markets of developing countries involves exposure to
economies that are generally less diverse and mature, and to political systems
that can be expected to have less stability than those of developed countries.
The Adviser attempts to limit exposure to investments in developing countries
where both liquidity and sovereign risk are high. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of developed countries. For a discussion of the risks associated
with investing in foreign securities, see "Other Investments and
Policies--Foreign Securities."
The foreign government securities in which the Portfolio may invest
generally consist of debt obligations or mortgage-related securities supported
by the full faith and credit of national, state, or provincial governments or
other political subdivisions. The Portfolio may also invest in debt obligations
of supranational entities, including international organizations supported by
governmental entities to promote economic development, international banking
institutions and related governmental entities such as the International Bank
for Reconstruction and Development (World Bank), the Asian Development Bank and
the InterAmerican Development Bank. The Portfolio may also invest in the debt
obligations of national, state or "quasi-governmental agencies" which are not
supported by the full faith and credit or general taxing power of such entities.
The Portfolio may also invest in cash deposits or certificates of deposit
issued by banks of high credit quality or in commercial paper rated at least
A1/P1 by S&P or Moody's or the equivalent by another NRSRO or in repurchase
agreements. The instruments may be denominated in either the US dollar or in
foreign currencies. The Portfolio may also invest in both exchange-traded and
over-the-counter options.
The Portfolio will attempt to hedge against unfavorable changes in
currency, exchange and other rates by engaging in foreign currency exchange
contracts, purchasing and writing put and call options on foreign currencies and
trading currencies futures contracts and options thereon and in other hedging
techniques. The Portfolio may, but is not required to, employ any of the hedging
techniques described above and there can be no assurance that any technique or
strategy will be successful. The use of these techniques and strategies entails
certain risks. See "Other Investments and Policies--Special Risks of Hedging and
Income Enhancement Strategies" and "--Foreign Securities."
17
<PAGE> 27
TOTAL RETURN BOND PORTFOLIO
The Total Return Bond Portfolio is advised by Pacific Investment Management
Company, a general partnership whose partners are PIMCO Advisors L.P. and PIMCO
Management Inc., a wholly-owned subsidiary of PIMCO Advisors. The Portfolio's
investment objective is total return consisting of current income and capital
appreciation. The Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of fixed-income securities of
varying maturities with a dollar-weighted average portfolio maturity of more
than four years but not more than fifteen years. Under normal circumstances, the
Portfolio will invest at least 65% of its total assets in bonds.
The fixed income securities in which the Portfolio may invest include
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, corporate and other debt obligations, convertible securities,
mortgage-backed securities, asset backed securities, obligations of foreign
governments or their subdivisions, agencies or instrumentalities, obligations of
supranational and quasi-governmental entities, commercial paper, certificates of
deposit, money market instruments, foreign currency exchange-related securities
and loan participations. The Portfolio may invest up to 20% of its assets in
foreign securities and up to 25% of its assets in privately issued mortgage
related securities. All of the securities in the Portfolio will be investment
grade (rated at least Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO, or determined by the Adviser to be of comparable quality), except that
the Portfolio may invest up to 10% of its total assets in securities rated below
investment grade but rated at least B by Moody's or S&P or the equivalent by
another NRSRO, or determined by the Adviser to be of comparable quality.
Securities rated Baa or lower by Moody's or BBB or lower by S&P or the
equivalent by another NRSRO have speculative characteristics and are subject to
greater risks. See "Other Investments and Policies--Medium and Lower Rated
Securities" below and Appendix A--"Description of S&P and Moody's Ratings."
The Portfolio may purchase and write (i.e., sell) put and call options on
debt securities, on U.S. Government securities, on aggregates of debt
securities, on financial indices and on foreign currencies that are traded on
national securities exchanges or in the over-the-counter market. The Portfolio
may also purchase and sell futures contracts on interest rates, on debt
securities, on financial indices, on U.S. Government securities, on Eurodollars,
on foreign currencies and on related options which are traded on a commodities
exchange or board of trade for certain bona fide hedging, return enhancement and
risk management purposes. In addition, the Portfolio may enter into repurchase
agreements and reverse repurchase agreements, lend its portfolio securities,
engage in interest rate swap transactions, purchase securities on a when-issued
or delayed-delivery basis and borrow money. See "Description of the
Portfolios--Other Investments and Policies."
When market or economic conditions indicate, in the view of the Adviser,
that a temporary defensive investment strategy is appropriate, the Portfolio may
invest without limit in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and high quality money market instruments.
Percentage and quality limitations applicable to the Portfolio's
investments are generally measured at the time a transaction is entered into.
Any subsequent change in a rating assigned by any rating service to a security,
or change in the percentage of Portfolio assets invested in certain
18
<PAGE> 28
securities or other instruments resulting from market fluctuations or other
changes in the Portfolio's total assets will not require the Portfolio to
dispose of an investment unless the Adviser determines that it is practicable to
sell or close out the investment without undue market or tax consequences to the
Portfolio. If different ratings services assign different ratings to the same
security, the Adviser will determine which rating it believes best reflects the
security's quality and risk at that time, which may be the higher of the several
assigned ratings.
INTERMEDIATE-TERM BOND PORTFOLIO
The Intermediate-Term Bond Portfolio is advised by Pacific Investment
Management Company, a general partnership whose partners are PIMCO Advisors L.P.
and PIMCO Management Inc., a wholly-owned subsidiary of PIMCO Advisors. The
Portfolio's investment objective is current income and reasonable stability of
principal. The Portfolio seeks to achieve its investment objective by investing
primarily in a diversified portfolio of fixed-income securities of varying
maturities with a dollar-weighted average portfolio maturity of more than three
years but not more than ten years. Under normal circumstances, the Portfolio
will invest at least 65% of its total assets in bonds.
The fixed income securities in which the Portfolio may invest include
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, corporate and other debt obligations, convertible securities,
mortgage-backed securities, asset backed securities, obligations of foreign
governments or their subdivisions, agencies or instrumentalities, obligations of
supranational and quasi-governmental entities, commercial paper, certificates of
deposit, money market instruments, foreign currency exchange-related securities
and loan participations. The Portfolio may invest up to 20% of its assets in
foreign securities and up to 25% of its assets in privately issued mortgage
related securities. All of the securities in the Portfolio will be investment
grade (rated at least Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO, or determined by the Adviser to be of comparable quality) except that the
Portfolio may invest up to 10% of its assets in securities rated below
investment grade but rated at least B by Moody's or S&P or the equivalent by
another NRSRO, or determined by the Adviser to be of comparable quality.
Securities rated Baa or lower by Moody's or BBB or lower by S&P or the
equivalent by another NRSRO have speculative characteristics and are subject to
greater risks. See "Other Investments and Policies--Medium and Lower Rated
Securities" below and Appendix A--"Description of Security Ratings."
The Portfolio may purchase and write (i.e., sell) put and call options on
debt securities, on U.S. Government securities, on aggregates of debt
securities, on financial indices and on foreign currencies that are traded on
national securities exchanges or in the over-the-counter market. The Portfolio
may also purchase and sell futures contracts on interest rates, on debt
securities, on financial indices, on U.S. Government securities, on Eurodollars,
on foreign currencies and on related options which are traded on a commodities
exchange or board of trade for certain bona fide hedging, return enhancement and
risk management purposes. In addition, the Portfolio may enter into repurchase
agreements and reverse repurchase agreements, lend its portfolio securities,
engage in interest rate swap transactions, purchase securities on a when-issued
or delayed-delivery basis and borrow money. See "Other Investments and
Policies."
When market or economic conditions indicate, in the view of the Adviser,
that a temporary defensive investment strategy is appropriate, the Portfolio may
invest without limit in obligations
19
<PAGE> 29
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and high quality money market instruments.
Percentage and quality limitations applicable to the Portfolio's
investments are generally measured at the time a transaction is entered into.
Any subsequent change in a rating assigned by any rating service to a security,
or change in the percentage of Portfolio assets invested in certain securities
or other instruments resulting from market fluctuations or other changes in the
Portfolio's total assets will not require the Portfolio to dispose of an
investment unless the Adviser determines that it is practicable to sell or close
out the investment without undue market or tax consequences to the Portfolio. In
the event that ratings services assign different ratings to the same security,
the Adviser will determine which rating it believes best reflects the security's
quality and risk at that time, which may be the higher of the several assigned
ratings.
MORTGAGE BACKED SECURITIES PORTFOLIO
The Mortgage Backed Securities Portfolio is advised by Wellington
Management Company LLP. The Portfolio's primary investment objective is high
current income and its secondary investment objective is capital appreciation,
each to the extent consistent with the protection of capital. The Portfolio
seeks to achieve its investment objectives by investing in mortgage related
securities. Under normal conditions, at least 65% of the Portfolio's total
assets will be invested in mortgage related securities. The Portfolio may also
invest in non-mortgage related securities, including obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, corporate
and other debt obligations, asset backed securities, money market instruments
and repurchase agreements. The Portfolio may also engage in reverse repurchase
agreements.
The mortgage related securities in which the Portfolio invests represent
pools of mortgage loans assembled for sale to investors by various U.S.
Government agencies, such as the Government National Mortgage Association
(GNMA), and government related organizations, such as the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC) as well as by private issuers, such as commercial banks, savings and
loan institutions, mortgage bankers and private mortgage insurance companies.
The Portfolio may also invest in stripped mortgage related securities issued and
guaranteed by GNMA, FNMA or FHLMC and collateralized mortgage obligations
(CMOs), which are obligations collateralized by mortgage loans or mortgage
pass-through certificates. Under current market conditions, the Portfolio's
holdings of mortgage related securities may be expected to consist primarily of
securities issued by GNMA, FNMA and FHLMC. However, the composition of the
Portfolio's assets will vary from time to time based upon a determination by the
Adviser of how best to achieve the Portfolio's investment objectives taking into
account such factors as the liquidity, yield and creditworthiness of various
mortgage related securities. Mortgage related securities held by the Portfolio
will generally be rated no lower than A by Moody's or S&P or the equivalent by
another NRSRO or, if unrated, will be of equivalent investment quality as
determined by the Adviser.
In order to enhance current income, the Portfolio may enter into forward
roll transactions with respect to mortgage related securities issued by GNMA,
FNMA and FHLMC. The Portfolio will not invest more than 25% of its assets in
privately issued mortgage related securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis, engage in interest rate
swap transactions, make short sales of securities and lend its portfolio
securities. The Portfolio may
20
<PAGE> 30
purchase and write (i.e., sell) put and call options on debt securities, on U.S.
Government securities, on aggregates of debt securities and on financial indices
that are traded on national securities exchanges or in the over-the-counter
market. The Portfolio may also purchase and sell futures contracts on interest
rates, on debt securities, on financial indices, on U.S. Government securities,
on Eurodollars and on related options which are traded on a commodities exchange
or board of trade for certain bona fide hedging, return enhancement and risk
management purposes.
When market or economic conditions indicate, in the view of the Adviser,
that a temporary defensive investment strategy is appropriate, the Portfolio may
invest without limit in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and high quality money market instruments. See
"Description of the Portfolios--Other Investments and Policies."
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The U.S. Government Money Market Portfolio is advised by Wellington
Management Company, LLP. The Portfolio's investment objective is maximum current
income consistent with the maintenance of liquidity and the preservation of
capital. Under normal circumstances, the Portfolio seeks to achieve its
investment objective by investing exclusively in U.S. Government securities and
repurchase agreements with respect to those securities. See "Other Investments
and Policies--U.S. Government Securities." Under normal circumstances, the
Portfolio will invest only in securities that are purchased with and payable in
U.S. dollars and that have remaining maturities of 397 days or less at the time
of purchase. The Portfolio maintains a dollar-weighted average portfolio
maturity of 90 days or less. All securities purchased by the Portfolio,
including repurchase agreements, will present minimal credit risks in the
opinion of the Adviser acting under procedures approved by the Trustees. The
Portfolio follows these policies in order to attempt to maintain a constant net
asset value of $1.00 per share, although there can be no assurance it can do so
on a continuing basis. The yield and value of Portfolio shares and the yield and
value of portfolio securities are also not guaranteed or insured by the Federal
Government. The yield attained by the Portfolio usually will not be as high as
that of other funds that invest in lower-quality or longer-term securities. The
Portfolio may purchase securities on a when-issued or delayed-delivery basis.
OTHER INVESTMENTS AND POLICIES
MONEY MARKET INSTRUMENTS
Each Portfolio (other than the U.S. Government Money Market Portfolio) may
invest in high-quality money market instruments, including commercial paper of a
U.S. or foreign company or foreign government 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.
These obligations will be generally U.S. dollar denominated, except with respect
to the International Bond Portfolio, where these instruments may also be
denominated in foreign currencies. 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. The International Bond Portfolio
will only invest in commercial paper rated at least A1/P1 by S&P or Moody's or
the equivalent by another NRSRO.
21
<PAGE> 31
U.S. GOVERNMENT SECURITIES
Each Portfolio 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.
SECURITIES 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. See "Mortgage Backed
Securities--Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities" below.
STRIPPED U.S. GOVERNMENT SECURITIES. A Portfolio 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 (i) obligations from which
the interest coupons have been stripped; (ii) the interest coupons that are
stripped; and (iii) 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 Portfolio 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. See "Mortgage Backed Securities" below. 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 Portfolio's shares. See "Objectives and Policies of the
Portfolios--U.S. Government Securities" in the Statement of Additional
Information. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal payments
from the mortgages underlying the certificate, net of certain fees. See
"Mortgage Backed Securities" below.
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 Portfolio 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
22
<PAGE> 32
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 Portfolio 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.
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 Portfolio accrues income on
these investments for tax 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 Portfolio's
distribution obligations, in which case the Portfolio 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.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Large Capitalization Value Portfolio, Small Capitalization Value
Portfolio, International Equity Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in corporate and other debt obligations. Except
where otherwise indicated, each Portfolio 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 Portfolios 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 Portfolios. The market
value of the obligations held by a Portfolio can be expected to vary inversely
with changes in prevailing interest rates. Investors also should recognize that,
in periods of declining interest rates, a Portfolio's yield will tend to be
somewhat higher than prevailing
23
<PAGE> 33
market rates and, in periods of rising interest rates, a Portfolio's yield will
tend to be somewhat lower. Also, when interest rates are falling, the inflow of
net new money to a Portfolio 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 Portfolio's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Portfolio 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 and Moody'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 Portfolio. 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 Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each 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, no Portfolio
will purchase a 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, 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 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 Portfolio to obtain accurate market
quotations for
24
<PAGE> 34
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 Portfolio to purchase and may also have the effect of limiting the ability
of a Portfolio 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 Portfolio 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 Portfolio may decline
proportionately more than a portfolio consisting of higher-rated securities. If
a Portfolio 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 Portfolio and increasing the exposure of the Portfolio to
the risks of lower-rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event will require sale of these securities by the
Portfolio, but the Adviser will consider this event in its determination of
whether the Portfolio should continue to hold the securities.
During the fiscal year ended December 31, 1996, the monthly dollar-weighted
average ratings of the debt obligations held by International Bond Portfolio,
the Total Return Bond Portfolio and the Intermediate-Term Bond Portfolio,
expressed as a percentage of each Portfolio's total investments, were as
follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
INVESTMENTS
---------------------------------------------------------
INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM
RATINGS BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
- ----------------- ---------------- -------------- -----------------
<S> <C> <C> <C>
AAA/Aaa --% 79.63% 73.64%
AA/Aa -- 1.11 4.39%
A/A -- 0.96 1.08%
BBB/Baa -- 11.13 13.72%
BB/Ba -- 5.78 3.70%
B/B -- 1.41 3.47%
CCC/Caa -- -- --
CC/Ca -- -- --
C/C -- -- --
Unrated -- -- --
</TABLE>
NON-PUBLICLY TRADED SECURITIES. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in non-publicly traded securities, which may be
less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolios. In addition,
companies whose securities are not publicly traded are not subject to the
disclosure and other investor protection requirements that may be applicable if
their securities were publicly traded.
25
<PAGE> 35
MORTGAGE BACKED SECURITIES
The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each 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: (i) 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; (ii) 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 (iii) 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. In addition, the International Bond
Portfolio may invest in mortgage related securities issued or guaranteed by
foreign, national, state or provincial governmental instrumentalities, including
quasi-governmental agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
(ARMs), are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for such
an instrument exceeds the sum of the interest accrued at the applicable mortgage
interest rate and the principal payment required at such point to amortize the
outstanding principal balance over the remaining term of the loan, the excess is
utilized to reduce the then outstanding principal balance of the ARM.
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
26
<PAGE> 36
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.
A Portfolio 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 rules and interpretations of the Securities and Exchange
Commission (SEC), a Portfolio's investments in certain qualifying CMOs and
REMICs are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Additional Investment
Information-Collateralized Mortgage Obligations" in the Statement of Additional
Information.
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, a
Portfolio 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
"Mortgage Related Securities Issued or Guaranteed by U.S. Government Agencies
and Instrumentalities" above.
27
<PAGE> 37
ASSET-BACKED SECURITIES
The Large Capitalization Value Portfolio, Small Capitalization Value
Portfolio, Mortgage Backed Securities Portfolio, Intermediate-Term Bond
Portfolio, Total Return Bond Portfolio and International Bond Portfolio 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 Portfolio 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: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to seek to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from default seeks to ensure ultimate payment of the
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquencies or losses in excess of those anticipated could
adversely affect the return on an investment in a security. A Portfolio 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
Portfolio 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 Portfolio purchases these securities at a
28
<PAGE> 38
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. A Portfolio 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. See "Additional Investment Information" in the
Statement of Additional Information. See "Asset-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 a Portfolio 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.
ADJUSTABLE RATE SECURITIES
The Large Capitalization Value Portfolio, Mortgage Backed Securities
Portfolio, Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and
International Bond Portfolio 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 Portfolio may
invest will tend to reduce sharp changes in a Portfolio's net asset value in
response to normal interest rate fluctuations. As the coupon rates of a
Portfolio'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 Portfolio's shares to fluctuate less dramatically than that
of a fund invested in long-term fixed-rate securities.
29
<PAGE> 39
However, while the adjustable rate feature of such securities will tend to limit
sharp swings in a Portfolio'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 Portfolio will
fluctuate.
CUSTODIAL RECEIPTS
Each Portfolio 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. 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 Portfolio other than the U.S.
Government Money Market Portfolio may also invest in such custodial receipts.
See "Other Investments" in the Statement of Additional Information.
CONVERTIBLE SECURITIES
Each Portfolio, other than the U.S. Government Money Market Portfolio, may
invest in convertible securities. A convertible security is typically a
corporate bond or preferred stock which may be converted at a stated price
within a specified period of time into a specified number of shares of common
stock of the same or a different issuer. Convertible securities are generally
senior to common stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible securities. While providing a fixed
income stream (generally higher in yield than the income derivable from a common
stock but lower than that afforded by a similar nonconvertible security), a
convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation attendant upon a
market price advance in the convertible security's underlying common stock.
Convertible securities also include preferred stocks which technically are
equity securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying common stock rises, whereas it tends to decrease as the market value
of the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
The International Equity Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments
30
<PAGE> 40
and to attempt to enhance return. A Portfolio, and thus the investor, may lose
money through any unsuccessful use of these strategies. These strategies include
the use of forward exchange contracts, options and futures contracts and options
thereon. The Portfolio's ability to use these strategies may be limited by
market conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Investment Objectives
and Policies--Additional Investment Information" in the Statement of Additional
Information. New financial products and risk management techniques continue to
be developed and each Portfolio may use these new investments and techniques to
the extent consistent with its investment objectives and policies.
OPTIONS TRANSACTIONS. A Portfolio may purchase and write (i.e., sell) put
and call options on securities and financial indices that are traded on national
securities exchanges or in the over-the-counter market (OTC) to attempt to
enhance return or to hedge its portfolio. These options will be on debt
securities, aggregates of debt securities, financial indices (e.g., S&P 500) and
U.S. Government securities. The International Bond Portfolio and International
Equity Portfolio may also purchase and write put and call options on foreign
currencies and foreign currency futures. A portfolio 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 Portfolio may also purchase put and call options to
offset previously written put and call options of the same series. See
"Investment Objectives and Policies--Options on Securities" in the Statement of
Additional Information.
A call option gives the purchaser, in exchange for a premium paid, the
right for a specified period of time to purchase the securities subject to the
option at a specified price (the "exercise price" or "strike price"). The writer
of a call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When a Portfolio writes a call option, the
Portfolio 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
Portfolio 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 subject to the option to the
writer of the put at the specified exercise price. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. The
Portfolio might, therefore, be obligated to purchase the underlying securities
for more than their current market price.
A Portfolio will write only "covered" options. A written option is covered
if, so long as the Portfolio is obligated under the option, it (i) owns an
offsetting position in the underlying security or (ii) maintains cash, or liquid
assets with a value sufficient at all times to cover its obligations. Under the
first circumstance, the Portfolio's losses are limited because it owns the
underlying security; under the second circumstance, in the case of a written
call option, the Portfolio's losses are potentially unlimited. See "Investment
Objectives and Policies--Additional Investment Information" in the Statement of
Additional Information. "Liquid assets," as used in the Trust's Prospectus and
Statement of Additional Information, include U.S. Government securities, equity
securities or other
31
<PAGE> 41
liquid, unencumbered assets, marked-to-market daily. A Portfolio may only write
covered put options to the extent that cover for such options does not exceed
25% of the Portfolio's net assets. A Portfolio 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.
OVER-THE-COUNTER OPTIONS. A Portfolio may also purchase and write (i.e.,
sell) put and call options on equity and debt securities and on stock indexes in
the over-the-counter market (OTC options). Unlike exchange-traded options, OTC
options are contracts between the Portfolio and its counterparty without the
interposition of any clearing organization. Thus, the value of an OTC option is
particularly dependent on the financial viability of the OTC counterparty. The
Portfolio's ability to purchase and write OTC options may be limited by market
conditions, regulatory limits and tax considerations. There are certain risks
associated with investments in OTC options. See "Investment Objectives and
Policies--Additional Risks--Options Transactions and Related Risks" in the
Statement of Additional Information.
FORWARD CURRENCY EXCHANGE CONTRACTS. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each enter into forward foreign currency exchange contracts
to protect the value of its portfolio against future changes in the level of
currency exchange rates. A Portfolio 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 Portfolio'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 Portfolio generally arising in connection with
the purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Portfolio 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 Portfolio may enter into, a Portfolio 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 Adviser will 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 Portfolio'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 forward exchange contract to (A) 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 (B) purchase
either the U.S. Dollar or a foreign currency expected to perform better than the
currency being sold. Position hedges may,
32
<PAGE> 42
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 risks perfectly, and if the Adviser is
incorrect in its judgment of future exchange rate relationships, the Portfolio
could be in a less advantageous position than if such a hedge had not been
established.
INDEXED COMMERCIAL PAPER. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio 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 Portfolio 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. A
Portfolio will establish a segregated account with respect to its investments in
this type of commercial paper and maintain in such account cash or 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 Portfolio 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. See
"Investment Objectives and Policies of the Portfolios--Forward Foreign Currency
Exchange Contracts" in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Mortgage Backed Securities Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each purchase and
sell financial futures contracts and options thereon which are traded on a
commodities exchange or board of trade for hedging purposes, to reduce and
manage certain risks of its investments and to attempt to enhance return in
accordance with regulations of the Commodity Futures Trading Commission. The
Portfolios, and thus their investors, may lose money through any unsuccessful
use of these strategies. These futures contracts and related options will be on
debt securities, aggregates of debt securities, currencies, financial indices
and U.S. Government securities and include futures contracts and options thereon
which are linked to the London Interbank Offered Rate (LIBOR).
A Portfolio's successful use of futures contracts and related options
depends upon the investment adviser's ability to predict the direction of the
market and is subject to various additional risks. The correlation between
movements in the price of a futures contract and the price of the securities
being hedged is imperfect and there is a risk that the value of the securities
being hedged may increase or decrease at a greater rate than a specified futures
contract resulting in losses to a Portfolio.
A Portfolio's ability to enter into or close out futures contracts and
options thereon may also be limited by the requirements of the Internal Revenue
Code of 1986, as amended (the Internal Revenue Code) for qualification as a
regulated investment company. See "Investment Objectives
33
<PAGE> 43
and Policies--Additional Investment Policies--Futures Contracts--Options on
Futures Contracts" and "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator", subject to compliance with certain conditions. The
exemption is conditioned on a Portfolio purchasing and selling futures contracts
and options therein for bona fide hedging transactions, except that the
Portfolio may purchase and sell futures contracts and options thereon for any
other purposes to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the liquidation value of the Portfolio's total
assets.
SPECIAL RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES. Participation
in the options or futures markets involves investment risks and transaction
costs to which a Portfolio would not be subject absent the use of these
strategies. A Portfolio, and thus the investor, may lose money through any
unsuccessful use of these strategies. If an Adviser's prediction of movements in
the direction of the securities and interest rate markets is inaccurate, the
adverse consequences to a Portfolio may leave the Portfolio in a worse position
than if such strategies were not used. Risks inherent in the use of options and
futures contracts and options on futures contracts include (1) dependence on the
Adviser's ability to predict correctly movements in the direction of interest
rates and securities prices; (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 possible need to defer closing out certain hedged positions
to avoid adverse tax consequences; and (6) the possible inability of a Portfolio
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 Portfolio to sell a
portfolio security at a disadvantageous time, due to the need for a Portfolio to
maintain "cover" or to segregate securities in connection with hedging
transactions. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
FOREIGN SECURITIES
The International Equity Portfolio, Intermediate-Term Bond Portfolio, Total
Return Bond Portfolio and International Bond Portfolio 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.
Investing in securities issued by foreign companies involves considerations
and potential risks not typically associated with investing in obligations
issued by domestic corporations. Less information may be available about foreign
companies than about domestic companies and foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic companies.
A Portfolio's investments in foreign government securities may include debt
securities issued or guaranteed, as to payment of principal and interest, by
governments, quasi-governmental entities, governmental agencies, supranational
entities and other governmental entities (collectively, the
34
<PAGE> 44
Government Entities) of countries considered stable by the 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
"quasi-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 quasi-government issuers include, among others, the Province
of Ontario and the City of Stockholm. "Foreign Government Securities" shall also
include debt securities of Government Entities denominated in European Currency
Units. A European Currency Unit represents specified amounts of the currencies
of certain of the twelve member states of the European Community. Foreign
Government Securities shall also include mortgage-backed securities issued by
Foreign Government Entities including quasi-governmental entities.
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 debt securities purchased by the International
Bond Portfolio are denominated in currencies other than the U.S. dollar, changes
in foreign currency exchange rates will affect the Portfolio'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 Portfolio. If the value of a foreign currency
rises against the U.S. dollar, the value of the Portfolio assets denominated in
that currency will increase; correspondingly, if the value of a foreign currency
declines against the U.S. dollar, the value of Portfolio assets denominated in
that currency will decrease. Under the Internal Revenue Code, the Portfolio 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 Portfolio'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 Portfolio values its
assets daily in U.S. dollars, the Portfolio will not convert its holdings of
foreign currencies to U.S. dollars daily. When the Portfolio converts its
holdings to another
35
<PAGE> 45
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.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements, wherein the seller
agrees to repurchase a security from a Portfolio 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. The resale price is
in excess of the purchase price, reflecting an agreed-upon rate of return
effective for the period of time a Portfolio's money is invested in the
repurchase agreement. A Portfolio'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 Portfolio will require additional collateral. In the event of a
default, insolvency or bankruptcy by a seller, the Portfolio will promptly seek
to liquidate the collateral. In such circumstances, the Portfolio 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 Portfolio will
suffer a loss. See "Investment Objectives and Policies--Repurchase Agreements"
in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio
and Total Return Bond Portfolio may each 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 a Portfolio of securities
concurrently with an agreement by the Portfolio to repurchase the same assets at
a later date at a fixed price. During the reverse repurchase agreement period,
the Portfolio continues to receive principal and interest payments on these
securities.
Dollar rolls involve sales by a Portfolio 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, a Portfolio forgoes principal and interest paid
on the securities. A Portfolio 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.
A Portfolio will establish a segregated account with its custodian in which
it will maintain cash or 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 a Portfolio may decline below the price of the securities
a Portfolio 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, a Portfolio's use of
36
<PAGE> 46
the proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce a Portfolio'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 a Portfolio for purposes of the percentage limitations applicable
to borrowings. See "Borrowing" below.
SECURITIES LENDING
The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each lend
portfolio securities to brokers or dealers, banks or other recognized
institutional borrowers of securities, provided that the borrower at all times
maintains cash or liquid assets or secures an irrevocable letter of credit in
favor of a Portfolio in an amount equal to at least 100% of the market value of
the securities loaned. During the time portfolio securities are on loan, the
borrower will pay a Portfolio an amount equivalent to any dividend or interest
paid on such securities and a Portfolio may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower. As with any extensions of credit, there are risks of delay in
recovery and in some cases loss of rights in the collateral should the borrower
of the securities fail financially. As a matter of fundamental policy, a
Portfolio cannot lend more than 33 1/3% of the value of its total assets. See
"Investment Objectives and Policies--Lending of Securities" in the Statement of
Additional Information.
INTEREST RATE SWAP TRANSACTIONS
The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
International Bond Portfolio and Total Return Bond Portfolio may each enter into
interest rate swaps. Interest rate swaps involve the exchange by a Portfolio
with another party of their respective commitments to pay or receive interest,
for example, an exchange of floating rate payments for fixed-rate payments. A
Portfolio 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 a Portfolio anticipates
purchasing at a later date. A Portfolio intends to use these transactions as a
hedge and not as a speculative investment. See "Investment Objectives and
Policies--Interest Rate Swap Transactions" in the Statement of Additional
Information. The risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the Portfolio is contractually
obligated to make and will not exceed 5% of a Portfolio's net assets. The use of
interest rate swaps may involve investment techniques and risks different from
those associated with ordinary portfolio transactions. If the Adviser is
incorrect in its forecast of market values, interest rates and other applicable
factors, the investment performance of the Portfolio would diminish compared to
what it would have been if this investment technique was never used.
ILLIQUID SECURITIES
Each Portfolio, except the U.S. Government Money Market Portfolio, may hold
up to 15% of its net assets in illiquid securities. The U.S. Government Money
Market Portfolio may hold up to 10% of its net assets in illiquid securities.
Illiquid securities include repurchase agreements which have a maturity of
longer than seven days, securities with legal or contractual restrictions on
resale (restricted securities) and securities that are not readily marketable.
Restricted securities eligible
37
<PAGE> 47
for resale pursuant to Rule 144A under the Securities Act of 1933 and privately
placed commercial paper that have a readily available market are not considered
illiquid for purposes of this limitation. The Portfolios' investment 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 Manager and the Advisers will monitor the
liquidity of such restricted securities under the supervision of the Trustees.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
The staff of the SEC has taken the position that purchased OTC options and
the assets used as "cover" for written OTC options are illiquid securities.
However, with respect to U.S. Government securities, a Portfolio 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 Portfolio may
sell such OTC options only to qualified dealers who agree that a Portfolio 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. See "Investment Objectives and
Policies--Illiquid Securities" in the Statement of Additional Information.
When a Portfolio enters into interest rate swaps on other than a net basis,
the entire amount of the Portfolio's obligations, if any, with respect to such
interest rate swaps will be treated as illiquid. To the extent that a Portfolio
enters into interest rate swaps on a net basis, the net amount of the excess, if
any, of the Portfolio's obligations over its entitlements with respect to each
interest rate swap will be treated as illiquid. The Portfolios will also treat
non-U.S. Government POs and IOs as illiquid securities so long as the staff of
the SEC maintains its position that such securities are illiquid.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each Portfolio 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 Portfolio 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 Portfolio at the time of entering into the transaction.
While a Portfolio will only purchase securities on a when-issued or
delayed-delivery basis with the intention of acquiring the securities, a
Portfolio may sell the securities before the settlement date, if it is deemed
advisable. At the time a Portfolio makes the commitment to purchase securities
on a when-issued or delayed-delivery basis, the Portfolio will record the
transaction and thereafter reflect the value, each day, of such security in
determining the net asset value of the Portfolio. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Trust's
Custodian will maintain, in a segregated account of a Portfolio, cash or liquid
assets having a value equal to or greater than a Portfolio's purchase
commitments.
One form of when-issued or delayed-delivery security that the Mortgage
Backed Securities Portfolio may purchase is a "to be announced" mortgage-backed
security. A "to be announced" mortgage-backed security transaction arises when a
mortgage-backed security, such as a GNMA pass-through security, is purchased or
sold with the specific pools that will constitute that GNMA pass-through
security to be announced on a future settlement date.
38
<PAGE> 48
SHORT SALES
The Mortgage Backed Securities Portfolio may sell a security it does not
own in anticipation of a decline in the market value of that security (i.e.,
make short sales). Generally, to complete the transaction, the Portfolio will
borrow the security to make delivery to the buyer. The Portfolio is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Portfolio. Until the security is
replaced, the Portfolio is required to pay to the lender any interest which
accrues during the period of the loan. To borrow the security, the Portfolio may
be required to pay a premium which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until the Portfolio replaces the borrowed security, it will (a) maintain in a
segregated account with its custodian cash or liquid assets at such a level that
the amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current market value of the security sold short and
will not be less than the market value of the security at the time it was sold
short or (b) otherwise cover its short position.
The Portfolio will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. The Portfolio will realize a
gain if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
will be increased, by the amount of any premium or interest paid in connection
with the short sale. No more than 5% of the Portfolio's net assets will be, when
added together: (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.
The Mortgage Backed Securities Portfolio may also make short sales
against-the-box for the purpose of deferring realization of gain or loss for
federal income tax purposes. A short sale against-the-box is a short sale in
which the Portfolio owns an equal amount of the securities sold short or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short.
BORROWING
The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each 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 (computed at the
time the loan is made) for temporary, extraordinary or emergency purposes, for
the clearance of transactions or to take advantage of investment opportunities.
A Portfolio may pledge up to 33 1/3% of its total assets to secure these
borrowings.
The other Portfolios 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 (computed at the time the loan is made) for temporary,
extraordinary or emergency purposes, or for the clearance of transactions. Each
of these Portfolios may pledge up to 20% of its total assets to secure these
borrowings.
39
<PAGE> 49
If a Portfolio borrows to invest in securities, or if a Portfolio 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 Portfolio, the net asset value of the
Portfolio's shares will decrease faster than would otherwise be the case. This
is the speculative characteristic known as "leverage." See "Reverse Repurchase
Agreements and Dollar Rolls" above.
If any Portfolio's asset coverage for borrowings falls below 300%, such
Portfolio will take prompt action to reduce its borrowings.
PORTFOLIO TURNOVER
The portfolio turnover rate for each of the Portfolios may exceed 100%,
although the rate is not expected to exceed 200%. Due to market volatility, for
the years ended December 31, 1996 and 1995 the portfolio turnover rate was 226%
and 456%, respectively, for the International Bond Portfolio, 340% and 141%,
respectively, for the Total Return Bond Portfolio and 311% and 93%, respectively
for the Intermediate-Term Bond Portfolio. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by each Portfolio. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information. In addition, high
portfolio turnover may result in increased short-term capital gains, which when
distributed to shareholders, are treated as ordinary income. See "Taxes,
Dividends, and Distributions."
INVESTMENT RESTRICTIONS
The Portfolios are subject to certain investment restrictions which
constitute fundamental policies. Fundamental policies may not be changed with
respect to any Portfolio without the approval of a majority of the outstanding
voting securities of that Portfolio, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
40
<PAGE> 50
MANAGEMENT OF THE TRUST
The Trustees, in addition to reviewing the actions of the Trust's Manager
and Advisers, as set forth below, decide upon matters of general policy. The
Trust's Manager conducts and supervises the daily business operations of the
Trust. For the year ended December 31, 1996 the total annualized expenses, net
of management fee waiver and including expense subsidies paid by the Manager, as
a percentage of average daily net assets for each Portfolio's shares were as
follows:
<TABLE>
<CAPTION>
TOTAL ANNUALIZED
EXPENSES AS A
PERCENTAGE OF
AVERAGE DAILY
PORTFOLIO NET ASSETS
--------------------------------------------------------- -------------------
<S> <C>
Large Capitalization Growth Portfolio.................... .82%
Large Capitalization Value Portfolio..................... .77%
Small Capitalization Growth Portfolio.................... .89%
Small Capitalization Value Portfolio..................... .92%
International Equity Portfolio........................... .99%
International Bond Portfolio............................. 1.34%
Total Return Bond Portfolio.............................. .94%
Intermediate-Term Bond Portfolio......................... .73%
Mortgage Backed Securities Portfolio..................... .91%
U.S. Government Money Market Portfolio................... .89%
</TABLE>
MANAGER
Prudential Mutual Fund Management LLC (PMF or the Manager), Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, is the Manager of the
Trust. PMF is organized in New York as a limited liability company. It is the
successor to Prudential Mutual Fund Management, Inc., which transferred its
assets to PMF in September 1996. It is an indirect, wholly-owned subsidiary of
The Prudential Insurance Company of America, a major diversified insurance and
financial services company.
41
<PAGE> 51
For the year ended December 31, 1996, PMF received the following management
fees from each of the Portfolios.
<TABLE>
<CAPTION>
ANNUALIZED
PERCENTAGE
OF
AVERAGE
NET
PORTFOLIO ASSETS AMOUNT
---------------------------------------------- ---- -----------
<S> <C> <C>
Large Capitalization Growth Portfolio......... .60% $ 1,216,415
Large Capitalization Value Portfolio.......... .60% 1,253,390
Small Capitalization Growth Portfolio......... .60% 848,974
Small Capitalization Value Portfolio.......... .60% 663,383
International Equity Portfolio................ .70% 1,551,382
International Bond Portfolio.................. .50% 193,939
Total Return Bond Portfolio................... .45% 212,605
Intermediate-Term Bond Portfolio.............. .45% 367,755
Mortgage Backed Securities Portfolio.......... .45% 324,962
U.S. Government Money Market Portfolio........ .25% 47,830
</TABLE>
As of January 31, 1997, PMF served as manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies. These companies have
aggregate assets of approximately $55.8 billion.
Pursuant to a Management Agreement (Management Agreement) with the Trust,
PMF manages the investment operations of the Trust, administers the Trust's
affairs and is responsible for the selection, subject to review and approval of
the Trustees, of Advisers for each of the Portfolios and the review of their
continued performance. See "Manager" in the Statement of Additional Information.
Pursuant to separate Sub-Advisory Agreements (the Advisory Agreements)
between PMF and the Advisers, the Advisers furnish investment advisory services
in connection with the management of the Trust. Each Adviser is paid a fee for
its services by the Manager out of the fee it collects from the Portfolio based
upon the portion of assets the Adviser manages. PMF continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the Advisers' performance of such services.
Subject to the supervision and direction of the Trustees, the Manager
provides to the Trust investment management evaluation services principally by
performing initial review on prospective Advisers for each Portfolio and
thereafter monitoring Adviser performance. In evaluating prospective Advisers,
the Manager considers, among other factors, each Adviser's level of expertise,
relative performance, consistency of performance, and investment discipline or
philosophy. The Manager has responsibility for communicating performance
expectations and evaluations to the Advisers and ultimately recommending to the
Trustees whether the Advisers' contracts should be renewed, modified or
terminated. The Manager provides reports to the Trustees regarding the results
of its evaluation and monitoring functions. The Manager is also responsible for
conducting all operations of the Trust except those operations contracted to the
Advisers, custodian and transfer
42
<PAGE> 52
agent. Each Portfolio pays the Manager a fee for its services that is computed
daily and paid monthly at the annual rate specified below based on the value of
the average net assets of the Portfolio. The Manager pays each Adviser a fee
that is computed daily and paid monthly at the annual rate specified below based
on the value of the Portfolio's average daily net assets managed by that
Adviser:
<TABLE>
<CAPTION>
PORTION PAID
BY THE MANAGER
PORTFOLIO MANAGER'S FEE TO THE ADVISER
--------------------------------------------- ---------------- --------------
<S> <C> <C>
Large Capitalization Growth Portfolio........ 0.60% 0.30%
Large Capitalization Value Portfolio......... 0.60% 0.30%
Small Capitalization Growth Portfolio........ 0.60% 0.30%
Small Capitalization Value Portfolio......... 0.60% 0.30%
International Equity Portfolio............... 0.70% 0.40%
International Bond Portfolio................. 0.50% 0.30%
Total Return Bond Portfolio.................. 0.45% 0.25%
Intermediate-Term Bond Portfolio............. 0.45% 0.25%
Mortgage Backed Securities Portfolio......... 0.45% 0.25%
U.S. Government Money Market Portfolio....... 0.25% 0.125%
</TABLE>
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 October 30, 1996, shareholders voted
affirmatively to give the Trust this ongoing authority. With Board approval, the
Manager is permitted to employ new Advisers for the Portfolios, change the terms
of the Portfolios' 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 Portfolio continue
to have the right to terminate an advisory agreement for the Portfolio at any
time by a vote of the majority of the outstanding voting securities of the
Portfolio. Shareholders will be notified of any Adviser changes or other
material amendments to advisory agreements that occur under these arrangements.
ADVISERS
The Advisers have agreed to the foregoing fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment adviser, and perform various administrative functions associated with
serving in that capacity in recognition of the reduced administrative
responsibilities they have undertaken with respect to the Portfolios. Subject to
the supervision and direction of the Manager and, ultimately, the Trustees, each
Adviser's responsibilities are limited to managing the securities held in the
Portfolio, or portion thereof, it manages in accordance with the Portfolio's
stated investment objective and policies, making investment decisions for such
Portfolio, or portion thereof, and placing orders to purchase and sell
securities on behalf of such Portfolio, or portion thereof. The Advisers furnish
investment advisory services in connection with the management of the Portfolios
and are paid their fees by PMF, not the Trust.
43
<PAGE> 53
Each of the two Advisers of the domestic equity Portfolios--the Large
Capitalization Growth Portfolio, Large Capitalization Value Portfolio, Small
Capitalization Growth Portfolio and Small Capitalization Value
Portfolio--manages approximately 50% of the assets of the respective Portfolio.
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)
will be divided between the two Advisers as the Manager deems it appropriate. In
addition, there will be a periodic rebalancing of each Portfolio's assets to
take account of market fluctuations in order to maintain the approximately equal
allocation. As a consequence, each Portfolio will allocate assets from the
better performing of the two Advisers to the other. By using two Advisers for
these Portfolios, and by periodically balancing a Portfolio for an approximately
equal allocation, each Portfolio seeks long-term benefits from a balance of
different investment disciplines, which is intended to achieve a certain
continuity in the Portfolio's performance. Reallocations may result in
additional transaction costs to the extent that sales of securities as part of
such reallocations result in higher portfolio turnover. In addition, if one
Adviser buys a security as the other Adviser sells it, the net position of the
Portfolio in the security may be approximately the same as it would have been
with a single Adviser and no such sale and purchase, but the Portfolio will have
incurred additional transaction costs and other expenses. The Manager will
consider these costs in determining the allocation and reallocation of assets.
The following sets forth certain information about each of the Advisers:
LARGE CAPITALIZATION GROWTH PORTFOLIO
Columbus Circle Investors (CCI), Metro Center, One Station Place, 8th
Floor, Stamford, Connecticut 06902 and Oak Associates, Ltd. (Oak), 3875 Embassy
Parkway, Suite 250, Akron, Ohio 44333, serve as the Advisers to the Large
Capitalization Growth Portfolio. CCI and Oak are paid a fee by PMF, not the
Trust, at an annual rate of .30 of 1% of the average daily net assets of the
portion of the Portfolio's assets managed by each of them.
CCI is a Delaware partnership and a subpartnership of PIMCO Advisors L.P.,
a leading institutional equity investment firm and, as of December 31, 1996, had
approximately $14.2 billion in assets under management for corporate, nonprofit,
government, union, and mutual fund clients.
CCI generally uses a team approach, although Clifford G. Fox is primarily
responsible for the day-to-day investment management of the portion of the
assets CCI manages for the Large Capitalization Growth Portfolio. Mr. Fox has
been a Vice President and Portfolio Manager of CCI since October, 1992. Prior to
joining CCI, he was Vice President of Equity Investments at General Reinsurance
Corporation. Mr. Fox is a Chartered Financial Analyst and a member of the New
York Society of Security Analysts.
Oak was founded in April 1985 and has specialized in the large cap market
since inception. It provides investment management services to both individual
and institutional clients and as of December 31, 1996, had more then $5 billion
in assets under management. Oak is a limited liability company organized under
the laws of the State of Ohio. James D. Oelschlager owns a controlling interest
(99%) of Oak.
44
<PAGE> 54
With respect to portfolio management, Oak makes its securities selections
based upon interest rate and inflation expectations, the company's growth rate
and its price to earnings ratio, among other factors. James D. Oelschlager is
the portfolio manager of the portion of the Portfolio managed by Oak which he
manages with the assistance of Donna Barton, Margaret Ballinger and Douglas
MacKay as assistant portfolio managers. Mr. Oelschager has been President of Oak
since 1985. Ms. Barton and Ms. Ballinger have been employed as a trader and
client service manager, respectively, for Oak since 1985. Mr. MacKay has been a
research analyst for Oak since 1990. Oak also manages two series of The
Advisers' Inner Circle Fund, White Oak Growth Stock Fund and Pin Oak Aggressive
Stock Fund.
LARGE CAPITALIZATION VALUE PORTFOLIO
INVESCO Capital Management, Inc. (INVESCO), 1315 Peachtree Street, Suite
500, Atlanta, Georgia 30309 and Hotchkis and Wiley, 800 West Sixth Street, Fifth
Floor, Los Angeles, California 90017 serve as the Advisers to the Large
Capitalization Value Portfolio. INVESCO and Hotchkis and Wiley are paid a fee by
PMF, not the Trust, at an annual rate of .30 of 1% of the average daily net
assets of the portion of the Portfolio's assets managed by them.
INVESCO is a Delaware corporation and member of INVESCO PLC, a global firm
specializing in the management of institutional portfolios. As of December 31,
1996, INVESCO had approximately $90 billion of assets under management for
clients located throughout the U.S., Europe and Japan.
Neilson Brown, a Vice President of INVESCO, is responsible for the
day-to-day management of the portion of the assets INVESCO manages for the
Portfolio and previously managed all of the Portfolio's assets since its
inception. Mr. Brown has served as a portfolio manager for INVESCO since 1989
and prior to 1989, served as a portfolio manager for Dreman Value Management and
Brown Brothers Harriman & Co. Mr. Brown is a Chartered Financial Analyst and a
member of the Atlanta Society of Financial Analysts.
Hotchkis and Wiley is a division of the Capital Management Group of Merrill
Lynch Asset Management, L.P. It was established in 1980 and has specialized in
the large-cap market since its inception. As of December 31, 1996, Hotchkis and
Wiley had approximately $10.3 billion in assets under management for corporate,
public, endowment and foundation, and mutual fund clients. Hotchkis and Wiley is
the adviser or subadviser for the American AAdvantage Funds, the Hirtle
Callaghan Trust and the Hotchkis and Wiley Funds.
Roger DeBard is primarily responsible for the day-to-day management of the
portion of assets Hotchkis and Wiley manages for the Large Capitalization Value
Portfolio. Dr. DeBard is a Managing Director at Hotchkis and Wiley. He also
serves as an Executive Vice President of the Hotchkis and Wiley Funds. Dr.
DeBard was formerly with Crocker Investment Management, Scudder, Stevens & Clark
and the investment consulting firm of A.G. Becker & Co. Dr. DeBard is a member
of the Los Angeles Society of Financial Analysts and a frequent guest on
financial news programs. He has served as a director of the Los Angeles Bond
Club and as an expert witness for the President's Commission on Pension Policy.
Dr. DeBard is also a Chartered Financial Analyst.
45
<PAGE> 55
SMALL CAPITALIZATION GROWTH PORTFOLIO
Nicholas-Applegate Capital Management (Nicholas-Applegate), 600 West
Broadway, 29th Floor, San Diego, California 92101 and Investment Advisers, Inc.
(IAI), 3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440 serve
as the Advisers to the Small Capitalization Growth Portfolio. Nicholas-Applegate
and IAI are paid a fee by PMF, not the Trust, at an annual rate of .30 of 1% of
the average daily net assets of the portion of the Portfolio's assets managed by
them.
Nicholas-Applegate was organized in 1984 as a California limited
partnership. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership controlled by Arthur E.
Nicholas. Mr. Nicholas founded Nicholas-Applegate in 1984 and has been a
principal of the firm since its founding. Mr. Nicholas and fourteen other
partners manage a staff of approximately 300 employees. As of December 31, 1996,
the firm managed a total of approximately $31 billion of assets for a wide
variety of clients, including employee benefit plans of corporations, public
retirement systems and unions, university endowments, foundations and other
institutional investors.
The portion of the Portfolio's assets for which Nicholas-Applegate is the
Advisor is managed by a team of professionals at Nicholas-Applegate, which is
overseen by Arthur E. Nicholas, Chief Investment Officer of the Firm.
IAI was established in 1947 and provides investment advice to corporate,
public, jointly-trusteed, endowment and foundation and mutual fund clients. As
of December 31, 1996, IAI managed approximately $16 billion in assets.
The day-to-day management of the Fund is the responsibility of Martin J.
Calihan. Mr. Calihan
is a Vice President and has served as a equity analyst of IAI since 1992 and a
portfolio
manager since February 1996. Prior to such time, Mr. Calihan was an equity
research analyst with Morgan Stanley & Co.
SMALL CAPITALIZATION VALUE PORTFOLIO
Lazard Freres Asset Management (LFAM), 30 Rockefeller Plaza, New York, New
York 10020 and Wood, Struthers & Winthrop Management Corp. (WSW), 277 Park
Avenue, New York, New York 10172, serve as the Advisers to the Small
Capitalization Value Portfolio. LFAM and WSW are paid a fee by PMF, not the
Trust, at an annual rate of .30 of 1% of the average daily net assets of the
portion of the Portfolio's assets managed by them.
Lazard Freres Asset Management (LFAM) is a division of Lazard Freres & Co.
LLC (Lazard Freres), a New York limited liability company. LFAM provides
investment management services to both individual and institutional clients and
as of December 31, 1996, had more than $38 billion in assets under management.
In addition to portfolio management, Lazard Freres provides a wide variety of
investment banking and related services. LFAM is also the Adviser of the
International Equity Portfolio of the Trust.
Herbert W. Gullquist and Eileen D. Alexanderson, CFA, are primarily
responsible for the day-to-day management of the portion of the assets LFAM
manages for the Small Capitalization Value Portfolio. Mr. Gullquist is a
managing director of Lazard Freres, is the chief investment officer of LFAM and
has been employed there since 1982. Ms. Alexanderson is a portfolio
manager/analyst.
46
<PAGE> 56
Ms. Alexanderson joined LFAM in 1982 and has 15 years of investment experience.
She is a Chartered Financial Analyst.
WSW was founded in 1871 and has specialized in the small-cap market since
1967. It provides investment management services to both individual and
institutional clients and, as of December 31, 1996, had more than $4 billion in
assets under management. WSW is a subsidiary of Donaldson, Lufkin & Jenrette
Securities Corporation (DLJSC), 277 Park Avenue, New York, New York 10172. DLJSC
is a wholly owned subsidiary of Donaldson Lufkin & Jenrette Inc (DLJ Inc), 36.1%
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 44.1% of DLJ Inc.
Approximately 60.7% 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.
James A. Engle and Roger W. Vogel are the co-managers of the portion of the
Portfolio managed by WSW. Mr. Engle has been Chief Investment Officer of WSW
since 1988. Mr. Vogel has been Director of Equity Research of WSW since 1993. He
was previously Vice President and Portfolio Manager at Chemical Bank from 1978
until 1993. Messrs. Engle and Vogel also manage the Winthrop Small Company
Value, Growth and Growth & Income Funds.
INTERNATIONAL EQUITY PORTFOLIO
Lazard Freres Asset Management (LFAM), 30 Rockefeller Plaza, New York, New
York 10020, serves as the Adviser to the International Equity Portfolio. LFAM is
paid a fee by PMF, not the Trust, at an annual rate of .40 of 1% of the
Portfolio's average daily net assets.
Herbert W. Gullquist and John R. Reinsberg are primarily responsible for
the day-to-day management of the Portfolio. Mr. Gullquist is a managing director
of Lazard Freres, is the chief investment officer of LFAM and has been employed
with both since 1982. Mr. Reinsberg is a managing director of LFAM and has been
employed there since 1992. Prior thereto, he was Executive Vice President of
General Electric Investment Company.
INTERNATIONAL BOND PORTFOLIO
Fiduciary International, Inc. (FII), 2 World Trade Center, 90th Floor, New
York, New York 10048, serves as the Adviser to the International Bond Portfolio.
FII is paid a fee by PMF, not the Trust, at an annual rate of .30 of 1% of the
Portfolio's average daily net assets. FII is a wholly-owned subsidiary of
Fiduciary Investment Corporation, which, in turn, is a wholly-owned subsidiary
of Fiduciary Trust Company International (FTCI). FTCI is a New York State
chartered bank specializing in investment and administration of assets for
pensions and other institutional accounts as well as individuals and families.
FII has access to all of FTCI's investment infrastructure. FTCI began investing
globally in the 1960's and serves its worldwide investment management and
custody
47
<PAGE> 57
clients from offices in New York, Los Angeles, Miami, Washington, D.C., London,
Geneva and Hong Kong. FTCI has over 60 investment professionals. FTCI has over
30 years of experience in international management. As of December 31, 1996,
total assets under management by FII, its parent organization FTCI and FTCI
affiliates, on behalf of all clients, amounted to approximately $33 billion.
The portfolio is managed by a team of two portfolio managers. Stuart
Hochberger is responsible for the day-to-day management of the Portfolio and has
been serving in such capacity since the inception of the Portfolio in May 1994.
Mr. Hochberger is the chief global fixed income strategist of FTCI and has been
with FTCI since 1981 and is currently an Executive Vice President and Director
of Fixed Income, which includes international fixed income. Anthony Gould
assists Mr. Hochberger in the management of the Portfolio, Mr. Gould is a Vice
President and Manager of global and international fixed income portfolios and
has been with FTCI since March 1995. Prior thereto, he was employed in BZW
Investment Management, the asset management subsidiary of the Barclays Group.
Mr. Gould is a Chartered Financial Analyst.
INTERMEDIATE-TERM BOND PORTFOLIO AND TOTAL RETURN BOND PORTFOLIO
Pacific Investment Management Company (PIMCO), 840 Newport Center Drive,
Newport Beach, California 92660, serves as the Adviser to the Intermediate-Term
Bond Portfolio and the Total Return Bond Portfolio. PIMCO furnishes investment
advisory services in connection with the management of each of these Portfolios
and is paid a fee by PMF, not the Trust, at an annual rate of .25 of 1% of each
Portfolio's average daily net assets. John L. Hague, a Managing Director of
PIMCO, has been responsible for the day-to-day management of the Trust's
Portfolio since its inception. Mr. Hague has been a fixed income manager of
PIMCO and its predecessor since 1989.
PIMCO is a general partnership whose partners are PIMCO Advisors L.P. and
PIMCO Management, Inc., a wholly owned subsidiary of PIMCO Advisors L.P. The
general partner of PIMCO Advisors L.P. is PIMCO Partners G.P., a general
partnership between Pacific Financial Asset Management Corporation, an indirect
wholly-owned subsidiary of Pacific Mutual Life Insurance Company, and PIMCO
Partners LLC, a limited liability company controlled by the PIMCO Managing
Directors. As of December 31, 1996, PIMCO had approximately $88.2 billion of
assets under management.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO AND MORTGAGE BACKED SECURITIES PORTFOLIO
Wellington Management Company, LLP (WMC), 75 State Street, Boston,
Massachusetts 02109, serves as the Adviser to the U.S. Government Money Market
Portfolio and the Mortgage Backed Securities Portfolio. WMC is paid a fee by
PMF, not the Trust, at the annual rates of .125 of 1% and .25 of 1% of each
Portfolio's average daily net assets, respectively.
WMC is a Massachusetts limited liability partnership of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland and John R.
Ryan. WMC is a professional investment counseling firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of December 31, 1996, WMC
had approximately $133.2 billion of assets under management.
48
<PAGE> 58
Thomas L. Pappas, Senior Vice President of WMC, has served as portfolio
manager to the Mortgage Backed Securities Portfolio since the Portfolio's
inception. Mr. Pappas has been an investment professional with WMC since 1987.
Timothy E. Smith, Vice President of WMC, has served as portfolio manager to the
U.S. Government Money Market Portfolio since February 28, 1997. Mr. Smith
assumed primary responsibility for management of the Portfolio from Mr. John C.
Keogh, Senior Vice President of WMC, who was the Portfolio's manager since its
inception. Prior to joining WMC in 1992, Mr. Smith was employed for 8 years with
Fidelity Investments, Inc., where he held a number of investment management
positions, including associate portfolio manager and money market trader.
FEE WAIVERS AND SUBSIDIES
For the year ending December 31, 1997, PMF has agreed to cap Total
Operating Expenses of the Total Return Bond Portfolio at .95%. See "Trust
Expenses." The Trust is not required to reimburse PMF for such management fee
waiver or expense subsidy. PMF may from time to time agree to waive all or a
portion of its management fee and subsidize certain operating expenses of the
Portfolios. Fee waivers and expense subsidies will increase a Portfolio's yield
or total return. See "Performance Information."
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, is a corporation organized under the
laws of the State of Delaware and serves as the distributor of the shares of the
Trust. It is an indirect, wholly-owned subsidiary of The Prudential Insurance
Company of America.
Pruco Securities Corporation ("Prusec"), 1111 Durham Avenue, South
Plainfield, New Jersey 07080-2398, is a corporation organized under the laws of
the State of New Jersey. It is a wholly-owned subsidiary of The Prudential
Insurance Company of America. Prusec is distributing shares of the Trust
pursuant to a dealer agreement between Prusec and Prudential Securities, the
principal underwriter of the Trust. Prusec is registered with the SEC as both a
broker-dealer and an investment adviser, and conducts its advisory activities
under the name "Prudential Preferred Advisors" ("PPA"). Advisory clients of PPA
may purchase and redeem shares of the Trust through their Prusec registered
representative, or may effect such transactions by dealing directly with the
Trust's Transfer Agent.
On October 21, 1993, PSI entered into an omnibus settlement with the
Securities and Exchange Commission (SEC), state securities regulators (with the
exception of the Texas Securities Commissioner who joined the settlement on
January 18, 1994) and the National Association of Securities Dealers, Inc.
(NASD) to resolve allegations that from 1980 through 1990 PSI sold certain
limited partnership interests in violation of securities laws to persons for
whom such securities were not suitable and misrepresented the safety, potential
returns and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
49
<PAGE> 59
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of $500,000
per jurisdiction. PSI has agreed to provide additional funds, if necessary, for
the purpose of the settlement fund. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1(800) 225-1852.
The Trust is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Trust's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities, one of the Advisers or an affiliate thereof (an
affiliated broker), may each act as a broker or futures commission merchant for
a Portfolio. In order for an affiliated broker to effect any portfolio
transactions for a Portfolio on an exchange or board of trade, the commissions,
fees or other remuneration received by the affiliated broker must be reasonable
and fair compared to the commissions, fees or other remuneration paid to other
brokers or futures commission merchants in connection with comparable
transactions involving similar securities being purchased or sold on an exchange
or board of trade 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 or futures commission merchant
in a commensurate arm's-length transaction.
NET ASSET VALUE
The net asset value per share is determined by subtracting from the value
of the assets of each Portfolio the amount of its liabilities, and dividing the
remainder by the number of outstanding shares of the Portfolio. The Trustees
have fixed the specific time of day for the computation of each
50
<PAGE> 60
Portfolio's net asset value to be as of 4:15 p.m., New York time, except that
the U.S. Government Money Market Portfolio will compute its net asset value at
4:30 p.m., New York time.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Trustees. See "Net Asset Value" in the Statement of
Additional Information.
The Trust will compute its net asset value once daily on days that the New
York Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem shares have been received by the Trust or days on which
changes in the value of portfolio securities do not affect the net asset value
of a Portfolio. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
The U.S. Government Money Market Portfolio determines the value of its
portfolio securities by the amortized cost method. This method involves valuing
an instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Portfolio
would receive if it sold the instrument. During these periods, the yield to a
shareholder may differ somewhat from that which could be obtained from a similar
fund which marks its portfolio securities to the market each day. For example,
during periods of declining interest rates, if the use of the amortized cost
method resulted in a lower value of the Portfolio's securities holdings on a
given day, a prospective investor in the Portfolio would be able to obtain a
somewhat higher yield and existing shareholders would receive correspondingly
less income. The converse would apply during periods of rising interest rates.
The Trustees have established procedures designed to stabilize, to the extent
reasonably possible, the net asset value of the shares of the Portfolio at $1.00
per share. See "Net Asset Value" in the Statement of Additional Information.
PURCHASE AND REDEMPTION OF SHARES
HOW TO PURCHASE SHARES
Purchases of shares of a Portfolio by a Target Program participant must be
made through a securities account maintained with Prudential Securities or its
affiliates. Payment for Portfolio shares must be made by check made payable to
Prudential Securities or to a broker or affiliate that clears securities
transactions through Prudential Securities on a fully disclosed basis (an
Introducing Broker). Clients of Prudential Securities may also make payment for
portfolio shares using free credit cash balances held in their securities
account including a cash payment by the participant into his or her securities
account or through the redemption of shares of money market funds held in the
account.
For non-Plan accounts, the minimum initial investment requirement is
$25,000. For Plan accounts, the minimum initial investment requirement is
$10,000. The minimum initial investment requirement is reduced to $10,000 for
non-Plan accounts for custodial accounts established under the Uniform Gift to
Minors Act and for Trustees of the Trust (except that the minimum initial
51
<PAGE> 61
investment requirement is waived entirely for Trustees who receive their fees
pursuant to a deferred fee agreement with the Trust), employees of Prudential
Securities and PMF and their subsidiaries, and members of the families of such
persons who maintain an "employee related" account at Prudential Securities. For
purposes of determining the minimum initial investment requirement, fiduciary
accounts having a common trustee (unaffiliated with Prudential Securities) may
be aggregated provided that such accounts, in the aggregate, have at least
$250,000 in assets in the Target Program. Such accounts may also be aggregated
for purposes of determining when the Target Program fee may be subject to
negotiation. In addition, the minimum initial investment requirement may be
reduced or waived for certain start-up qualified employee benefit plans which
have been in existence for less than one year and for certain transfers of
assets from asset allocation programs of investments in registered investment
companies. From time to time, the minimum initial investment requirement may
otherwise be reduced for Plan and non-Plan accounts in the discretion of
Prudential Securities. Please contact a Prudential Securities Financial Advisor
for details. Prudential Securities must be notified, prior to the opening of any
Target Program account of any factors under which an account would be eligible
for a waiver or reduction of the minimum investment or Target Program fee. The
aggregation of accounts or reduction or waiver of the Target Program fee will be
permitted subject to confirmation of the account's entitlement.
Shares of the Portfolios are available to (i) participants in the Target
Program with payment of the Target Program Fee and (ii) to banks, trust
companies and other investment advisory services and certain fee-based programs
sponsored by Prudential Securities and its affiliates which include mutual funds
as investment options and for which the Portfolios are an available option
without payment of the Target Program fee. Such programs may require payment of
different fees. Trustees of the Trust, employees of Prudential Securities and
PMF and their subsidiaries, and members of the families of such persons who
maintain an "employee related" account at Prudential Securities may also
participate in the Target Program without the imposition of the Target Program
fee. In addition, the Target Program fee may be waived in whole or in part for
certain banks, trust companies or unaffiliated investment advisers who maintain
securities accounts with Prudential Securities as well as personal trusts which
are part of The Prudential Bank Personal Trust Program administered by
Prudential Bank & Trust (as trustee) or an affiliate thereof. Parties interested
in utilizing the Portfolios should contact the Trust or Prudential Securities.
The Target Program and the Trust are designed to help investors devise an asset
allocation strategy to meet their individual needs as well as selecting
individual investments within each asset category among the choices available.
THE TARGET PROGRAM. Prudential Securities, through the Target Program,
provides advisory services in connection with investments among the Portfolios
by identifying the investor's investment objectives, preferences and risk
tolerances through evaluation of a Questionnaire; identifying and recommending
in writing an appropriate allocation of assets among the Portfolios that conform
to those objectives, preferences and risk tolerances in an Evaluation; and
providing a quarterly account statement (Quarterly Account Monitor). Prudential
Securities will not have any investment discretion over the investor's Target
Program account; all investment decisions ultimately rest with the investor.
Under the Target Program, financial advisors of Prudential Securities
provide services to the investor by assisting the investor in identifying his or
her financial characteristics and completing the investor Questionnaire.
Prudential Securities has contracted with Ibbotson Associates, Inc., Chicago, an
investment consulting, data and software firm, to develop an investment profile
matrix and asset
52
<PAGE> 62
allocation methodology to assist it in translating investor needs, preferences
and attitudes identified from the Questionnaire into suggested portfolio
allocations. Financial advisors may also review the Evaluation and Quarterly
Account Monitor with the investor, monitor identified changes in the investor's
financial characteristics, assist the investor in preparing a revised
Questionnaire, and communicate any changes to Prudential Securities for
reevaluation.
Prudential Securities is paid a quarterly fee for the services comprising
the Target Program. For non-Plan accounts, the quarterly advisory fee is charged
at the maximum annual rate of 1.5% of assets held in a Target Program account
invested in equity portfolios and 1.0% of assets held in a Target Program
account invested in income portfolios. For Plan accounts, the quarterly advisory
fee is charged at the maximum annual rate of 1.25% of assets held in a Target
Program account invested in equity portfolios and 1.35% of assets held in a
Target Program account invested in income portfolios. The advisory fees may be
modified or changed by Prudential Securities upon notice to account holders.
Plan accounts and non-Plan accounts may elect to have their Target Program fee
either automatically charged to their securities account as described above or
billed to them quarterly. For accounts that elect to be billed, the quarterly
fee is payable by check. The advisory fee is subject to negotiation when assets
in the Target Program exceed $100,000 based on a number of factors including,
but not limited to, the size of the account and other accounts with Prudential
Securities. An independent plan fiduciary should consider, in a prudent manner,
the relationship of the fees to be paid by its Plan along with the level of
services provided by Prudential Securities.
Financial advisors receive a portion of any fee paid by Target Program
clients for participation in the Target Program. As the quarterly fee paid by
non-Plan investors for investments in an equity portfolio is greater than the
quarterly fee paid by non-Plan investors for investments in an income portfolio,
Prudential Securities will receive greater compensation if a non-Plan Target
Program client invests in equity portfolios rather than income portfolios.
Consequently, Prudential Securities, when making asset allocation
recommendations for non-Plan Target Program clients will be presented with a
conflict of interest as to the specific Portfolios recommended for investment.
For participants in the Target Program, shares of the Portfolios may be
purchased directly through Prudential Securities only after the completion and
processing of the Client's Target Program investment advisory agreement. The
offering price is the net asset value per share next determined following
receipt of an order by Prudential Securities. Shareholders will not receive
share certificates, as the Trust does not issue share certificates.
HOW TO SELL SHARES
Shares of the Portfolios may be redeemed at any time for cash at the net
asset value per share next determined after the redemption request is received.
Investors wishing to redeem their shares in a Portfolio should contact their
Prudential Securities financial advisor or Prusec registered representative.
Payment for shares presented for redemption will be made by check within seven
days after receipt by Prudential Securities of a redemption request. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on such Exchange is restricted, (c) when an emergency
exists as a result of which disposal by a Portfolio of securities owned by it is
not reasonably practicable or it is not reasonably practicable for a Portfolio
fairly to determine the value of its net assets, or (d) during any other period
when the SEC, by order, so
53
<PAGE> 63
permits; provided that applicable rules and regulations of the SEC shall govern
as to whether the conditions prescribed in (b), (c) or (d) exist. If a Target
Program account is terminated, including a termination of such an account by
Prudential Securities or Prusec, all shares of the Portfolios held in that
account will be redeemed.
The Trust may redeem shares when a Target Program participant's account
value falls below $10,000 by reason other than (i) fluctuations in the
participant's account net asset value or (ii) redemptions to pay Target Program
fees if the investor does not restore the share value to more than $10,000
within 30 days after written notice by the Trust.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE. Shares of a Portfolio may be exchanged without payment
of any exchange fee for shares of another Portfolio at their respective net
asset values. There are no exchange privileges between the Portfolios and other
Prudential Mutual Funds.
An exchange of shares is treated for federal income tax purposes as a
redemption (sale) of shares in exchange by the shareholder, and an exchanging
shareholder may, therefore, realize a taxable gain or loss in connection with
the exchange.
For further information regarding the exchange privilege, investors should
contact their Prudential Securities financial advisor. Prudential Securities
reserves the right to reject any exchange request and the exchange privilege may
be modified or terminated after 60 days' written notice.
TAXES, DIVIDENDS AND DISTRIBUTIONS
Each Portfolio intends to continue to qualify and elect to be treated as a
regulated investment company under the Internal Revenue Code. Accordingly, each
Portfolio will not be subject to federal income taxes on its net investment
income and capital gains, if any, that it distributes to its shareholders. All
dividends out of net investment income, together with distributions of net
short-term gains (i.e., the excess of net short-term capital gains over net
long-term capital losses), will be taxable as ordinary income to the
shareholders whether or not reinvested. To the extent a Portfolio's income is
derived from certain dividends received from domestic corporations, a portion of
the dividends paid to corporate shareholders of the Portfolio will be eligible
for the 70% dividends received deduction. Any net capital gains (i.e., the
excess of net long-term capital gains over net short-term capital losses)
distributed to shareholders will be taxable as such to the shareholders, whether
or not reinvested and regardless of the length of time a shareholder has owned
his or her shares. The maximum long-term capital gains rate for individuals
currently is 28%. The maximum long-term capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary income.
Dividends attributable to the net investment income of the U.S. Government
Money Market Portfolio, Intermediate-Term Bond Portfolio, Mortgage Backed
Securities Portfolio, Total Return Bond Portfolio and International Bond
Portfolio will be declared daily and paid monthly. Shareholders of those
Portfolios receive dividends from the day following the purchase up to and
including the date of redemption. Dividends attributable to the net investment
income of the Large Capitalization Value Portfolio, Large Capitalization Growth
Portfolio, Small Capitalization Value Portfolio, Small Capitalization Growth
Portfolio and International Equity Portfolio will be declared and paid annually.
54
<PAGE> 64
Distributions of any net realized long-term and short-term capital gains earned
by a Portfolio will be made at least annually.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, will be treated as a
long-term capital loss to the extent of any capital gain distributions received
by the shareholder. Additionally, a capital loss realized upon a sale or
redemption of shares in a Portfolio will be deferred under the "wash sale" rules
of the Internal Revenue Code if the shareholder acquires shares in such
Portfolio during the 61-day period beginning 30 days before and ending 30 days
after the sale which gave rise to the loss.
Net investment income or capital gains earned by a Portfolio from foreign
securities may be subject to foreign income taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries that
entitle the Portfolios to a reduced rate of tax or exemption from tax on this
related income and gains. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Portfolio's assets to be invested
within various countries is not known. The Portfolios intend to operate so as to
qualify for treaty-reduced rates of tax where applicable. Furthermore, if a
Portfolio qualifies as a regulated investment company, if certain distribution
requirements are satisfied, and if more than 50% of the value of the Portfolio's
assets at the close of the taxable year consists of stocks or securities of
foreign corporations, the Portfolio may elect, for U.S. federal income tax
purposes, to treat foreign income taxes paid by the Portfolio that can be
treated as income taxes under U.S. income tax principles as paid by its
shareholders. If the Portfolio were to make an election, an amount equal to the
foreign income taxes paid by the Portfolio would be included in the income of
its shareholders and the shareholders would be entitled to credit their portions
of this amount against their U.S. tax liabilities, if any, or to deduct such
portions from their U.S. taxable income, if any. Shortly after any year for
which it makes an election, the Portfolio will report to its shareholders, in
writing, the amount per share of foreign tax that must be included in each
shareholder's gross income and the amount which will be available for deduction
or credit. No deduction for foreign taxes may be claimed by a non-corporate
shareholder who does not itemize deductions. Certain limitations will be imposed
on the extent to which the credit for foreign taxes may be claimed. As a result
of the election, shareholders who are non-resident alien individuals or foreign
entities may be subject to additional U.S. withholding tax on the foreign taxes
deemed distributed hereto, but be unable to claim a deduction or credit for such
taxes in the U.S. Except in the case of the International Equity Portfolio and
the International Bond Portfolio, it is not anticipated that any Portfolio will
satisfy the requirements for making the election to treat shareholders as having
paid foreign taxes paid by a Portfolio.
A Portfolio may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, a Portfolio's investments
in PFICs may subject the Portfolio to federal income taxes on certain gains
realized by the Portfolio.
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts). At
the end of each year, such investments held by a Portfolio will be required to
be "marked to market" for federal income tax purposes; that is, treated as
having been sold at market value. Sixty percent of any gain or loss recognized
on these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss,
55
<PAGE> 65
and the remainder will be treated as short-term capital gain or loss. See
"Taxes, Dividends and Distributions" in the Statement of Additional Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition 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 a Portfolio's investment company taxable income available to be distributed
to shareholders as ordinary income, rather than increasing or decreasing the
amount of the Portfolio's net capital gain. If currency fluctuation losses
exceed other investment company taxable income during a taxable year,
distributions made by the Portfolio during the year would be characterized as a
return of capital to shareholders, reducing the shareholder's basis in their
Portfolio shares.
For most non-Plan investors who are individuals and for Plans which pay the
Target Program fee by check, the Target Program fee may be treated as a
"miscellaneous itemized deduction" for federal income tax purposes. Under
current federal income tax law, an individual's miscellaneous itemized
deductions for any taxable year shall be allowed as a deduction only to the
extent that the aggregate of these deductions exceeds 2% of adjusted gross
income.
Under the Internal Revenue Code, each Portfolio is required to withhold and
remit to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law, or otherwise are subject
to backup withholding.
As a result of the allocation and any reallocation of assets between the
two Advisers of each of the four domestic equity Portfolios of the Fund, with
respect to those Portfolios, there may be tax ramifications relating to the sale
of assets in the form of increased short term or long term capital gains. As
described above, net short term gains derived by a Portfolio are taxed as
ordinary income. In order to maintain its tax status as a regulated investment
company under Subchapter M of the Internal Revenue Code, each Portfolio must
derive less than 30% of its gross income from the sale or other disposition of
stock and certain other securities held by the Portfolio for less than three
months. Additionally, Portfolios may also be subject to the "wash sale" rules of
the Internal Revenue Code as described above.
Any dividends out of net investment income and short-term capital gains
paid to a foreign shareholder will generally be subject to U.S. withholding tax
of 30% (or lower treaty rate if applicable).
Dividends and distributions will be paid in additional Portfolio shares, at
net asset value computed on the payment date and record date, respectively, or
such other date as the Trustees may determine, unless the shareholder elects in
writing not less than five business days prior to the record date to receive
such dividends and distributions in cash. Such election should be submitted to
the Trust or the investor's financial advisor. Each Portfolio will notify each
shareholder after the close of each Portfolio's taxable year both of the per
share amount and the taxable status of that year's dividends and distributions.
The foregoing is a general summary of the U.S. Federal Income tax consequences
of investing in a Portfolio. Shareholders are advised to consult their own tax
advisers regarding specific questions as to federal, state, local or foreign
taxes. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
56
<PAGE> 66
GENERAL INFORMATION
PERFORMANCE INFORMATION
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
From time to time the U.S. Government Money Market Portfolio may advertise
its "current yield" based on the net change, exclusive of realized and
unrealized gains or losses, in the value of a hypothetical account over a seven
calendar day base period. The U.S. Government Money Market Portfolio also
calculates its "effective annual yield," assuming weekly compounding, and its
tax-equivalent yield. Tax-equivalent yield shows the taxable yield an investor
would have to earn from a fully taxable investment in order to equal an after
taxes yield equivalent to the Portfolio's tax-free yield and is calculated by
dividing the Portfolio's current or effective yield by the result of one minus a
certain state tax rate. THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND IS NOT
INTENDED TO INDICATE AND IS NOT NECESSARILY REPRESENTATIVE OF FUTURE
PERFORMANCE.
OTHER PORTFOLIOS
FROM TIME TO TIME THE TRUST MAY ADVERTISE THE TOTAL RETURN OF A PORTFOLIO
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN, "AGGREGATE" TOTAL RETURN AND "YIELD")
IN ADVERTISEMENTS OR SALES LITERATURE. THESE FIGURES ARE BASED ON HISTORICAL
EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return"
shows how much an investment in a Portfolio of the Trust would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Portfolio) assuming that all distributions and dividends
paid by the Portfolio were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects actual
performance over a stated period of time. "Average annual" total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The Trust may also from time to time advertise the 30-day yield of a Portfolio.
The "yield" refers to the income generated by an investment in a Portfolio over
a one-month or 30-day period. This income is then "annualized," that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Trust may
also include comparative performance information for its Portfolios in
advertising or marketing the Trust's shares. Such performance information may
include data from Lipper Analytical Services, Inc., Morningstar Publications,
Inc., other industry publications, business periodicals, and market indices. See
"Performance Information" in the Statement of Additional Information. Further
performance information is contained in the Trust's annual report to
shareholders which may be obtained without charge.
DESCRIPTION OF SHARES
The Trust, organized as an unincorporated business trust in 1992 under the
laws of Delaware, is a trust fund of the type commonly known as a "business
trust."
57
<PAGE> 67
The shareholders of the Portfolios are each entitled to a full vote for
each full share of beneficial interest (par value $.001 per share) held (and
fractional votes for fractional shares). Shares of each Portfolio are entitled
to vote as a class only to the extent required by the provisions of the
Investment Company Act or as otherwise permitted by the Trustees in their sole
discretion. Pursuant to the Investment Company Act, shareholders of each
Portfolio have to approve the adoption of any investment advisory agreement
relating to such Portfolio and of any changes in certain investment policies
related thereto.
It is the intention of the Trust not to hold Annual Meetings of
Shareholders. The Trustees may call Special Meetings of Shareholders for action
by shareholder vote as may be required by the Investment Company Act or the
Declaration of Trust. Shareholders have certain rights, including the right to
call a meeting upon a vote of 10% of the Trust's outstanding shares for the
purpose of voting on the removal of one or more Trustees. The Trust may from
time to time, in its discretion and pursuant to applicable regulations, add
additional Portfolios to the Trust or, with the approval of the Shareholders of
an existing Portfolio, if necessary, terminate one or more of the Portfolios.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
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. Its mailing address is P.O.
Box 9131, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Trust. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Trust with the Securities
and Exchange Commission under the Securities Act of 1933. Copies of the
Registration Statement may be obtained at a reasonable charge from the SEC or
may be examined, without charge, at the office of the SEC in Washington, D.C.
58
<PAGE> 68
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA -- Debt rated AAA have 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 is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB represents a lower degree of
speculation than B. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
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.
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 sometime 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
A-1
<PAGE> 69
unreliable over any great length of time. Such bonds lack outstanding Investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable Investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
An S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as
high as for Issues designated A-1.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's, issuers rated Prime-1 (or supporting institutions) are considered to
have a superior capacity for repayment of senior short-term debt obligations.
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, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
A-2
<PAGE> 70
APPENDIX B
GLOSSARY OF INDICES
U.S. LARGE CAP STOCKS (S&P 500) -- The S&P 500 is a capital weighted index
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The S&P 500 is an unmanaged
index.
U.S. SMALL CAP STOCKS (RUSSELL 2000) -- The Russell 2000 Index is a stock market
index comprised of the 2000 smallest U.S. domiciled publicly traded common
stocks that are included in the Russell 3000 Index. These common stocks
represent approximately 11% of the 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 1023 non-U.S. companies
representing 18 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 (SALOMON NON U.S.) -- Based on the Salomon Brothers World
Bond Index excluding issues denominated in U.S. dollars. This index measures the
total return of high-quality securities in major sectors of the international
bond market. The index covers approximately 600 bonds across 10 currencies.
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 BROTHERS MORTGAGES INDEX (SALOMON MORTGAGE) -- This index is comprised
of mortgage-backed pass-through securities consisting of 70% pass-through
securities issued by the Government National Mortgage Association, 23% by the
Federal Home Loan Mortgage Corporation, 5% by the Federal National Mortgage
Association and the balance a mixture of conventional and Federal Housing
Administration project mortgage pools.
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.
B-1
<PAGE> 71
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.
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.
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.
B-2
<PAGE> 72
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.
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.
B-3
<PAGE> 73
APPENDIX C
EXEMPTIONS
The following is the text of the proposed and final exemptions from the
Department of Labor from certain provisions of the Employee Retirement Income
Security Act of 1974 relating to the purchase of shares and participation in
TARGET by certain retirement plans.
PROPOSED EXEMPTION
FEDERAL REGISTER
VOL. 58, No. 131
Monday, July 12, 1993
Notices
DEPARTMENT OF LABOR (DOL)
Pension and Welfare Benefits Administration (PWBA)
. . .
Prudential Mutual Fund Management, Inc. (PMF) Located in New York, NY
[Application No. D-9217]
PROPOSED EXEMPTION
SECTION I. COVERED TRANSACTIONS
The Department is considering granting an exemption under the authority of
section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance
with the procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, the restrictions of section
406(a) of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code,
shall not apply to the purchase or redemption of shares by an employee benefit
plan, an individual retirement account (the IRA) or a retirement plan for a
self-employed individual (the Keogh Plan; collectively, the Plans) in the Target
Portfolio Trust (the Trust) established in connection with such Plans'
participation in the Target Personal Investment Advisory Service (the Target
Program). In addition, the restrictions of section 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(E) and (F) of the Code, shall not apply to the provision,
by Prudential Securities Incorporated (Prudential Securities), of investment
advisory services to an independent fiduciary of a participating Plan (the
Independent Plan Fiduciary) which may result in such fiduciary's selection of
portfolios of the Trust (the Portfolios) in the Target Program for the
investment of Plan assets.
This exemption is subject to the following conditions that are set forth
below in Section II.
SECTION II. GENERAL CONDITIONS
(1) The participation of Plans in the Target Program is approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of Prudential Securities and/or its affiliates covered by an
IRA not subject to Title I of the Act will be considered an Independent Plan
Fiduciary with respect to such IRA.
(2) The total fees paid to Prudential Securities and its affiliates
constitute no more than reasonable compensation.
(3) No Plan pays a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares remain at least
as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(5) Prudential Securities provides written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(6) Any recommendation or evaluation made by Prudential Securities to an
Independent Plan Fiduciary are implemented only at the express direction of such
independent fiduciary.
C-1
<PAGE> 74
(7) Prudential Securities provides investment advice in writing to an
Independent Plan Fiduciary with respect to all available Portfolios.
(8) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio is independent of Prudential Securities
and its affiliates.
(9) The quarterly investment advisory fee that is paid by a Plan to
Prudential Securities for investment advisory services rendered to such Plan is
offset by such amount as is necessary to assure that PMF retains no more than 20
basis points from any Portfolio (with the exception of the U.S. Government Money
Market Portfolio for which PMF retains an investment management fee of 12.5
basis points) containing investments attributable to the Plan investor.
(10) With respect to its participation in the Target Program prior to
purchasing Trust shares,
(a) Each Plan receives the following written or oral disclosures or
questionnaires from Prudential Securities or the Trust:
(1) A copy of the prospectus (the Prospectus) for the Trust discussing
the investment objectives of the Portfolios comprising the Trust, the
policies employed to achieve these objectives, the corporate affiliation
existing between Prudential Securities, PMF and its subsidiaries, the
compensation paid to such entities and additional information explaining
the risks attendant to investing in the Trust.
(2) Upon written or oral request to Prudential Securities, the
Independent Plan Fiduciary will be given a Statement of Additional
Information supplementing the Prospectus which describes the types of
securities and other instruments in which the Portfolios may invest, the
investment policies and strategies that the Portfolios may utilize,
including a description of the risks.
(3) As applicable, an Investor Profile Questionnaire given to the
Independent Plan Fiduciary or eligible participant of a Plan providing
for participant-directed investments (the section 404(c) Plan).
(4) As applicable, a written analysis of Prudential Securities' asset
allocation decision and recommendation of specific Portfolios given to
the Independent Plan Fiduciary or the participant in a section 404(c)
Plan.
(5) A copy of the investment advisory agreement between Prudential
Securities and such Plan relating to participation in the Target Program.
(6) Upon written request to the Trust, a copy of the respective
investment advisory agreement between Prudential Securities and the
Sub-Advisers.
(7) As applicable, an explanation by a Prudential Securities Financial
Advisor (the Financial Advisor) to section 404(c) Plan participants or
the Independent Plan Fiduciary of the services offered under the Target
Program and the operation and objectives of the Portfolios.
(8) Copies of the proposed exemption and grant notice describing the
exemptive relief provided herein.
(b) If accepted as an investor in the Target Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing to Prudential Securities, prior to purchasing Trust shares that such
fiduciary has received copies of the documents described in subparagraph
10(a) of this section.
(c) With respect to a section 404(c) Plan, written acknowledgment of the
receipt of such documents is provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, or, in some instances, the Plan participant).
Such Independent Plan Fiduciary will be required to represent in writing to
PMF that such fiduciary is (1) independent of PMF and its affiliates and (2)
knowledgeable with respect to the Plan in administrative matters and funding
matters related thereto, and able to make an informed decision concerning
participation in the Target Program.
(d) With respect to a Plan that is covered under title I of the Act,
where investment decisions are made by a trustee, investment manager or a
named fiduciary, such Independent Plan Fiduciary is required to acknowledge,
in writing, receipt of such documents and represent to PMF that such
fiduciary is (1) independent of PMF and its affiliates, (2) capable of
making an independent decision regarding the investment of Plan assets and
(3) knowledgeable with
C-2
<PAGE> 75
respect to the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision concerning participation in
the Target Program.
(11) Subsequent to its participation in the Target Program, each Plan
receives the following written or oral disclosures with respect to its ongoing
participation:
(a) Written confirmations of each purchase or redemption transaction by
the Plan with respect to a Portfolio.
(b) Telephone quotations from Prudential Securities of such Plan's
account balance.
(c) A monthly statement of account from Prudential Securities specifying
the net asset value of the Plan's investment in such account to the extent
there are transactions by the Plan.
(d) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees paid by
each Portfolio.
(e) A written quarterly monitoring report (the Quarterly Account
Monitor) containing a record of the performance of the Plan's assets
invested in the Target Program, the rates of return received by the Plan
with respect to such investments, the Plan's actual portfolio with a
breakdown of investments made in each Portfolio, year to date and cumulative
realized gains and losses and income received from each Portfolio, a summary
of purchase, sale and exchange activity, dividends and interest received or
reinvested and market commentary. The Quarterly Account Monitor will also
contain an analysis and an evaluation of a Plan investor's account to
ascertain whether the Plan's investment objectives have been met and
recommending, if required, changes in Portfolio allocations.
(1) In the case of a section 404(c) Plan where the Independent Plan
Fiduciary has established an omnibus account in the name of the Plan (the
Undisclosed Account) with Prudential Securities, the Quarterly Account
Monitor will be provided to the Independent Plan Fiduciary.
(2) In the case of a section 404(c) Plan where the Independent Plan
Fiduciary opens an account for each Plan participant (the Disclosed
Account), the Quarterly Account Monitor will be furnished to each
participant and will set forth information pertaining to the
participant's individual account.
(f) Written disclosures to the Independent Plan Fiduciary, on a
quarterly and annual basis, of the (1) percentage of each Portfolio's
brokerage commissions that are paid to Prudential Securities and (2) the
average brokerage commission per share paid by each Portfolio to Prudential
Securities, as compared to the average brokerage commission per share paid
by the Trust to brokers other than Prudential Securities, both expressed as
cents per share.
(g) Periodic meetings with Financial Advisors, Independent Plan
Fiduciaries or if applicable, participants of Section 404(c) Plans, to
discuss the Quarterly Account Monitor or other questions that may arise.
(12) PMF maintains, for a period of six years, the records necessary to
enable the persons described in paragraph (13) of this section to determine
whether the conditions of this exemption have been met, except that (a) a
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of PMF and/or its affiliates, the records are
lost or destroyed prior to the end of the six year period, and (b) no party in
interest other than PMF shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (13) below.
(13)(a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section 504 of
the Act, the records referred to in paragraph (14) of this section are
unconditionally available at their customary location during normal business
hours by:
(1) Any duly authorized employee or representative of the Department or
the Internal Revenue Service (the Service);
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
C-3
<PAGE> 76
(4) Any participant or beneficiary of any participating Plan, or any
duly authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4) of this
paragraph (13) are authorized to examine the trade secrets of PMF or
commercial or financial information which is privileged or confidential.
SECTION III. DEFINITIONS
For purposes of this exemption:
(1) An "affiliate" of Prudential Securities includes --
(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control with
Prudential Securities. (For purposes of this subsection, the term "control"
means the power to exercise a controlling influence over the management or
policies of a person other than an individual.)
(b) Any officer, director or partner in such person, and
(c) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is
independent of Prudential Securities and its affiliates and is either
(a) A Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares of a Section 404(c) Plan,
(b) A participant in a Keogh Plan,
(c) An individual covered under a self-directed IRA which invests in
Trust shares, or
(d) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a title I Plan that does not permit
individual direction as contemplated by section 404(c) of the Act.
Effective date: If granted, this proposed exemption will be effective
March 15, 1993.
SUMMARY OF FACTS AND REPRESENTATIONS
1. The parties to the transactions are as follows:
a. Prudential Securities, located in New York, New York, is an indirect,
wholly owned subsidiary of the Prudential Insurance Company of America
(Prudential), the largest insurance company in the United States and the
second largest insurance company in the world. Prudential Securities offers
a broad spectrum of financial services to both individual and institutional
investors including cash management services, retirement and financial
planning services, mutual funds, investment management services and
insurance and annuity services. Among these services are a variety of asset
allocation programs. The investment management and financial services that
comprise Prudential Securities are involved with the management of more than
$50 billion in assets. Prudential Securities assists investors in selecting
Portfolios for investment in the Trust. In addition, Prudential Securities
serves as the distributor of Trust shares and provides investment allocation
advice to investors.
b. PMF, which is located in New York, New York, is an indirect wholly
owned subsidiary of Prudential. PMF is a registered investment adviser under
the Investment Advisers Act of 1940, as amended (the 1940 Act). PMF was
incorporated in May 1987 under the laws of the State of Delaware.
Currently, PMF is the investment manager to 35 open-end investment
companies, constituting all of the Prudential mutual funds. In addition, PMF
serves as investment manager or administrator to 19 closed-end investment
companies. These companies collectively have total assets of approximately
$41 billion. PMF serves as the investment manager of the Trust and the
underlying Portfolios.
C-4
<PAGE> 77
c. Prudential Mutual Fund Services, Inc. (PMFS) of Edison, New Jersey is
a wholly owned subsidiary of PMF. PMFS will serve as Transfer Agent and
Dividend Disbursing Agent for the Trust. In these capacities, PMFS maintains
certain books and records for the Trust.
d. Ibbotson Associates, Inc. (Ibbotson) of Chicago, Illinois, is an
investment consulting, data and software products firm that specializes in
applying investment theories and empirical findings to current business
practice. Ibbotson is not related to Prudential or its affiliates. Ibbotson
has developed software for the Target Program (described herein) which
involve investment profile matrices and asset allocation methodologies.
These matrices and methodologies translate investor needs, preferences and
attitudes into suggested portfolio allocations. Ibbotson will maintain and
update the software package from time to time as deemed appropriate by
Prudential Securities.
2. On July 31, 1992, Prudential Securities formed the Trust, a no load,
open-end, diversified management investment company registered under the
Investment Company Act of 1940, as amended. The Trust is organized as a Delaware
business trust and it has an indefinite duration. As of September 22, 1992, the
Trust had no assets.
The Trust consists of nine different portfolios which range from the U.S.
Government Money Market Portfolio to the International Equity Portfolio and
which pay monthly or annual dividends to investors. The composition of the
Portfolios covers a spectrum of investments which include U.S.
Government-related securities or equity or debt securities issued by foreign or
domestic corporations. The Portfolios are further categorized under two major
groupings-Equity and Income. No Portfolio of the Trust is permitted to invest
any of its assets in securities issued by Prudential Securities or companies
which are directly or indirectly controlled by, or under common control with
Prudential Securities. Further, no Portfolio of the Trust may engage in
principal transactions with Prudential Securities or its affiliates.
3. Shares in the Trust are being offered by Prudential Securities, as
distributor, to participants in the Target Program. The Target Program is an
investment advisory service pursuant to which the Asset Management Group of
Prudential Securities, in its capacity as investment adviser to participants in
the Target Program, in conjunction with Ibbotson, directly provides to investors
asset allocation recommendations and related services with respect to the
Portfolios based on an evaluation of an investor's investment objectives and
risk tolerances.
The Target Program is designed for mid-sized investors with assets of
$10,000 - $1 million. To participate in the Trust, each investor must open a
brokerage account with Prudential Securities by making a current, minimum
initial investment of $10,000.(3)
Although PMF anticipates that investors in the Trust will consist of
institutions and individuals, it is proposed that prospective investors include
Plans for which PMF may or may not currently maintain investment accounts. A
majority of these Plans may be IRAs or Keogh Plans. In addition, it is proposed
that Plans for which PMF or an affiliate serves as a prototype sponsor and/or a
nondiscretionary trustee or custodian be permitted to invest in the Trust.(4)
The applicants represent that the initial purchase of shares in the Trust by
a Plan may give rise to a prohibited transaction where PMF or an affiliate has a
party in interest relationship with the Plan. PMF also acknowledges that a
prohibited
- ---------------
(3) Shares in the Trust are not certificated for reasons of economy and
convenience. PMFS, the Trust's transfer agent, however, maintains a record
of each investor's ownership of shares. Although Trust shares are
transferable and accord voting rights to their owners, they do not confer
pre-emptive rights (i.e., the privilege of a shareholder to maintain a
proportionate share of ownership of a company by purchasing a
proportionate share of any new stock issues). PMF represents that in the
context of an open-end investment company that continuously issues and
redeems shares, a pre-emptive right would make the normal operations of
the Trust impossible.
As for the voting rights, PMF states that they are accorded to
recordholders of Trust shares. PMF notes that a recordholder of Trust
shares may determine to seek the submission of proxies by Plan
participants and vote Trust shares accordingly. In the case of individual
account plans such as Section 404(c) Plans, PMF believes that most Plans
will pass-through the vote to participants on a pro-rata basis.
(4) The Department notes that the general standards of fiduciary conduct
promulgated under the Act would apply to the participation in the Target
Program by an Independent Plan Fiduciary. Section 404 of the Act requires
that a fiduciary discharge his duties respecting a plan solely in the
interest of the plan's participants and beneficiaries and in a prudent
fashion. Accordingly, an Independent Plan Fiduciary must act prudently
with respect to the decision to enter into the Target Program with
Prudential Securities as well as with respect to the negotiation of
services that will be performed thereunder and the compensation that will
be paid to Prudential Securities and its affiliates. The Department
expects that an Independent Plan Fiduciary, prior to entering into the
Target Program, to understand fully all aspects of such arrangement
following disclosure by Prudential Securities of all relevant information.
C-5
<PAGE> 78
transaction could arise upon a subsequent purchase or redemption of shares in
the Trust by a participating Plan inasmuch as the party in interest relationship
between PMF and the Plan may have been established at that point.
Accordingly, the applicants have requested retroactive exemptive relief from
the Department with respect to the purchase and redemption from Prudential
Securities of shares in the Trust by a participating Plan where Prudential
Securities does not (a) sponsor the Plan (other than serving as a prototype
sponsor) or (b) exercise discretionary authority over such Plan's assets. (5) No
commissions or fees are being paid by a Plan with respect to the sale and
redemption transactions or a Plan's exchange of shares in a Portfolio for shares
of another Portfolio. If granted, the applicants request that the exemption be
made effective as of March 15, 1993.
4. Overall responsibility for the management and supervision of the Trust
and the Portfolios rests with the Trust's Board of Trustees (the Trustees) which
will initially be comprised of seven members. The Trustees approve all
significant agreements involving the Trust and the persons and companies that
provide services to the Trust and the Portfolios. Three of the Trustees and all
of the Trust's executive officers are affiliated with PMF and/or its affiliates.
The four remaining Trustees are not affiliated with PMF.
5. Under its management agreement entered into with the Trust, PMF, as
investment manager, manages the investment operations of the Trust, administers
the Trust's affairs and is responsible for the selection, subject to the review
and approval of the Trustees, of the Sub-Advisers of each Portfolio. (6)
Through the Target Program, Prudential Securities provides a Plan investor
with non-binding, asset allocation recommendations with respect to such
investor's investments in the Portfolios. In order to make these evaluations,
Prudential Securities will furnish copies of an Investor Profile Questionnaire,
designed to elicit information about the specific investment needs, objectives
and expectations of the investor, to the Independent Plan Fiduciary or
participant of a Title I Plan, as provided below, or to an IRA or a Keogh Plan.
In the case of a Plan where the Independent Plan Fiduciary has established a
Disclosed Account in the name of each Plan participant (such as in a section
404(c) Plan), Prudential Securities will furnish copies of the Investor Profile
Questionnaire to each of the Plan participants for response. However, if the
Independent Plan fiduciary establishes an Undisclosed Account with Prudential
Securities in the name of the Plan, Prudential Securities will provide the
Independent Plan Fiduciary, upon oral or written request and at no additional
cost, with sufficient copies of the Investor Profile Questionnaire so that the
Independent Plan Fiduciary may distribute such questionnaire to Plan
participants. Prudential Securities, if requested, will also perform, at no
additional cost, the asset allocation analyses for each of these participants.
6. Based upon data obtained from the Investor Profile Questionnaire,
Prudential Securities evaluates the investor's risk tolerances and financial
goals. Prudential Securities then provides investment advice as to the
appropriate mix of investment Portfolios of the Trust that are designed to
balance the investor's goals, objectives and risk tolerances as part of a
long-term investment strategy.
The applicants represent that Prudential Securities does not have any
discretionary authority or control with respect to the allocation of an
investor's assets among the Portfolios. In the case of an IRA or Keogh Plan, the
applicants represent that all of Prudential Securities' recommendations and
evaluations are presented to the Independent Plan Fiduciary and are implemented
only if accepted an acted upon by such Independent Plan Fiduciary. However, in
the case of a Plan such as a section 404(c) Plan, PMF represents that
Independent Plan Fiduciaries or participants in such Plan are presented with
- ---------------
(5) PMF represents that to the extent employee benefit plans that are
maintained by PMF purchase or redeem shares in the Trust, such
transactions will meet the provisions of Prohibited Transaction Exemption
(PTE) 77-3 (42 FR 18734, April 8, 1977). The applicants further represent
that, although the exemptive relief proposed above would not permit PMF or
an affiliate (while serving as a Plan fiduciary with discretionary
authority over the management of a Plan's assets) to invest those assets
over which it exercises discretionary authority in Trust shares, a
purchase or redemption of Trust shares under such circumstances would be
permissible if made in compliance with the terms and conditions of PTE
77-4 (42 FR 18732, April 8, 1977). The Department expresses no opinion
herein as to whether such transactions will comply with the terms and
conditions of PTEs 77-3 and 77-4.
(6) Subject to the supervision and direction of the Trustees, PMF provides to
the Trust investment management evaluation services principally by
performing initial review on prospective Sub-Advisers for each Portfolio
and thereafter monitoring each Sub-Adviser's performance. In evaluating
prospective Sub-Advisers, PMF considers, among other factors, each Sub-
Adviser's level of expertise, consistency of performance and investment
discipline or philosophy. PMF has the responsibility for communicating
performance expectations and evaluations to the Sub-Advisers and
ultimately recommending to the Trustees whether the Sub-Advisers'
contracts should be renewed.
C-6
<PAGE> 79
Prudential Securities' recommendations and evaluations depending upon the type
of account the Independent Plan Fiduciary has established with Prudential
Securities.
7. With respect to an Undisclosed Account, the applicants represent that
Prudential Securities' recommendations will be presented to the Independent Plan
Fiduciary and such fiduciary will advise Prudential Securities of the investment
to be made for the Plan. However, with respect to a Disclosed Account, the
applicants note that Prudential Securities' recommendations will be presented to
the participants who will be responsible for acting upon that recommendation.
8. The applicants note that not all of the services described above will be
provided to every Plan. The services provided to each Plan or to each Plan
participant will depend on what is decided upon by the Independent Plan
Fiduciary. The applicants represent that an Independent Plan Fiduciary may
decide for its own reasons to establish an Undisclosed Account with Prudential
Securities under which Prudential Securities is not required to provide
investment allocation services to each Plan participant. The applicants state
that an Independent Plan Fiduciary may already have an established relationship
with a recordkeeper which, depending on the recordkeeper's accounting system,
makes it administratively desirable for the Independent Plan Fiduciary to invest
a Plan's assets on an undisclosed basis instead of on a disclosed basis. The
recordkeeper would be responsible for making allocations to each participant's
account in the Plan.
However, if the Independent Plan Fiduciary requests a reduction in the level
of services, there will be no corresponding reduction in the fee that the
fiduciary pays Prudential Securities if the investment in the Target Program is
$100,000 or less. Only investments in excess of $100,000 in the Target Program
can result in the payment to Prudential Securities of a quarterly investment
allocation fee that is lower than 1.35 percent. (See Representation 17.)(7)
9. Based upon the investment advice and recommendations, which may or may
not be adopted, the Independent Plan Fiduciary, with respect to an Undisclosed
Account, the Plan participant, with respect to a Disclosed Account, or the IRA
or Keogh Plan participant, as applicable, selects the specific Portfolios.
Prudential Securities will continue to render Portfolio selection advice to
Plans or Plan fiduciaries relating to asset allocations among the selected
Portfolios.
10. As stated above, PMF is responsible, subject to the supervision and
direction of the Trustees, for selecting the Sub-Advisers which will provide
discretionary advisory services with respect to the investment of the assets of
the individual Portfolios on the basis of their performance in their respective
areas of expertise in asset management. PMF represents that there are presently
seven Sub-Advisers, all of which are independent of, and will remain independent
of, PMF and/or its affiliates(8). The Sub-Advisers are registered investment
advisers under the 1940 Act. They maintain their principal executive offices in
various regions of the United States.
11. Aside from the Investor Profile Questionnaire described above, in order
for a Plan to participate in the Target Program, Prudential Securities will
provide an Independent Plan Fiduciary with a copy of the Trust Prospectus. This
document discusses the investment objectives of the Portfolios comprising the
Trust, the policies employed to achieve these objectives, the corporate
affiliation existing between Prudential Securities, PMF and its subsidiaries,
the compensation paid to such entities and information explaining the risks
attendant to investing in the Trust. In addition, upon written or oral request
to Prudential Securities, the Independent Plan Fiduciary will be given a
Statement of Additional Information supplementing the Prospectus which describes
the types of securities and other instruments in which the Portfolios may
invest, the investment policies and strategies that the Portfolios may utilize
including a description of the risks. (9) Further, each Independent Plan
Fiduciary or if, applicable, Plan participant, will be given a copy of the
investment advisory agreement
- ---------------
(7) In this regard, the Department emphasizes that it expects the Independent
Plan Fiduciary to prudently consider the relationship of the fees to be
paid by the Plan to the level of services to be provided by Prudential
Securities. In light of the relatively fixed nature of the fees,
Independent Plan Fiduciaries should consider the appropriateness of this
arrangement in the context of a section 404(c) Plan where asset allocation
advice is not provided directly or indirectly to Plan participants.
In response to the Department's concern over this matter, Prudential
Securities represents that it will amend the Trust Prospectus and
Investment Advisory Agreement to include the following statement: "The
Independent Plan Fiduciary [has] [should] consider, in a prudent manner,
the relationship of the fees to be paid by the Plan along with the level
of services provided by Prudential Securities."
(8) Although there are presently nine Portfolios comprising the Trust, there
are only seven Sub-Advisers because two of the Sub-Advisers manage two
Portfolios.
(9) In the case of a section 404(c) Plan, Prudential Securities represents
that the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, will make available the Trust Prospectus to
section 404(c) Plan participants. If requested by such Plan administrator,
trustee or named fiduciary, the Prudential Securities will make available
to such Independent Plan Fiduciaries sufficient quantities of Prospectuses
for distribution to Plan participants, as well as provide Statements of
Additional Information to any parties upon request.
C-7
<PAGE> 80
between Prudential Securities and such Plan relating to participation in the
Target Program including copies of the notice of proposed exemption and grant
notice for the exemptive relief provided herein. Upon written request to the
Trust, Prudential Securities will also provide an Independent Plan Fiduciary or
if applicable, Plan participant, with a copy of the respective investment
advisory agreement between PMF and the Sub-Advisers. (Independent Plan
Fiduciaries or Plan participants will be apprised by Prudential Securities that
they may receive the aforementioned information in sales and marketing material
and/or in communications made by brokers.)
With respect to a section 404(c) Plan, Financial Advisors affiliated with
Prudential Securities will also explain the services offered under the Target
Program as well as the operation and objectives of the Portfolios to either the
Independent Plan Fiduciary or to eligible section 404(c) Plan participants
depending upon the type of account the Independent Plan Fiduciary establishes
with Prudential Securities.(10)
If accepted as a Trust investor, an Independent Plan Fiduciary will be
required by Prudential Securities to acknowledge, in writing, prior to
purchasing Trust shares, that such fiduciary has received copies of the
aforementioned documents. With respect to a Plan that is covered by title I of
the Act (e.g., a defined contribution plan), where investment decisions will be
made by a trustee, investment manager or a named fiduciary, Prudential
Securities will require that such Independent Plan Fiduciary acknowledge in
writing receipt of such documents and represent to Prudential Securities that
such fiduciary is (a) independent of Prudential Securities and its affiliates,
(b) capable of making an independent decision regarding the investment of Plan
assets and (c) knowledgeable with respect to the Plan in administrative matters
and funding matters related thereto, and able to make an informed decision
concerning participation in the Target Program. With respect to a section 404(c)
Plan, written acknowledgment of the receipt of such documents will be provided
by the Independent Plan Fiduciary (i.e., the Plan administrator, trustee or
named fiduciary, as the recordholder of Trust shares, or in some instances, the
Plan participant). Such Independent Plan Fiduciary will be required to
represent, in writing, to Prudential Securities that such fiduciary is (a)
independent of Prudential Securities and its affiliates and (b) knowledgeable
with respect to the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision concerning participation in the
Target Program.
12. Prudential Securities will provide all parties that execute the
investment advisory agreement and in whose name the Target Program account is
registered with written confirmations of each purchase and redemption of shares
of a Portfolio, telephone quotations of such investor's account balance, a
monthly statement of account specifying the net asset value of a Plan's assets
that are invested in such account (to the extent there are transactions
involving the account), and a written quarterly Target Program account
statement. The Quarterly Account Monitor is designed to include a record of the
performance of the client's assets and rates of return as compared to several
appropriate market indices (illustrated in a manner that reflects the effect of
any fees for participation in the Target Program actually incurred during the
period), the client's actual portfolio with a breakdown of investments made in
each Portfolio, year to date and cumulative realized gains and losses and income
received from each Portfolio, a summary of purchase, sale and exchange activity
and dividends and interest received or reinvested as well as a market
commentary. In addition, the Quarterly Account Monitor will contain an analysis
and an evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations. The Quarterly Account Monitor is described in the summary
of the Target Program attached to the front of the Trust's Prospectus.
If an Independent Plan Fiduciary of a section 404(c) Plan opens a Disclosed
Account for each Plan participant, such participant will receive a Quarterly
Account Monitor reflecting information that pertains to the participant's
individual account. However, if an Independent Plan Fiduciary elects to
establish an Undisclosed Account with Prudential Securities, then Prudential
Securities will provide the Quarterly Account Monitor to the Independent Plan
Fiduciary. Such report will contain information relative to the Plan's account.
In addition, on both a quarterly and annual basis, commencing with the first
quarterly report due after this notice of proposed exemption is issued,
Prudential Securities will provide, as applicable, an Independent Plan Fiduciary
or a section 404(c) Plan participant with written disclosures of (a) the
percentage of each Portfolio's aggregate brokerage commissions that are paid to
Prudential Securities and (b) the average brokerage commission per share paid by
each
- ---------------
(10) The Department is expressing no opinion as to whether the information
provided under the Target Program is sufficient to enable a participant to
exercise independent control over assets in his or her account as
contemplated by section 404(c) of the Act.
C-8
<PAGE> 81
Portfolio to Prudential Securities, as compared to the average brokerage
commission per share paid by each Portfolio to brokers other than Prudential
Securities, both expressed as cents per share. With respect to a Disclosed
Account established for a section 404(c) Plan participant, Prudential Securities
will provide the brokerage report to the participant and not to the Independent
Plan Fiduciary.
Further, the Independent Plan Fiduciary or section 404(c) Plan participant,
as applicable, will have access to a Financial Advisor for the discussion of any
questions that may arise.
13. A Plan wishing to redeem Trust shares must communicate such request in
writing or by telephone to Prudential Securities. Redemption requests received
in proper form prior to the close of trading on the New York Stock Exchange (the
NYSE) will be effected at the net asset value per share determined on that day.
Redemption requests received after the close of regular trading on the NYSE will
be effected at the net asset value at the close of business of the next day,
except on weekends or holidays when the NYSE is closed. A Portfolio is required
to transmit redemption proceeds for credit to an investor's account with PMF or
to an "introducing" broker(11) within 5 business days after receipt of the
redemption request. Prudential Securities will place redemption proceeds in the
client's brokerage account and will, in the absence of receiving investment
instructions, place all such assets in a money market fund (other than the
Trust's U.S. Government Money Market Portfolio) which may be affiliated with
Prudential Securities.(12)
Due to the high costs of maintaining small accounts, the Trust may also
redeem an account where the current value is $10,000 or less, provided the Plan
has been given at least 30 days' advance written notice in which to increase the
account balance to more than the $10,000 amount. The proceeds of such redemption
will be deposited in the investor's brokerage account unless Prudential
Securities is otherwise instructed.(13)
14. Shares of a Portfolio may be exchanged by an investor, without the
payment of any fees, for shares of another Portfolio at their respective net
asset values. However, Portfolio shares are not exchangeable with shares of
other Prudential Mutual Funds.
15. With respect to brokerage transactions that are entered into under the
Target Program for a Portfolio, such transactions may be executed through
Prudential Securities, if in the judgment of the Sub-Adviser, the use of such
broker-dealer is likely to result in price and execution at least as favorable,
and at a commission charge at least as comparable to those of other qualified
broker-dealers. In addition, Prudential Securities may not execute transactions
for a Portfolio on the floor of any national securities exchange but it may
effect transactions by transmitting orders to other brokers for execution. In
this regard, Prudential Securities is required to pay fees charged by those
persons performing the floor brokerage elements out of the brokerage
compensation it receives from a Portfolio.
16. Each Portfolio bears its own expenses, which generally include all costs
that are not specifically borne by PMF, Prudential Securities, the Sub-Advisers
or PMFS. Included among a Portfolio's expenses are costs incurred in connection
with the Portfolio's organization, investment management and administration
fees, fees for necessary professional and brokerage services, fees for any
pricing service, the costs of regulatory compliance and costs associated with
maintaining the Trust's legal existence and shareholder relations. No Portfolio,
however, will impose sales charges on purchases, reinvested dividends, deferred
sales charges, redemption fees, nor will any Portfolio incur distribution
expenses.
17. The total fees that are paid to Prudential Securities and its affiliates
will constitute no more than reasonable compensation. In this regard, for its
asset allocation and related services, Prudential Securities will charge an
investor a quarterly investment advisory fee. The "outside fee," which is
computed quarterly, ranges annually from .50 percent up to a
- ---------------
(11) Prudential Securities provides clearance, settlement and other back office
services to other broker-dealers. Prudential Securities may also provide
confirmations and account statements to clients of brokers who have
"introduced" clients to Prudential Securities. If a Plan uses an
introducing broker, the arrangement between the Plan and that broker will
define whether the broker is authorized by the Plan to accept redemption
proceeds.
(12) The applicants are not requesting, nor is the Department proposing,
exemptive relief with respect to the investment, by Prudential Securities,
of redemption proceeds in an affiliated money market fund where the Plan
investor has not given investment instructions. The applicants represent
that to the extent Prudential Securities is considered a fiduciary, such
investments will comply with the terms and conditions of PTE 77-4.
However, the Department expresses no opinion herein on whether such
transactions are covered by this class exemption.
(13) The 30 day limit does not restrict a Plan's ability to redeem its interest
in the Trust. The 30 day notice period is provided to give a Plan an
opportunity to increase the value of the assets in its Plan account with
Prudential Securities to an amount in excess of $10,000. If desired, the
Plan may still follow the redemption guidelines described in
Representation 13 above.
C-9
<PAGE> 82
maximum of 1.35 percent of the average annual net assets held in a Target
Program account invested by the Plans in the Equity and Income Portfolios. The
outside fee will be charged directly to an investor and it will not be affected
by the allocation of assets among the Equity or the Income Portfolios nor by
whether an investor follows or ignores Prudential Securities' advice.(14) The
outside fee can be negotiated to below the 1.35 percent maximum only if the Plan
invests an aggregate amount of $100,000 or greater in the Target Program. In the
case of Plans, the outside fee may be paid by the Plan or by the Plan sponsor
or, in the case of IRAs only, the fee may be paid by the IRA beneficiary
directly.
For Plan investors, the outside fee will be payable in full within 6
business days after the trade date for the initial investment in the Portfolios
and will be based on the value of assets in the Target Program on the trade date
of the initial investment. The initial fee payment will cover the period from
the initial investment trade date through the last calendar day of the calendar
quarter, and the fee will be pro-rated accordingly. Thereafter, the quarterly
fee will cover the period from the first calendar day through the last calendar
day of the current calendar quarter. The quarterly fee is based on the value of
assets in the Target Program measured as of the last calendar day of the
previous quarter and is payable on the fifth business day of the current
quarter.(15)
18. Each time that additional funds aggregating $10,000 or more are invested
in the Portfolios during any one quarter, the applicable fee, pro-rated for the
number of calendar days then remaining in the quarter and covering the amount of
such additional funds, shall be charged and be payable 6 business days later. In
the case of redemptions aggregating $10,000 or more during a quarter, the fee
will be reduced accordingly, pro-rated for the number of calendar days then
remaining in the quarter.
In addition, for investment management and related services provided to the
Trust, PMF is paid, from each Portfolio, a management fee which is computed
daily and paid monthly at an annual rate ranging from .25 percent to .70 percent
of the value of the Portfolio's average daily net assets depending upon the
Portfolio's objective. From these management fees, PMF compensates the
Sub-Advisers. This "inside fee," which is the difference between the individual
Portfolio's total management fee and the fee paid by PMF to the Sub-Adviser,
varies from 12.5 to 30 basis points depending on the Portfolio. In addition,
pursuant to a Transfer Agency and Service Agreement with the Trust, PMFS will be
paid an annual fee of $35 per Target Program participant out of the operating
expenses of the Portfolios.(16)
- ---------------
(14) Prudential Securities represents that the outside fee is not imposed on
the accounts of employees of Prudential and its subsidiaries, including
PMF, the accounts of their immediate families, IRAs and certain employee
pension benefit plans for these persons. With respect to employee benefit
plans maintained by PMF or its affiliates for their employees, the
applicants assert that such waiver would be required by PTE 77-3.
(15) The applicants represent that an Independent Plan Fiduciary or Plan
participant may change Portfolio allocations on any business day and there
are no limitations as to how frequently Portfolio allocations can be made.
The applicants also state that assets which are subsequently added to a
Target Program account after the beginning of any calendar quarter (and
are allocated in accordance with the Independent Plan Fiduciary's or
participant's asset allocation decision) will not be subject to the
outside fee for that quarter until such additional investments "aggregate"
(i.e., new money invested during the quarter) $10,000 or more. When this
occurs, the applicants explain that the outside fee will be assessed on
such additional assets and will be payable six business days thereafter
(pro-rated based on the length of time remaining in the current calendar
quarter). If the additional investments have not reached the $10,000 level
by the last day of the calendar quarter, the applicants state that such
investments will start being subject to the outside fee as of the first
business day of the next calendar quarter.
(16) The applicants represent that if an Undisclosed Account is established by
an Independent Plan Fiduciary only one $35 fee will be levied.
C-10
<PAGE> 83
19. The management fees that are paid at the Portfolio level to PMF and the
Sub-Advisers are set forth in the table below. As noted in the table, the sum of
the management fees paid by a Portfolio to PMF and the Sub-Advisers (S-A) and
retained by such entities equals the total management fee paid by the Portfolio.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TOT. MGT. S-A RET. PMF RET.
PORTFOLIO FEE (%) FEE (%) FEE (%)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity:
Large capitalization value portfolio.................... .60 .30 .30
Large capitalization growth portfolio................... .60 .30 .30
Small capitalization value portfolio.................... .60 .30 .30
Small capitalization growth portfolio................... .60 .30 .30
International equity portfolio.......................... .70 .40 .30
Income:
U.S. Government Money Market portfolio.................. .25 .125 .125
Mortgage backed securities portfolio.................... .45 .25 .20
Intermediate-term bond portfolio........................ .45 .25 .20
Total return bond portfolio............................. .45 .25 .20
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
20. PMF proposes to offset, quarterly, against the outside fee that will be
paid to Prudential Securities such amount as is necessary to assure that PMF
retains no more than 20 basis points (the Reduction Factor) from any Portfolio
on investment of assets attributable to any Plan.(17)
Under the proposed fee offset, a Reduction Factor of .10 percent will be
applied against Prudential Securities' quarterly outside fee with respect to the
value of the Plan assets that have been invested in the Equity Portfolios only.
As noted above, the Income Portfolios do not involve a Reduction Factor because
the fee retained by PMF for these Portfolios does not exceed 20 basis points.
The Department, in conjunction with the applicants, has developed the
following example to demonstrate how the fee offset mechanism will work and
determine the aggregate fee that a hypothetical Plan investor might expect to
pay to both Prudential Securities and PMF in a given calendar quarter or year:
Assume that as of March 31, 1993, the average daily value of Trust shares
held by a Plan investor was $1,000. Investment assets attributable to the Plan
were distributed among five Portfolios: (1) U.S. Government Money Market
Portfolio in which the Plan made a $50 investment and from which PMF would not
retain, after payment of the sub-advisory fee to the Sub-Adviser, an inside fee
of .125 percent; (2) Total Return Bond Portfolio in which the Plan made a $200
investment and from which PMF would retain, after payment of the sub-advisory
fee to the Sub-Adviser, an inside fee of .20 percent; (3) Small Capitalization
Growth Portfolio in which the Plan made a $250 investment and from which PMF
would be entitled to retain, after payment of the sub-advisory fee to the
Sub-Adviser, an inside fee of .30 percent; (4) Large Capitalization Growth
Portfolio in which the Plan made a $250 investment and from which PMF would be
entitled to retain, after payment of the sub-advisory fee to the Sub-Adviser, an
inside fee of .30 percent and (5) International Equity Portfolio in which the
Plan made a $250 investment and from which PMF would be entitled to retain,
after payment of the sub-advisory fee to the Sub-Adviser, an inside fee of .30
percent.
- ---------------
(17) Prudential Securities asserts that it chose 20 basis points as the maximum
net fee retained for management services rendered to the Portfolios
because this amount represents the lowest percentage management fee
charged by PMF among the Portfolios (except that the fee paid by the U.S.
Government Money Market Portfolio to PMF is equal to 12.5 basis points).
C-11
<PAGE> 84
Assume that the Plan investor pays the maximum annual outside fee of 1.35
percent on the Portfolios so that the total outside fee for the calendar quarter
April 1 through June 30, 1993, prior to the offset, would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
OUTSIDE
AMOUNT MAX. OUTSIDE FEE FOR
PORTFOLIO INVESTED QUART. FEE QUART.
------------------
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Money Market portfolio...... $ 50 1.35%(.25) $0.1688
Total return bond portfolio................. 200 1.35%(.25) .6750
Small capitalization growth portfolio....... 250 1.35%(.25) .8438
Large capitalization growth portfolio....... 250 1.35%(.25) .8438
International equity portfolio.............. 250 1.35%(.25) .8438
------ -------
Total....................................... 1,000 $3.3752
--------------------------------------------------------------------------------------------------
</TABLE>
Under the proposed fee offset, the outside fee charged to the Plan must be
reduced by the Reduction Factor to ensure that PMF retains an inside fee of no
more than .20% from each of the Portfolios on investment assets attributable to
the Plan. The following table shows the Reduction Factor as applied to each of
the Portfolios comprising the Trust:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
PMF. RET. RED. FACT. PMF RET. FEE
PORTFOLIO FEE (%) (%) AFTER RED. FACT.
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity:
Large capitalization value portfolio........ 0.30 0.10 0.20
Large capitalization growth portfolio .30 0.10 .20
Small capitalization value portfolio........ .30 0.10 .20
Small capitalization growth portfolio....... .30 0.10 .20
International equity portfolio.............. .30 0.10 .20
Income:
U.S. Government Money Market portfolio...... .125 -- .125
Mortgage backed securities portfolio........ .20 -- .20
Intermediate-term bond portfolio............ .20 -- .20
Total return bond portfolio................. .20 -- .20
--------------------------------------------------------------------------------------------------
</TABLE>
Under the proposed fee offset, the quarterly outside fee will be reduced
with respect to Plan assets in the example that have been invested in the Small
Capitalization Growth Portfolio, the Large Capitalization Growth Portfolio and
the International Equity Portfolio only (i.e., the Equity portfolios). In the
example above, the U.S. Government Money Market Portfolio and the Total Return
Bond Portfolio do not require a reduction of the outside fee because the fee
retained by PMF for these Portfolios does not exceed 20 basis points. Therefore,
the quarterly offset for the Plan investor is computed as follows:
(.25)[($250)(.10%) + ($250)(.10%) + ($250)(.10%)] = $.1875.
In the foregoing example, the Plan investor, like all other investors in the
Target Program, would receive a statement for its Target Program account during
the fourth week of April 1993. This statement would include a debit notice for
the outside fee for the calendar quarter April 1 through June 30, as adjusted by
subtracting the quarterly offset from the quarterly outside fee as determined
above. The net quarterly outside fee that would be paid to Prudential Securities
would be determined as follows:
$3.3752 - $.1875 = $3.1877.
The account of the Plan investor (as with other investors) would be debited
on or about April 8, 1993 (i.e., the sixth business day of the calendar quarter)
for the amount of the net quarterly outside fee (pursuant to the authorization
contained in the Target Program investment advisory agreement, and as described
in the Target Program description attached to the cover of the Trust's
Prospectus).18
- ---------------
(18) The foregoing example illustrates that fact that the outside fee and
the fee offset are computed contemporaneously and that Plan investors will get
the benefit of the fee offset contemporaneously upon the payment of the outside
fee. Because the inside fee is paid monthly and the fee offset is computed
quarterly, the applicants represent that PMF will not receive the benefit of a
"float" as a result of such calculations because the fee offset will always be
realized no later than the time that the outside fee is paid (i.e., on or about
the sixth business day of the first month of the calendar quarter). Since the
inside fee is paid at the end of each calendar month, Plan investors will
realize the full benefit of the offset before the time that the inside fee is
paid for the second and third months of the calendar quarter.
C-12
<PAGE> 85
Assuming the Plan investor wishes to gain a more realistic perspective of
the aggregate quarterly and annual fees that would be paid to both Prudential
Securities and PMF at both the Plan level and the Portfolio level, the investor
would include within the computation on the net quarterly outside fee, the
quarterly inside fee that such investor would be paying to PMF.
The quarterly, aggregate fee calculation would be computed as follows:
$3.1877, representing the quarterly net outside fee paid to Prudential
Securities + (.25) [(.125%)($50) + (.20%)($200) + (.30)($250 + $250 + $250)] or
$.6781, representing the quarterly inside fee paid to PMF = $3.8658, which
represents the quarterly fee that would be paid to Prudential Securities and
PMF for services provided to the Plan investor.
The total annual fee that the Plan investor would pay to both Prudential
Securities and PMF would be equal to (4)[$3.1877 (net outside fee) + $.6781
(inside fee)] or $15.4632 per $1,000 investment, or a total fee percentage of
1.55%.
21. Because PMF will retain an inside fee of 12.5 basis points with respect
to assets invested in the U.S. Government Money Market Portfolio, the applicants
note that a potential conflict may exist by reason of the variance in net inside
fees among the U.S. Government Money Market Portfolio and the other Portfolios.
The applicants also recognize that this factor could result in the
recommendation by Prudential Securities of a higher fee-generating Portfolio to
an investing Plan. To help address this potential conflict, Prudential
Securities will disclose to all participants in the Target Program the fee
differentials of the various Portfolios.
22. The books of the Trust will be audited annually by independent,
certified public accountants selected by the Trustees and approved by the
investors. All investors will receive copies of an audited financial report no
later than 60 days after the close of each Trust fiscal year. The books and
financial records of the Trust will be open for inspection by any investor,
including the Department, the Service and the Securities and Exchange
Commission, at all times during regular business hours.
23. In summary, it is represented that the transactions satisfy the
statutory criteria for an exemption under section 408(a) of the Act because: (a)
The investment of a Plan's assets in the Target Program will be made and
approved by a Plan fiduciary which is independent of Prudential Securities and
its affiliates such that Independent Plan Fiduciaries will maintain complete
discretion with respect to participating in the Target Program; (b) Independent
Plan Fiduciaries will have an opportunity to redeem their shares in the Trust in
such fiduciaries' individual discretion; (c) no Plan will pay a fee or
commission by reason of the acquisition or redemption of shares in the Trust;
(d) prior to making an investment in the Trust, each Independent Plan Fiduciary
will receive offering materials and disclosures from either PMF or Prudential
Securities which disclose all material facts concerning the purpose, fees,
structure, operation, risks and participation in the Target Program; (e)
Prudential Securities will provide written documentation to an Independent Plan
Fiduciary of its recommendations or evaluations based upon objective criteria;
(f) any Sub-Adviser that is appointed by Prudential Securities to exercise
investment discretion over a Portfolio will always be independent of Prudential
Securities and its affiliates; (g) the annual investment advisory fee that is
paid by a Plan to Prudential Securities for investment advisory services
rendered to such Plan will be offset by such amount as is necessary to assure
that PMF retains no more than 20 basis points from any Portfolio on investment
assets attributable to the Plan investor; (h) each Plan will receive copies of
the Trust's semi-annual and annual report which will include financial
statements for the Trust and investment management fees paid by each Portfolio;
and (i) on a quarterly and annual basis, Prudential Securities will provide
written disclosures to Independent Plan Fiduciaries with respect to (1) the
percentage of each Trust Portfolio's brokerage commissions that are paid to
Prudential Securities and its affiliates and (2) the average brokerage
commission per share paid by each Portfolio to Prudential Securities as compared
to the average brokerage commission per share paid by each Portfolio to brokers
other than Prudential Securities and its affiliates, both expressed as cents per
share.
For Further Information Contact: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
C-13
<PAGE> 86
FINAL EXEMPTION
FEDERAL REGISTER
VOL. 58, NO. 172
WEDNESDAY, SEPTEMBER 8, 1993
NOTICES
DEPARTMENT OF LABOR (DOL)
Pension and Welfare Benefits Administration (PWBA)
. . .
Prudential Mutual Fund Management, Inc. (PMF) Located in New York, NY
[Prohibited Transaction Exemption 93-59; Exemption Application No. D-9217]
EXEMPTION
SECTION I. COVERED TRANSACTIONS
The restrictions of section 406(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1) (A) through (D) of the Code, shall not apply to the purchase or
redemption of shares by an employee benefit plan, an individual retirement
account (the IRA) or a retirement plan for a self-employed individual (the Keogh
Plan; collectively, the Plans) in the Target Portfolio Trust (the Trust)
established in connection with such Plans' participation in the Target Personal
Investment Advisory Service (the Target Program). In addition, the restrictions
of section 406(b) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1) (E) and (F) of the
Code, shall not apply to the provision, by Prudential Securities Incorporated
(Prudential Securities), of investment advisory services to an independent
fiduciary of a participating Plan (the Independent Plan Fiduciary) which may
result in such fiduciary's selection of portfolios of the Trust (the Portfolios)
in the Target Program for the investment of Plan assets.
This exemption is subject to the following conditions that are set forth
below in Section II.
SECTION II. GENERAL CONDITIONS
(1) The participation of Plans in the Target Program is approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of Prudential Securities and/or its affiliates covered by an
IRA not subject to title I of the Act will be considered an Independent Plan
Fiduciary with respect to such IRA.
(2) The total fees paid to Prudential Securities and its affiliates
constitute no more than reasonable compensation.
(3) No Plan pays a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares remain at least
as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(5) Prudential Securities provides written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(6) Any recommendation or evaluation made by Prudential Securities to an
Independent Plan Fiduciary are implemented only at the express direction of such
independent fiduciary.
(7) Prudential Securities provides investment advice in writing to an
Independent Plan Fiduciary with respect to all available Portfolios.
(8) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio is independent of Prudential Securities
and its affiliates.
(9) The quarterly investment advisory fee that is paid by a Plan to
Prudential Securities for investment advisory services rendered to such Plan is
offset by such amount as is necessary to assure that PMF retains no more than 20
basis points from any Portfolio (with the exception of the U.S. Government Money
Market Portfolio for which PMF retains an investment management fee of 12.5
basis points) containing investments attributable to the Plan investor.
C-14
<PAGE> 87
(10) With respect to its participation in the Target Program prior to
purchasing Trust shares,
(a) Each Plan receives the following written or oral disclosures or
questionnaires from Prudential Securities or the Trust:
(1) A copy of the prospectus (the Prospectus) for the Trust discussing
the investment objectives of the Portfolios comprising the Trust, the
policies employed to achieve these objectives, the corporate affiliation
existing between Prudential Securities, PMF and its subsidiaries, the
compensation paid to such entities and additional information explaining
the risks attendant to investing in the Trust.
(2) Upon written or oral request to Prudential Securities, the
Independent Plan Fiduciary will be given a Statement of Additional
Information supplementing the Prospectus which describes the types of
securities and other instruments in which the Portfolios may invest, the
investment policies and strategies that the Portfolios may utilize,
including a description of the risks.
(3) As applicable, an Investor Profile Questionnaire given to the
Independent Plan Fiduciary or eligible participant of a Plan providing
for participant-directed investments (the section 404(c) Plan).
(4) As applicable, a written analysis of Prudential Securities' asset
allocation decision and recommendation of specific Portfolios given to
the Independent Plan Fiduciary or the participant in a section 404(c)
Plan.
(5) A copy of the investment advisory agreement between Prudential
Securities and such Plan relating to participation in the Target Program.
(6) Upon written request to the Trust, a copy of the respective
investment advisory agreement between Prudential Securities and the
Sub-Advisers.
(7) As applicable, an explanation by a Prudential Securities Financial
Advisor (the Financial Advisor) to section 404(c) Plan participants or
the Independent Plan Fiduciary of the services offered under the Target
Program and the operation and objectives of the Portfolios.
(8) Copies of the proposed exemption and grant notice describing the
exemptive relief provided herein.
(b) If accepted as an investor in the Target Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing to Prudential Securities, prior to purchasing Trust shares that such
fiduciary has received copies of the documents described in subparagraph
10(a) of this section.
(c) With respect to a section 404(c) Plan, written acknowledgment of the
receipt of such documents is provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, or, in some instances, the Plan participant).
Such Independent Plan Fiduciary will be required to represent in writing to
PMF that such fiduciary is (1) Independent of PMF and its affiliates and (2)
knowledgeable with respect to the Plan in administrative matters and funding
matters related thereto, and able to make an informed decision concerning
participation in the Target Program.
(d) With respect to a Plan that is covered under title I of the Act,
where investment decisions are made by a trustee, investment manager or a
named fiduciary, such Independent Plan Fiduciary is required to acknowledge,
in writing, receipt of such documents and represent to PMF that such
fiduciary is (1) Independent of PMF and its affiliates, (2) capable of
making an independent decision regarding the investment of Plan assets, and
(3) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the Target Program.
(11) Subsequent to its participation in the Target Program, each Plan
receives the following written or oral disclosures with respect to its ongoing
participation:
(a) Written confirmations of each purchase or redemption transaction by
the Plan with respect to a Portfolio.
(b) Telephone quotations from Prudential Securities of such Plan's
account balance.
(c) A monthly statement of account from Prudential Securities specifying
the net asset value of the Plan's investment in such account to the extent
there are transactions by the Plan.
C-15
<PAGE> 88
(d) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees paid by
each Portfolio.
(e) A written quarterly monitoring report (the Quarterly Account
Monitor) containing a record of the performance of the Plan's assets
invested in the Target Program, the rates of return received by the Plan
with respect to such investments, the Plan's actual portfolio with a
breakdown of investments made in each Portfolio, year to date and cumulative
realized gains and losses and income received from each Portfolio, a summary
of purchase, sale and exchange activity, dividends and interest received or
reinvested and market commentary. The Quarterly Account Monitor will also
contain an analysis and an evaluation of a Plan investor's account to assist
the Independent Plan Fiduciary or section 404(c) Plan participant in
ascertaining whether the investment objectives for a Plan or an individual
account have been met and recommending, if required, changes in Portfolio
allocations.
(1) In the case of a section 404(c) Plan where the Independent Plan
Fiduciary has established an omnibus account in the name of the Plan with
Prudential Securities, the Quarterly Account Monitor will be provided to
the Independent Plan Fiduciary.
(2) In the case of a section 404(c) Plan where the Independent Plan
Fiduciary opens an account for each Plan participant, the Quarterly
Account Monitor will be furnished to each participant and will set forth
information pertaining to the participant's individual account.
(f) Written disclosures to the Independent Plan Fiduciary, on a
quarterly and annual basis, of the (1) Percentage of each Portfolio's
brokerage commissions that are paid to Prudential Securities and (2) the
average brokerage commission per share paid by each Portfolio to Prudential
Securities, as compared to the average brokerage commission per share paid
by the Trust to brokers other than Prudential Securities, both expressed as
cents per share.
(g) Notification that periodic meetings will be held, upon the request
of Plan investors, with Financial Advisors, Independent Plan Fiduciaries or,
if applicable, participants of section 404(c) Plans, to discuss the
Quarterly Account Monitor or other questions that may arise.
(12) PMF maintains, for a period of six years, the records necessary to
enable the persons described in paragraph (13) of this section to determine
whether the conditions of this exemption have been met, except that (a) A
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of PMF and/or its affiliates, the records are
lost or destroyed prior to the end of the six-year period, and (b) no party in
interest other than PMF shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (13) below.
(13)(a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section 504 of
the Act, the records referred to in paragraph (14) of this section are
unconditionally available at their customary location during normal business
hours by:
(1) Any duly authorized employee or representative of the Department or
the Internal Revenue Service (the Service);
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(4) Any participant or beneficiary of any participating Plan, or any
duly authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4) of this
paragraph (13) are authorized to examine the trade secrets of PMF or commercial
or financial information which is privileged or confidential.
C-16
<PAGE> 89
SECTION III. DEFINITIONS
For purposes of this exemption:
(1) An "affiliate" of Prudential Securities includes --
(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control with
Prudential Securities. (For purposes of this subsection, the term
"control" means the power to exercise a controlling influence over the
management or policies of a person other than an individual.)
(b) Any officer, director or partner in such person, and
(c) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is
independent of Prudential Securities and its affiliates and is either:
(a) A Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares of a section 404(c) Plan,
(b) A participant in a Keogh Plan,
(c) An individual covered under a self-directed IRA which invests in
Trust shares, or
(d) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a title I Plan that does not permit
individual direction as contemplated by section 404(c) of the Act.
For a more complete statement of the facts and representations supporting
the Department's decision to grant this exemption, refer to the notice of
proposed exemption (the Notice) published on July 12, 1993 at 58 FR 37514.
EFFECTIVE DATE: This exemption is effective March 15, 1993.
WRITTEN COMMENTS
The Department received one written comment with respect to the Notice and
no requests for a public hearing. The comment letter was submitted by PMF,
Prudential Securities and their affiliates (hereinafter, the Applicants) and it
suggested certain clarifications to the General Conditions and the Summary of
Facts and Representations of the Notice. Discussed below are the changes
suggested by the Applicants and the Department's responses to these amendments.
With respect to the General Conditions of the Notice that are set forth in
Section II, the Applicants suggest that the last sentence of paragraph (e) be
clarified to read as follows:
The Quarterly Account Monitor will also contain an evaluation of a
Plan investor's account to assist the Plan ascertaining whether its
investment objectives have been met and recommending, if required,
changes in Portfolio allocations.
However, after considering this comment, the Department has decided that further
revisions of Condition 11(e) are warranted to reflect the fact that it is the
Independent Plan Fiduciary or section 404(c) Plan participant rather than the
Plan who makes determinations about the prudence of continuing a Plan or account
investment in the Target Program. Therefore, the Department has modified the
last sentence of Condition 11(e)as follows:
The Quarterly Account Monitor will also contain an analysis and an
evaluation of a Plan investor's account to assist the Independent
Plan Fiduciary or section 404(c) Plan participant in ascertaining
whether the investment objectives for a Plan or an individual account
have been met and recommending, if required, changes in Portfolio
allocations.
C-17
<PAGE> 90
The Applicants also suggest that Condition 11(g) of the Notice, which
addresses ongoing oral and written disclosures that will be provided by
Prudential Securities to Plan investors, be modified to read as follows:
(g) Periodic meetings will be held at the request of Plan investors
with Financial Advisors, Independent Plan Fiduciaries or, if
applicable, participants of section 404(c) Plans, to discuss the
Quarterly Account Monitor or other questions that may arise.
Although generally agreeing with this comment, the Department believes it would
be more comprehensible if the words "Notification that" were inserted at the
beginning of this clause to emphasize the fact that Prudential Securities will
inform Plan investors of meetings with its Financial Advisors. Therefore, the
Department has modified Condition 11(g) as follows:
(g) Notification that periodic meetings will be held, upon the
request of Plan investors, with Financial Advisors, Independent Plan
Fiduciaries or, if applicable, participants of section 404(c) Plans,
to discuss the Quarterly Account Monitor or other questions that may
arise.
With respect to modifications to the Summary of Facts and Representations of
the Notice, the Applicants suggest that the last sentence of the second
paragraph of Representation 8 be revised to reflect the fact that, in certain
circumstances, the quarterly investment allocation fee can be lower than 1.35
percent. In response to this comment, the Department has revised Representation
8 to read as follows:
The quarterly allocation fee of 1.35 percent per annum may be
lowered in connection with (a) investments of $100,000 or more in the
Target Program or (b) the fee offset described in Representation 20.
The Applicants also request that the Department revise the first sentence of
Footnote 9 in which Prudential Securities states that a Plan administrator,
trustee or named fiduciary, as the recordholder of Trust share, will make
available the Trust Prospectus to section 404(c) Plan participants. The
Applicants explain that Prudential Securities is not in a position to make any
statements with respect to actions undertaken by Plan administrators, trustees
or named fiduciaries. Therefore, they recommend that the first sentence of
Footnote 9 be deleted.
The Department does not concur entirely with the suggested modification.
Rather than deleting the first sentence of the footnote, the Department believes
the sentence can be clarified to read as follows:
In the case of a section 404(c) Plan, Prudential Securities
represents that the Plan administrator, trustee or named fiduciary,
as the recordholder of Trust shares, has agreed to make the Trust
Prospectus available to section 404(c) Plan participants.
With respect to Representation 17 of the Notice, the Applicants state that
it is possible that the outside fee can be negotiated to a level below .50
percent. However, the Applicants anticipate that this fee will generally be no
lower than .50 percent. Therefore, they suggest that the Department revise the
third sentence of Representation 17 to reflect that the fee will generally range
from .50 percent to a maximum of 1.35 percent. The Department concurs with this
change and has revised sentence three of Representation 17 as follows:
The "outside fee," which is computed quarterly, generally ranges on
an annual basis from .50 percent up to a maximum of 1.35 percent of
the average annual net assets held in a Target Program account
invested by the Plans in the Equity and Income Portfolios.
The Applicants note that a Plan may be given the option of being separately
invoiced for the outside fee and paying such fee by check or having the outside
fee deducted from the Plan's account with Prudential Securities. In the event
the Plan elects to be invoiced separately for the outside fee, the Applicants
state that the fee is payable 45 days after the end of each calendar quarter or,
for additional investments, after such investments aggregate $10,000. Therefore,
the Applicants suggest that relevant portions of Representations 17, 18 and 20
of the Notice be revised as well as Footnote 18.
In response to this change, the Department has revised Representation 17 of
the Notice by changing the initial clause of the second paragraph to read "For
some Plan investors" instead of "For Plan investors" and adding a new third
paragraph which should be inserted at the end of the text of this
representation. The new paragraph would read as follows:
Plan investors will be given the option of either being separately
invoiced for the outside fee and paying such fee by check or having
the outside fee deducted from their Prudential Securities account. In
the event the Plan elects to be invoiced separately for the outside
fee, the fee is payable 45 calendar days after the end of the
C-18
<PAGE> 91
quarter. However, if the Plan elects to have the outside fee deducted
from its Plan account with Prudential Securities, such outside fee would
be payable within 6 business days of the trade date for an initial
investment or within 6 business days of the current calendar quarter.
The Department also wishes to clarify that the term "applicable fee" referred to
in the initial sentence of Representation 18 means the "outside fee" which will
be paid after a Plan's additional investments in the Trust total $10,000 or
more. Therefore, the Department has revised this sentence by placing the term
outside fee in parentheticals. The revised sentence reads as follows:
Each time that additional funds aggregating $10,000 or more are
invested in the Portfolios during any one quarter, the applicable fee
(i.e., the outside fee), pro-rated for the number of calendar days
then remaining in the quarter and covering the amount of such
additional funds, shall be charged and be payable 6 business days
later.
To reflect the dual billing procedure that Prudential Securities has
established for Plans investing in the Trust, the Department has revised
paragraph 5 of the hypothetical example contained in Representation 20 of the
Notice. The amended paragraph now reads as follows:
The account of the Plan investor (as with other investors) would be
debited on or about April 8, 1993 (i.e., the sixth business day of
the calendar quarter) for the amount of the net quarterly outside fee
(pursuant to the authorization contained in the Target Program
investment advisory agreement, and as described in the Target Program
description attached to the cover of the Trust's Prospectus. However,
if the Plan investor is separately invoiced by Prudential Securities,
the outside fee would be payable 45 calendar days after the end of
the calendar quarter.
The Department has also amended Footnote 18 by adding new language to that
contained in the parenthetical so as to reflect the two payment schedules for
the outside fee:
* * * i.e., on or about the sixth business day of the first month
of the calendar quarter or within 45 calendar days after the end of
the calendar quarter.
Finally, with respect to the example contained in Representation 20, the
Applicants point out that in Clause (1) of the first paragraph of the example
(id at 37520) inadvertently includes the word "not" prior to the word "retain."
The Department concurs with this change and has deleted the word "not" so that
Clause (1) will read as follows:
* * * (1) U.S. Government Money Market Portfolio in which the Plan
made a $50 investment and from which PMF would retain, after payment
of the subadvisory fee to the Sub-Adviser, an inside fee of .125
percent;
Upon a review of the entire record, including the written comment received,
the Department has determined to grant the exemption subject to the
modifications described above.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
C-19
<PAGE> 92
(This Page Intentionally Left Blank)
<PAGE> 93
(This Page Intentionally Left Blank)
<PAGE> 94
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Trust or the Distributor. This Prospectus does not constitute
an offer by the Trust or by the Distributor to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer in such jurisdiction.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................... 2
Trust Expenses.............................. 6
Financial Highlights........................ 8
Description of the Portfolios............... 13
Investment Objectives and Policies........ 13
Other Investments and Policies............ 21
Investment Restrictions................... 40
Management of the Trust..................... 41
Manager................................... 41
Advisers.................................. 43
Distributor............................... 49
Portfolio Transactions.................... 50
Net Asset Value............................. 50
Purchase and Redemption of Shares........... 51
Shareholder Services...................... 54
Taxes, Dividends and Distributions.......... 54
General Information......................... 57
Performance Information................... 57
Description of Shares..................... 57
Custodian and Transfer and Dividend
Disbursing Agent........................ 58
Additional Information.................... 58
Appendix A -- Description of Security
Ratings................................... A-1
Appendix B -- Glossary of Indices........... B-1
Appendix C -- Exemptions.................... C-1
</TABLE>
------------------------
TMF 158 A
CUSIP NOS.:
Large Capitalization Growth 875921 20 7
Large Capitalization Value 875921 10 8
Small Capitalization Growth 875921 40 5
Small Capitalization Value 875921 30 6
International Equity 875921 50 4
International Bond 875921 87 6
Total Return Bond 875921 88 4
Intermediate-Term Bond 875921 80 1
Mortgage Backed Securities 875921 70 2
U.S. Government Money Market 875921 60 3
[TARGET LOGO]
THE TARGET
PORTFOLIO TRUST(SM)
PROSPECTUS
MARCH , 1997
<PAGE> 95
THE TARGET PORTFOLIO TRUST(SM)
Statement of Additional Information
March , 1997
The Target Portfolio Trust(SM) (the Trust), is an open-end, management
investment company currently composed of ten separate investment portfolios (the
Portfolios) professionally managed by Prudential Mutual Fund Management LLC (PMF
or the Manager). Each Portfolio 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 ten Portfolios:
<TABLE>
<S> <C>
Equity Portfolios Income Portfolios
- Large Capitalization Growth Portfolio - International Bond Portfolio
- Large Capitalization Value Portfolio - Total Return Bond Portfolio
- Small Capitalization Growth Portfolio - Intermediate-Term Bond Portfolio
- Small Capitalization Value Portfolio - Mortgage Backed Securities Portfolio
- International Equity Portfolio - U.S. Government Money Market Portfolio
</TABLE>
Shares of the Portfolios are offered to participants in the Prudential
Securities Target Program(SM) (the Target Program), an investment advisory
service that provides to investors asset allocation recommendations with respect
to the Portfolios based on an evaluation of an investor's investment objectives,
preferences and risk tolerances. The Target Program or shares of the Trust are
also available to banks, trust companies and other investment advisory services.
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 March , 1997, a copy of
which may be obtained from the Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
Investment Objectives and Policies............................................ B-2 13
Additional Investment Information............................................. B-2 21
Investment Restrictions....................................................... B-24 40
Trustees and Officers......................................................... B-26 41
Manager....................................................................... B-31 41
Advisers...................................................................... B-35 43
Distributor................................................................... B-38 49
Portfolio Transactions and Brokerage.......................................... B-39 50
Purchase and Redemption of Shares............................................. B-42 51
Shareholder Investment Account................................................ B-42 54
Net Asset Value............................................................... B-44 50
Taxes, Dividends and Distributions............................................ B-46 54
Performance Information....................................................... B-48 57
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants................................................................. B-53 58
Financial Statements.......................................................... B-82 --
Independent Auditors' Report.................................................. B-98 --
Appendix A -- Historical Performance Data..................................... A-1
Appendix B -- General Investment Information.................................. A-5
Appendix C -- Information relating to The Prudential.......................... A-6
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 96
INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INVESTMENT INFORMATION
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in U.S. Government securities.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A Portfolio may purchase mortgage-related
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including GNMA, FNMA and FHLMC Certificates. See "Mortgage
Backed Securities" below. Mortgages backing the securities which may be
purchased by a Portfolio include conventional thirty-year fixed-rate mortgages,
graduated payment mortgages, fifteen-year mortgages, adjustable 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.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage backed securities can be expected to accelerate. When
mortgage obligations are prepaid, a Portfolio reinvests the prepaid amounts in
securities, the yields which reflect interest rates prevailing at that time.
Therefore, a Portfolio'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.
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
B-2
<PAGE> 97
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 Portfolio.
At a time when a Portfolio 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
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by a Portfolio. The termination of
option positions under these conditions would generally result in the
realization of capital losses, which would reduce a Portfolio's capital gains
distribution. Accordingly, a Portfolio 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. See "Additional Risks -- Options
Transactions and Related Risks."
MORTGAGE BACKED SECURITIES
As discussed in the Prospectus, the mortgage-backed securities purchased by
the Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio evidence an
interest in a specific pool of mortgages. Such securities are issued by GNMA,
FNMA and FHLMC.
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 that the
Portfolios purchase 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: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) 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); (viii) 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 (ix) 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. 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
B-3
<PAGE> 98
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.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
FHLMC SECURITIES. 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.
The 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. The
FHMLC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
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. FHLMC may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than 30 days
following (i) foreclosure sale, (ii) payment of a claim by any mortgage insurer
or (iii) the expiration of any right of redemption, whichever occurs later, but
in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. The obligations of FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by the full
faith and credit of the U.S. Government.
B-4
<PAGE> 99
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one-to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. An FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if such
mortgage securities are purchased at a discount, an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
(ARMs) are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. Generally, ARMs have a specified maturity
date and amortize principal over their life. In periods of declining interest
rates, there is a reasonable likelihood that ARMs will experience increased
rates of prepayment of principal. However, the major difference between ARMs and
fixed rate mortgage securities is that the interest rate and the rate of
amortization of principal of ARMs can and do change in accordance with movements
in a particular, pre-specified, published interest rate index.
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 to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. 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.
There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury Note
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds index (often related to ARMs issued
by FNMA), tend to lag changes in market rate levels and tend to be somewhat less
volatile.
B-5
<PAGE> 100
COLLATERALIZED MORTGAGE OBLIGATIONS. In reliance on a Securities and
Exchange Commission (the SEC) interpretation, a Portfolio's investments in
certain qualifying collateralized mortgage obligations (CMOs), including CMOs
that have elected to be treated as Real Estate Mortgage Investment Conduits
(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 (a) invest primarily in mortgage-backed securities, (b) do not
issue redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (d) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that a Portfolio selects CMOs or REMICs that do not
meet the above requirements, the Portfolio may not invest more than 10% of its
assets in all such entities and may not acquire more than 3% of the voting
securities of any single such entity.
OTHER INVESTMENTS
CUSTODIAL RECEIPTS. Each Portfolio may purchase obligations issued or
guaranteed as to principal and interest by the U.S. Government in the form of
custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain U.S. Treasury notes or bonds. Such notes
and bonds are held in custody by a bank on behalf of the owners. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investment Growth Receipts" (TIGRs) and "Certificates of Accrual on Treasury
Securities" (CATS). Each Portfolio will not invest more than 5% of its net
assets in such custodial receipts.
LOAN PARTICIPATIONS. The Intermediate-Term Bond Portfolio and Total Return
Bond Portfolio may invest up to 5% of 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 a Portfolio 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 Portfolio 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 a Portfolio acts as co-lender in connection with a participation
interest or when the Portfolio acquires a participation interest the terms of
which provide that the Portfolio will be in
B-6
<PAGE> 101
privity with the corporate borrower, the Portfolio will have direct recourse
against the borrower in the event the borrower fails to pay scheduled principal
and interest. In cases where the Portfolio lacks such direct recourse, the
Portfolio will look to the agent bank to enforce appropriate credit remedies
against the borrower.
The Portfolios believe 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. A Portfolio may
incur additional credit risk, however, when a Portfolio is in the position of
participant rather than a co-lender because the Portfolio 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 Portfolio and the
co-lender. However, in acquiring participation interests, the Portfolio will
conduct analysis and evaluation of the financial condition of each such
co-lender and participant to ensure that the participation interest meets the
Portfolio's high quality standard and will continue to do so as long as it holds
a participation. For purposes of a Portfolio's requirement to maintain
diversification for tax purposes, the issuer of a loan participation will be the
underlying borrower. In cases where a Portfolio does not have recourse directly
against the borrower, both the borrower and each agent bank and co-lender
interposed between the Portfolio and the borrower will be deemed issuers of the
loan participation for tax diversification purposes.
For purposes of each Portfolio's fundamental investment restriction against
investing 25% or more of its total assets in any one industry, a Portfolio 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.
COMMERCIAL PAPER. Each Portfolio 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.
ADDITIONAL RISKS
OPTIONS TRANSACTIONS AND RELATED RISKS
The International Equity Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each purchase put and call options and sell covered put and
call options which are traded on national securities exchanges and may also
engage in over-the-counter options transactions with recognized United States
securities dealers (OTC Options).
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 Portfolio becomes obligated during the term of the option, upon
B-7
<PAGE> 102
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
Portfolio writes a call option, the Portfolio 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 Portfolio 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
Portfolio 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 a
decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.
A Portfolio 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 Portfolio may therefore purchase
a put option on other carefully selected 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 Portfolio's investments and therefore the put option may not
provide complete protection against a decline in the value of the Portfolio's
investments below the level sought to be protected by the put option.
A Portfolio 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 Portfolio may, therefore, purchase call
options on other carefully selected debt securities the values of which the
Investment Adviser expects will have a high degree of positive correlation to
the values of the debt securities that the Portfolio intends to acquire. In such
circumstances the Portfolio 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 Portfolio 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 Portfolio.
A Portfolio may write options on securities in connection with
buy-and-write transactions; that is, the Portfolio may purchase a security and
concurrently write a call option against that security. If the call option is
exercised, the Portfolio's maximum gain will be the premium it received for
writing the option, adjusted upwards or downwards by the difference between the
Portfolio'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. 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
B-8
<PAGE> 103
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
Portfolio's maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between the Portfolio'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 every exchange-traded option transaction. In contrast, OTC options
are contracts between the Portfolio and its counter-party with no clearing
organization guarantee. Thus, when the Portfolio 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 Portfolio as well as the
loss of the expected benefit of the transaction. The Trustees will approve a
list of dealers with which the Portfolios may engage in OTC options.
When a Portfolio 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 Portfolio originally wrote the
OTC option. While the Portfolio 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 Portfolio, there can be no assurance that the Portfolio
will be able to liquidate an OTC option at a favorable price at any time prior
to expiration. Until the Portfolio is able to effect a closing purchase
transaction in a covered OTC call option the Portfolio 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 Portfolio may be unable to liquidate an OTC option.
OTC options purchased by a Portfolio 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 Portfolio will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the
Portfolio 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
B-9
<PAGE> 104
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Each Portfolio may write only "covered" options. A call option written by
the Portfolio is "covered" if the Portfolio owns the security underlying the
option or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its Custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Portfolio
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 Portfolio will maintain the
difference in cash or liquid securities in a segregated account with its
Custodian. A put option written by the Portfolio is "covered" if the Portfolio
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 Portfolio will maintain cash or
liquid securities in a segregated account with its Custodian equivalent in value
to the exercise price of the option. This means that so long as the Portfolio 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 establish and maintain with its Custodian for the term
of the option a segregated account consisting of cash or 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 Portfolio, the amount maintained in the segregated
account will equal the amount, if any, by which the put is "in-the-money."
"Liquid assets," for the purposes of the Trust's Prospectus and Statement of
Additional Information include U.S. Government Securities, equity securities or
other liquid, unencumbered assets, marked to market daily.
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not
currently traded on any exchange. However, the Mortgage Backed Securities
Portfolio, Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and
International Bond Portfolio may each 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 Portfolio, 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 Portfolio 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 a Portfolio 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 Portfolio will no longer be covered, and the Portfolio will either enter
into a closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Portfolio closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.
B-10
<PAGE> 105
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 Portfolio 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 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 Portfolio would have to exercise its exchange-traded options in order
to realize any profit and may incur transaction costs in connection therewith.
If the Portfolio 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: (a) insufficient trading interest in certain options; (b)
restrictions or transactions imposed by an exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an exchange; (e) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (f) a decision by one or more
exchanges 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 that
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with their
terms.
In the event of the bankruptcy of a broker through which the Portfolio
engages in options transactions, the Portfolio 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
Portfolio, the Portfolio could experience a loss of all or part of the value of
the option. Transactions are entered into by the Portfolio only with brokers or
financial institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
OPTIONS ON SECURITIES INDICES. The International Equity Portfolio,
Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio, Total
Return Bond Portfolio and International Bond Portfolio each may purchase and
write call and put options on securities indices in an attempt to hedge against
market conditions affecting the value of securities that the Portfolio owns or
intends to purchase, and not for speculation. Through the writing or purchase of
index options, the Portfolio can achieve many of the same objectives as through
the use of options on individual securities. Options on securities indices are
similar to options on a security except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference
B-11
<PAGE> 106
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 Portfolio owns
or intends to purchase will probably not correlate perfectly with movements in
the level of an index and, therefore, the Portfolio bears the risk that a loss
on an index option would not be completely offset by movements in the price of
such securities.
When a Portfolio 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 Portfolio writes a
call option on a securities index at a time when the contract value exceeds the
exercise price, the Portfolio 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 Portfolio may expire worthless, in which case the Portfolio
would lose the premium paid therefor.
RISKS OF OPTIONS ON INDICES. A Portfolio's purchase and sale of options on
indices will be subject to risks described above under "Risks of Options
Transactions." In addition, the distinctive characteristics of options on
indices create certain risks that are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the 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 Portfolio 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 Portfolio. It is each Portfolio's policy to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. A
Portfolio 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 not substantially greater
than the risk in connection with options on securities in the index.
SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercise of index
options are settled in cash, a call writer such as a Portfolio cannot determine
the amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Portfolio will write call options on indices only under the
circumstances described below under "Limitations on Purchase and Sale of Stock
Options and Options on Stock Indices, Foreign Currencies and Futures Contracts
on Foreign Currencies."
B-12
<PAGE> 107
Price movements in a Portfolio's security holdings probably will not
correlate precisely with movements in the level of the index and, therefore, the
Portfolio bears the risk that the price of the securities held by the Portfolio
may not increase as much as the index. In such event, the Portfolio would bear a
loss on the call which is not completely offset by movements in the price of the
Portfolio's security holdings. It is also possible that the index may rise when
the Portfolio's stocks do not rise. If this occurred, the Portfolio 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 Portfolio in the
opposite direction as the market would be likely to occur for only a short
period or to a small degree.
Unless a Portfolio has other liquid assets which are sufficient to satisfy
the exercise of a call, the Portfolio 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 Portfolio fails to
anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 33 1/3% of the Portfolio's total assets) pending settlement of the
sale of securities in its portfolio and would incur interest charges thereon.
When a Portfolio has written a call, there is also a risk that the market
may decline between the time the Portfolio 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 Portfolio is able to sell stocks in its portfolio. As
with stock options, the Portfolio 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 Portfolio would be able to deliver the underlying securities in
settlement, the Portfolio may have to sell part of its investment portfolio in
order to make settlement in cash, and the price of such investments 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 Portfolio has
written is "covered" by an index call held by the Fund with the same strike
price, the Portfolio 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 Portfolio
exercises the call it holds or the time the Portfolio sells the call which, in
either case, would occur no earlier than the day following the day the exercise
notice was filed.
If the Portfolio 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 Portfolio will be required to
pay the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer. Although the
Portfolio 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.
B-13
<PAGE> 108
FUTURES CONTRACTS
The International Equity Portfolio, Intermediate-Term Bond Portfolio,
Mortgage Backed Securities Portfolio, Total Return Bond Portfolio and
International Bond Portfolio may each enter into futures contracts. As a
purchaser of a futures contract (futures contract), a Portfolio 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 Portfolio incurs an obligation to deliver
the specified amount of the underlying obligation at a specified time in return
for an agreed upon price. A Portfolio may purchase futures contracts on debt
securities, aggregates of debt securities, financial indices and U.S. Government
securities including futures contracts or options linked to LIBOR. Eurodollar
futures contracts are currently traded on the Chicago Mercantile Exchange. They
enable purchasers to obtain a fixed rate for the lending of funds and sellers to
obtain a fixed rate for borrowings. A Portfolio would use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which many
interest rate swaps are linked. See the discussion of "Risks of Options
Transactions."
A Portfolio will purchase or sell futures contracts for the purpose of
hedging its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the investment adviser anticipates that interest
rates may rise and, concomitantly, the price of the Portfolio's securities
holdings may fall, the Portfolio may sell a futures contract. If declining
interest rates are anticipated, the Portfolio may purchase a futures contract to
protect against a potential increase in the price of securities the Portfolio
intends to purchase. Subsequently, appropriate securities may be purchased by
the Portfolio in an orderly fashion; as securities are purchased, corresponding
futures positions would be terminated by offsetting sales of contracts. In
addition, futures contracts will be bought or sold in order to close out a short
or long position in a corresponding futures contract.
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
Portfolio will be able to enter into a closing transaction.
When a Portfolio 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 U.S. Government
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.
B-14
<PAGE> 109
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 Portfolio upon the proper termination of
the futures contract. The margin deposits made are marked-to-market daily and
the Portfolio may be required to make subsequent deposits into the segregated
account, maintained at its Custodian for that purpose, or 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 Portfolio,
Intermediate-Term Bond Portfolio, Mortgage Backed Securities Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each purchase call
and put options on futures contracts which are traded on an exchange and enter
into closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid), and the writer the obligation, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put) at a specified exercise price at any time
during the term of the option. Upon exercise of the option, the assumption of an
offsetting futures position by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract at exercise exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures contract.
A Portfolio may only write "covered" put and call options on futures
contracts. A Portfolio will be considered "covered" with respect to a call
option it writes on a futures contract if the Portfolio 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 and maintains with its
Custodian for the term of the option cash or liquid assets equal to the
fluctuating value of the optioned future. The Portfolio 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 and
maintains with its Custodian for the term of the option cash or liquid assets at
all times equal in value to the exercise price of the put (less any initial
margin deposited by the Portfolio with its Custodian with respect to such
option). There is no limitation on the amount of the Portfolio's assets which
can be placed in the segregated account.
A Portfolio 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 Portfolio may
purchase or sell futures contracts or purchase related options thereon for bona
fide hedging transactions without limit. In addition, the Portfolios may use
futures contracts and options thereon for any other purpose
B-15
<PAGE> 110
to the extent that the aggregate initial margin and option premium does not
exceed 5% of the liquidation value of the Portfolios. There is no overall
limitation on the percentage of the Portfolio's assets which may be subject to a
hedge position. In addition, in accordance with the regulations of the Commodity
Futures Trading Commission (CFTC) the Portfolio is exempt from registration as a
commodity pool operator.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A
Portfolio may sell a futures contract to protect against the decline in the
value of securities held by the Portfolio. However, it is possible that the
futures market may advance and the value of securities held in the Portfolio's
portfolio may decline. If this were to occur, the Portfolio would lose money on
the futures contracts and also experience a decline in value in its portfolio
securities.
If a Portfolio 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 Portfolio 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 Portfolio is entering into transactions in
futures contracts for hedging purposes as such term is defined by the
Commodities Futures Trading Commission, either: (1) a substantial majority
(i.e., approximately 75%) of all anticipatory hedge transactions (transactions
in which the Portfolio does not own at the time of the transaction, but expects
to acquire, the securities underlying the relevant futures contract) involving
the purchase of futures contracts will be completed by the purchase of
securities which are the subject of the hedge, or (2) the underlying value of
all long positions in futures contracts will not exceed the total value of (a)
all short-term debt obligations held by the Portfolio; (b) cash held by the
Portfolio; (c) cash proceeds due to the Portfolio 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 Portfolio maintains a short position in a futures contract, it will
cover this position by holding, in a segregated account maintained at its
Custodian, cash or 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 Portfolio to purchase the same contract at a price no higher than
the price at which the short position was established.
In addition, if a Portfolio holds a long position in a futures contract, it
will hold cash or liquid assets equal to the purchase price of the contract
(less the amount of initial or variation margin on deposit) in a segregated
account maintained for the Portfolio by its Custodian. Alternatively, the
Portfolio 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 Portfolio.
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 Portfolio
would continue to be required to make daily cash payments of variation margin on
open futures positions. In such situations, if the Portfolio has insufficient
cash, it may be disadvantageous to do so. In addition, the Portfolio 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
B-16
<PAGE> 111
close out options and futures positions could also have an adverse impact on the
Portfolio's ability to hedge its portfolio effectively.
In the event of the bankruptcy of a broker through which the Portfolio
engages in transactions in futures or options thereon, the Portfolio 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 Portfolio 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 Portfolio'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 Portfolio'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
Portfolio 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.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Portfolio and the movements in the prices of
the securities which are the subject of the hedge. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities and futures market could
result. Price distortions could also result if investors in futures contracts
elect to make or take delivery of underlying securities rather than engage in
closing transactions due to the resultant reduction in the liquidity of the
futures market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures markets could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate trends by the Adviser may still not result in a successful hedging
transaction.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the
Portfolio 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
Portfolio 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 Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond
B-17
<PAGE> 112
Portfolio and International Bond Portfolio 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 Portfolio the right to sell a
currency at the exercise price until the option expires. A call option gives the
Portfolio 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 those described in the Prospectus under
"Other Investments and Policies--Foreign Securities," including 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The International Equity Portfolio, Intermediate-Term Bond Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each enter into
forward foreign currency exchange contracts in several circumstances. When a
Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when a Portfolio anticipates the receipt
in a foreign currency of dividends or interest payments on a security which it
holds, the Portfolio may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, a Portfolio may be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the foreign currency during the period between the date on which
the security is purchased or sold, or on which the dividend or interest payment
is declared, and the date on which such payments are made or received.
Additionally, when an Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Portfolio may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
the Portfolio's securities holdings denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. A Portfolio does not intend to enter into
such forward contracts to protect the value of its portfolio securities on a
regular or continuous basis. A Portfolio 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 Portfolio to deliver an amount
of foreign currency in excess of the value of the Portfolio's securities
holdings or other assets denominated in that currency. However, the Portfolios
B-18
<PAGE> 113
believe that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of the Portfolio will
thereby be served.
The Portfolio generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, the Portfolio
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 Portfolio is obligated to deliver, then it would be
necessary for the Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss to the extent
that there has been movement in forward contract prices. Should forward contract
prices decline during the period between the Portfolio'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 Portfolio 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 Portfolio 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 Portfolio's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, a Portfolio
is not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be recognized that this method
of protecting the value of a Portfolio'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, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
Although the Portfolio 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 Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
B-19
<PAGE> 114
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK INDICES,
FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES
A Portfolio may write put and call options on stocks only if they are
covered, and such options must remain covered so long as the Portfolio is
obligated as a writer. A Portfolio will write put options on stock indices and
foreign currencies and futures contracts on foreign currencies only if they are
covered by segregating with the Portfolio's Custodian an amount of cash or
liquid assets equal to the aggregate exercise price of the puts. In addition,
the Portfolio may use futures contracts or related options for any other purpose
to the extent that aggregate initial margin and option premiums do not exceed 5%
of the liquidation value of the Portfolio's assets. A Portfolio does not intend
to purchase options on equity securities or securities indices if the aggregate
premiums paid for such outstanding options would exceed 10% of the Portfolio's
total assets.
Except as described below, a Portfolio will write call options on indices
only if on such date it holds a portfolio of stocks at least equal to the value
of the index times the multiplier times the number of contracts. When a
Portfolio writes a call option on a broadly-based stock market index, the
Portfolio will segregate or put into escrow with its Custodian, or pledge to a
broker as collateral for the option, cash, liquid assets or at least one
"qualified security" 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 Portfolio has written an option on an industry or market segment
index, it will segregate or put into escrow with its Custodian, or pledge to a
broker as collateral for the option, at least ten "qualified securities," all of
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 Portfolio's holdings
in that industry or market segment. No individual security will represent more
than 15% of the amount so segregated, pledged or escrowed 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, escrowed or pledged
falls below 100% of the current index value times the multiplier times the
number of contracts, the Fund will so segregate, escrow or pledge an amount in
cash or liquid assets equal in value to the difference. In addition, when a
Portfolio writes a call on an index which is in-the-money at the time the call
is written, the Portfolio will segregate with its Custodian or pledge to the
broker as collateral cash or 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
Portfolio'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 Portfolio has not written a stock call option
and which has not been hedged by the Portfolio by the sale of stock index
futures. However, if the Portfolio 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 maintained by the Portfolio in cash or liquid
assets in a segregated account with its Custodian, it will not be subject to the
requirements described in this paragraph.
B-20
<PAGE> 115
A Portfolio 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 Portfolio is subject or
to which the Portfolio expects to be subject in connection with future
purchases. A Portfolio may engage in such transactions when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Portfolio. A Portfolio may write options on futures contracts
to realize through the receipt of premium income a greater return than would be
realized in the Portfolio's securities holdings alone.
REPURCHASE AGREEMENTS
Each Portfolio may each enter into repurchase transactions with parties
meeting creditworthiness standards approved by the Trustees. Each Adviser will
monitor the creditworthiness of such parties, under the general supervision of
the Manager and the Trustees. In the event of a default or bankruptcy by a
seller, the Portfolio will promptly seek to liquidate 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 repurchase price, the Portfolio will
suffer a loss.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Mortgage Backed
Securities Portfolio, Intermediate-Term Bond Portfolio, Total Return Bond
Portfolio and International Bond Portfolio may each lend portfolio securities to
brokers, dealers and other financial institutions, provided that such loans are
callable at any time by a Portfolio, and are at all times secured by cash or
cash equivalents, which are maintained in a segregated account pursuant to
applicable regulations that are equal to at least the market value, determined
daily, of the loaned securities. The advantage of such loans is that a Portfolio
continues to receive the income on the loaned securities while at the same time
earning interest on the cash amounts deposited as collateral, which will be
invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice, or
by a Portfolio on two business days' notice. If the borrower fails to deliver
the loaned securities within two days after receipt of notice, a Portfolio 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 a Portfolio's Adviser to be creditworthy 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 a Portfolio. Any gain
or loss in the market price during the loan period would inure to a Portfolio.
The creditworthiness of firms to which a Portfolio lends its portfolio
securities will be monitored on an ongoing basis by the Adviser pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Trustees.
When voting or consent rights which accompany loaned securities pass to the
borrower, a Portfolio will follow the policy of calling the loaned securities,
to be delivered within one day after notice, to permit the exercise of such
rights if the matters involved would have a material effect on a Portfolio's
investment in such loaned securities. A Portfolio may pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities.
B-21
<PAGE> 116
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, each Portfolio may
purchase securities on a when-issued or delayed delivery basis, i.e., delivery
and payment can take place a month or more after the date of the transactions.
The securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. While a Portfolio will only
purchase securities on a when-issued, delayed delivery or forward commitment
basis with the intention of acquiring the securities, a Portfolio may sell the
securities before the settlement date, if it is deemed advisable. At the time a
Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, a Portfolio will record the transaction and thereafter
reflect the value, each day, of such security in determining the net asset value
of a Portfolio. At the time of delivery of the securities, the value may be more
or less than the purchase price. A Portfolio will also establish a segregated
account with a Portfolio's custodian bank in which it will continuously maintain
cash or liquid assets equal in value to commitments for such when-issued or
delayed delivery securities; subject to this requirement, a Portfolio may
purchase securities on such basis without limit. An increase in the percentage
of a Portfolio's assets committed to the purchase of securities on a when-issued
or delayed delivery basis may increase the volatility of a Portfolio's net asset
value. The Adviser does not believe that a Portfolio's net asset value or income
will be adversely affected by a Portfolio's purchase of securities on such
basis.
INTEREST RATE SWAP TRANSACTIONS
The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each 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 Portfolio
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with a Portfolio 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 a segregated
account has been established, 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 each
Portfolio. The net amount of the excess, if any, of a Portfolio'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 liquid assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by a custodian that satisfies the requirements of the
Investment Company Act. To the extent that a Portfolio enters into interest rate
swaps on other than a net basis, the amount maintained in a segregated account
will be the full amount of a Portfolio's obligations, if any, with respect to
such interest rate swaps, accrued on a daily basis. The Portfolios 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, a Portfolio will have contractual remedies pursuant to the
agreement related to the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid.
B-22
<PAGE> 117
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 incorrect in its forecast of
market values, interest rates and other applicable factors, the investment
performance of a Portfolio would diminish compared to what it would have been if
this investment technique was never used.
A Portfolio 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 a
Portfolio is contractually obligated to make. If the other party to an interest
rate swap defaults, a Portfolio's risk of loss consists of the net amount of
interest payments that a Portfolio is contractually entitled to receive. Since
interest rate swaps are individually negotiated, a Portfolio expects to achieve
an acceptable degree of correlation between its rights to receive interest on
its portfolio securities and its rights and obligations to receive and pay
interest pursuant to interest rate swaps.
ILLIQUID SECURITIES
Each Portfolio may hold up to 15% of its net assets in illiquid securities,
except for the U.S. Government Money Market Portfolio which may hold up to 10%
of its net assets in illiquid securities. Illiquid securities include repurchase
agreements which have a maturity of longer than seven days, and securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. 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 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 of 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
B-23
<PAGE> 118
qualified institutional buyers. The Adviser 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 NASD.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act are not deemed to be illiquid. The Adviser will monitor the
liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Advisers will consider, inter
alia, 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 (e.g., 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, (i) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations (NRSRO), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the Adviser; and
(ii) it must not be "traded flat" (i.e., without accrued interest) or in default
as to principal or interest. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
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 Portfolio's outstanding voting securities. A "majority of the
outstanding voting securities" of a Portfolio when used in this Statement of
Additional Information, means the lesser of (i) 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 (ii) more than 50% of the outstanding shares.
A Portfolio may not:
1. Purchase securities on margin (but the Portfolio may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by the Portfolio 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 Portfolio'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.
3. Issue senior securities, borrow money or pledge its assets, except that
the Portfolio 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
B-24
<PAGE> 119
transactions and may pledge up to 33 1/3% of the value of its total assets to
secure such borrowings. For purposes of this restriction, the purchase or sale
of securities on a "when-issued" or delayed delivery basis and the purchase and
sale of futures contracts are not deemed to be a pledge of assets and neither
such arrangements nor the purchase or sale of futures contracts nor the purchase
and sale of related options, nor obligations of the Portfolio to Trustees
pursuant to deferred compensation arrangements are deemed to be the issuance of
a senior security.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies and instrumentalities) if as a result: (i) except with respect to
the International Bond Portfolio, with respect to 75% of its total assets, more
than 5% of the Portfolio's total assets (determined at the time of investment)
would then be invested in securities of a single issuer or (ii) 25% or more of
the Portfolio's total assets (determined at the time of investment) would be
invested in one or more issuers having their principal business activities in
the same industry.
5. Invest more than 5% of its total assets in securities of any issuer
having a record, together with predecessors, of less than three years of
continuous operations. This restriction shall not apply to mortgage-backed
securities, asset-backed securities or obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
6. Buy or sell real estate or interests in real estate, except that the
Portfolio 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. The Portfolios may purchase restricted
securities without limit.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which the Portfolio will not hold more than 3% of the outstanding
voting securities of any one investment company, will not have invested more
than 5% of its total assets in any one investment company and will not have
invested more than 10% of its total assets (determined at the time of
investment) in such securities or one or more investment company's, or except as
part of a merger, consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Portfolio may invest in the securities of
companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the value of the Portfolio's total
assets.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
13. Buy or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell financial futures contracts and options thereon.
B-25
<PAGE> 120
The foregoing restrictions are fundamental policies that may not be changed
without the approval of a majority of the Portfolio's voting securities.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Portfolio'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
Portfolio's asset coverage for borrowings falls below 300%, the Portfolio 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 Portfolio would then have more than 5% of its
assets (determined at the time of investment) invested in rights.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(1) THE TRUST DURING PAST FIVE YEARS
- ----------------------------- -------------- ----------------------------------------------
<S> <C> <C>
Eugene C. Dorsey (70) 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 Company; past Chairman, Independent
Sector, Washington, D.C. (largest national
coalition of philanthropic organizations)
(since October 1989); former Chairman of the
American Council for the Arts; Director of
the advisory board of Chase Manhattan Bank
of Rochester, and The High Yield Income
Fund, Inc.
Douglas H. McCorkindale (57) Trustee Vice Chairman, Gannett Co. Inc. (publishing
and media) (since March 1984); Director of
Gannett Co. Inc., Frontier Corporation and
Continental Airlines, Inc.
Thomas T. Mooney (55) Trustee President of the Greater Rochester Metro
Chamber of Commence; former Rochester City
Manager, Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of
Rochester, Monroe County Water Authority,
Rochester Jobs, Inc., Executive Service
Corps of Rochester, Monroe County Industrial
Development Corporation, Northeast-Midwest
Institute, The Business Council of New York
State, First Financial Fund, Inc., The High
Yield Plus Fund, Inc. and The High Yield
Income Fund, Inc.
</TABLE>
B-26
<PAGE> 121
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(1) THE TRUST DURING PAST FIVE YEARS
- ----------------------------- -------------- ----------------------------------------------
<S> <C> <C>
*Richard A. Redeker (53) President and Employee of Prudential Investments; formerly
751 Broad Street Trustee President, Chief Executive Officer and
Newark, New Jersey 07102 Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc.,
Executive Vice President, Director and
Member of the Operating Committee (October
1993- September 1996), Prudential Securities
Incorporated (Prudential Securities),
Director (October 1993-September 1996) of
Prudential Securities Group, Inc.; Executive
Vice President (January 1994-September 1996)
The Prudential Investment Corporation;
Director (January 1994-September 1996); of
Prudential Mutual Fund Distributors, Inc.
(PMFD) and Prudential Mutual Fund Services,
Inc. (PMFS); formerly Senior Executive Vice
President and Director (September 1978-
September 1993) of Kemper Financial
Services, Inc.; President and Director of
The High Yield Income Fund, Inc.
Susan C. Cote (42) Vice President Executive Vice President (since February 1997)
and Chief Financial Officer (since May 1996)
of Prudential Mutual Fund Management LLC
("PMF"); Managing Director, Prudential
Investments and Vice President, PIC
(February 1995-May 1996); Senior Vice
President (January 1989-January 1995) of
Prudential Mutual Fund Management, Inc.;
Senior Vice President (January 1992-January
1995) of Prudential Securities.
Thomas A. Early (42) Vice President Executive Vice President, Secretary and
General Counsel (since December 1996) of
PMF; Vice President and General Counsel
(since May 1994) of Prudential Retirement
Services; formerly Associated General
Counsel and Chief Financial Services
Officer, Frank Russell Company (1988-1994).
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of
PMF; formerly Senior Vice President (January
1991-September 1996) and Senior Counsel
(June 1987-September 1996) of Prudential
Mutual Fund Management, Inc.; Senior Vice
President and Senior Counsel (since July
1992) of Prudential Securities; formerly
Vice President and Associate General Counsel
of Prudential Securities.
</TABLE>
B-27
<PAGE> 122
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(1) THE TRUST DURING PAST FIVE YEARS
- ----------------------------- -------------- ----------------------------------------------
<S> <C> <C>
Grace C. Torres (38) Treasurer First Vice President (since December 1996) of
PMF; formerly First Vice President (March
1994-September 1996) of Prudential Mutual
Fund Management, Inc.; First Vice President
(since March 1994); of Prudential Securities
prior thereto, Vice President of Bankers
Trust Corporation.
Marguerite E. H. Assistant Vice President and Associate General Counsel
Morrison (40) Secretary (since December 1996) of PMF; Vice President
and Associate General Counsel (June
1991-September 1996) of Prudential Mutual
Fund Management, Inc.; Vice President and
Associate General Counsel of Prudential
Securities.
Stephen M. Ungerman (43) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments and the Private Asset Group of
The Prudential Insurance Company of America;
formerly First Vice President of Prudential
Mutual Fund Management, Inc. (February
1993-(September 1996)); Prior thereto,
Senior Tax Manager of Price Waterhouse
(1981-January 1993).
</TABLE>
- ---------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential, Prudential Securities or PMF.
(1) The addresses of the persons listed in the table above is Gateway Center
Three, Newark, New Jersey 07102, unless otherwise noted.
Trustees and officers of the Trust are also directors, trustees and
officers of some or all of the other investment companies distributed by
Prudential Securities.
The officers conduct and supervise the daily business operations of the
Trust, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
72, except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993.
The Trust pays each of its Trustees who is not an affiliated person of the
Manager or a Portfolio's Adviser annual compensation of $7,500, 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
which the Trustee will 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.
B-28
<PAGE> 123
Treasury Bills at the beginning of each calendar quarter or, pursuant to an SEC
exemptive order, at the daily rate of return of a Target Portfolio selected by
the Trustee (the Fund rate). The minimum initial investment requirement is
waived for Trustees who receive their fees pursuant to a deferred fee agreement.
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. As of December 31, 1996, Mr. Dorsey and Ms. Smith elected to
reduce their Trustees' fees pursuant to the deferred fee agreement.
Pursuant to the terms of 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 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 December 31, 1996 and the aggregate compensation paid to such Trustees for
service on the Trust's Board and that of all other funds managed by PMF (Fund
Complex) for the calendar year ended December 31, 1996. In October, 1996,
shareholders elected a new Board of Trustees. Below are listed all Trustees who
have served the Trust during its most recent fiscal year, as well as the new
Trustees who took office after the shareholder meeting in October.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM TRUST
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF TRUST BENEFITS UPON COMPLEX PAID
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT TO TRUSTEES
- ---------------------------------------- ------------ ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Eugene C. Dorsey*....................... $ 10,000 None N/A $ 98,583(12/36)**
Donald D. Lennox,
Former Trustee........................ $ 10,000 None N/A $ 90,000(10/22)**
Douglas H. McCorkindale*................ $ -- None N/A $ 71,208(10/13)**
Thomas T. Mooney*....................... $ -- None N/A $135,375(18/36)**
Richard A. Redeker+..................... $ -- None N/A --
Stanley E. Shirk,
Former Trustee........................ $ 10,000 None N/A $ 71,000(9/18)**
Robin B. Smith,*
Former Trustee........................ $ 10,000 None N/A $ 89,957(11/20)**
</TABLE>
- ---------------
* Total compensation from all the Funds in the Fund Complex for the calendar
year ended December 31, 1996 includes amounts deferred at the election of
Trustees under the Funds' deferred compensation plans. Including accrued
interest, total compensation amounted to approximately $111,535, $71,034,
$139,869 and $109,294 for Mr. Dorsey, Mr. McCorkindale, Mr. Mooney and Ms.
Smith, respectively.
** Indicates number of funds/portfolios in the Fund Complex (including the
Trust) to which aggregate compensation relates.
B-29
<PAGE> 124
+ Richard A. Redeker, who is an interested Trustee, does not receive
compensation from the Trust or any fund in the Fund Complex.
As of February 28, 1997, the Trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding shares of beneficial interest of
the Portfolios.
As of February 28, 1997, Prudential Securities was record holder for other
beneficial owners of the following shares of beneficial interest outstanding and
entitled to vote in each Portfolio, $.001 par value per share:
<TABLE>
<CAPTION>
NUMBER OF
PORTFOLIO SHARES
- ------------------------------------------------------------------------------ ----------
<S> <C>
Large Capitalization Growth Portfolio......................................... 16,915,116
Large Capitalization Value Portfolio.......................................... 16,165,201
Small Capitalization Growth Portfolio......................................... 9,814,029
Small Capitalization Value Portfolio.......................................... 8,296,123
International Equity Portfolio................................................ 15,982,646
International Bond Portfolio.................................................. 3,969,457
Intermediate-Term Bond Portfolio.............................................. 9,596,966
Total Return Bond Portfolio................................................... 4,739,189
Mortgage Backed Securities Portfolio.......................................... 7,184,532
U.S. Government Money Market Portfolio........................................ 32,780,815
</TABLE>
B-30
<PAGE> 125
MANAGER
The Manager of the Trust is Prudential Mutual Fund Management LLC (PMF or
the Manager), Gateway Center Three, 100 Mulberry Street, New Jersey 07102-4077.
PMF serves as manager to all of the other open-end management investment
companies that comprise the Prudential Mutual Funds. See "Management of the
Trust" in the Prospectus. As of January 31, 1997, PMF managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $55.8 billion. According to the Investment Company Institute,
as of December 31, 1996, the Prudential Mutual Funds was the 15th largest family
of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary
of PMF, 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), PMF, 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 Portfolios, including the purchase,
retention and disposition thereof. The Manager is authorized to enter into
subadvisory agreements for investment advisory services in connection with the
management of the Trust and each Portfolio 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, PMF is obligated to keep certain books and
records of the Trust. PMF 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 Trust's custodian and PMFS, the
Trust's transfer and dividend disbursing agent. The management services of PMF
for the Trust are not exclusive under the terms of the Management Agreement and
PMF is free to, and does, render management services to others.
B-31
<PAGE> 126
The following table sets forth the annual management fee rates currently
paid by each Portfolio to PMF pursuant to the Management Agreement, and the
amount of such fees returned by PMF, each expressed as a percentage of the
Portfolio's average daily net assets:
<TABLE>
<CAPTION>
TOTAL AMOUNT RETAINED
PORTFOLIO MANAGEMENT FEE BY MANAGER
- ----------------------------------------------------- -------------- ---------------
<S> <C> <C>
Large Capitalization Growth Portfolio................ 0.60% 0.30%
Large Capitalization Value Portfolio................. 0.60% 0.30%
Small Capitalization Growth Portfolio................ 0.60% 0.30%
Small Capitalization Value Portfolio................. 0.60% 0.30%
International Equity Portfolio....................... 0.70% 0.30%
International Bond Portfolio......................... 0.50% 0.20%
Total Return Bond Portfolio.......................... 0.45% 0.20%
Intermediate-Term Bond Portfolio..................... 0.45% 0.20%
Mortgage Backed Securities Portfolio................. 0.45% 0.20%
U.S. Government Money Market Portfolio............... 0.25% 0.125%
</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 PMF, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Trust's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Trust's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Trust. No such reductions
were required during the fiscal year ended December 31, 1996. No jurisdiction
currently limits the Trust's expenses.
In connection with its management of the business affairs of the Trust, PMF
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 PMF
or the Trust's Advisers;
(b) all expenses incurred by PMF 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 PMF 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
B-32
<PAGE> 127
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) the fees and expenses involved in registering and
maintaining registration of the Trust and of its shares with the SEC,
registering the Trust and qualifying its shares under state securities laws,
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 PMF 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 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. The
Management Agreement was last approved by the Trustees of the Trust, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act of 1940, as
amended, (non-interested Trustees) on April 9, 1996 and by PMF, as sole
shareholder of the Trust, on October 14, 1992, and with respect to the
International Bond Portfolio, on January 11, 1994.
For the fiscal year ended December 31, 1996, PMF waived all or a portion of
its management fees for each Portfolio in the amounts shown below and subsidized
certain operating expenses of the Portfolios to the extent necessary to cap the
Total Fund operating expenses of each Portfolio as described in "Trust Expenses"
in the Prospectus.
<TABLE>
<CAPTION>
MANAGEMENT
FEE WAIVED
----
ANNUALIZED
MANAGEMENT FEE PAID PERCENTAGE
------------------------------------------------------------------------ OF
AVERAGE
ANNUALIZED PERCENTAGE NET
OF AVERAGE NET ASSETS AMOUNT ASSETS
---------------------------- ------------------------------------ ----
PORTFOLIO 1996 1995 1994 1996 1995 1994 1995
- -------------------------------------- --- --- --- ---------- ---------- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Large Capitalization
Growth Portfolio..................... .60% 0.60% 0.60% $1,216,415 $ 977,893 $ 778,122 --
Large Capitalization Value
Portfolio............................ .60% 0.60% 0.60% 1,253,390 978,742 773,190 --
Small Capitalization Growth
Portfolio............................ .60% 0.60% 0.60% 848,974 645,895 524,420 --
Small Capitalization Value
Portfolio............................ .60% 0.60% 0.60% 663,383 528,512 503,348 --
International Equity Portfolio........ .70% 0.70% 0.70% 1,551,382 1,283,896 1,257,301 --
International Bond Portfolio.......... .50% 0.35% -- 193,939 102,710 -- 0.15%
Total Return Bond Portfolio........... .45% 0.26% 0.12% 212,605 97,987 37,151 0.19%
Intermediate-Term Bond Portfolio...... .45% 0.45% 0.45% 367,755 308,827 140,135 --
Mortgage Backed Securities
Portfolio............................ .45% 0.38% 0.31% 324,962 245,215 204,074 0.07%
U.S. Government Money Market
Portfolio............................ .25% 0.20% -- 47,830 41,031 -- 0.05%
<CAPTION>
AMOUNT
------------------
PORTFOLIO 1994 1995 1994
- -------------------------------------- --- ------- --------
<S> <C> <C> <C>
Large Capitalization
Growth Portfolio..................... -- -- --
Large Capitalization Value
Portfolio............................ -- -- --
Small Capitalization Growth
Portfolio............................ -- -- --
Small Capitalization Value
Portfolio............................ -- -- --
International Equity Portfolio........ -- -- --
International Bond Portfolio.......... 0.50% $44,839 $ 48,202
Total Return Bond Portfolio........... 0.33% 68,615 102,984
Intermediate-Term Bond Portfolio...... -- -- --
Mortgage Backed Securities
Portfolio............................ 0.14% 47,957 94,170
U.S. Government Money Market
Portfolio............................ 0.25% 9,401 37,619
</TABLE>
B-33
<PAGE> 128
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 Portfolio it serves in accordance with the Portfolio's
stated investment objectives and policies, makes investment decisions for the
portion of the Portfolio and places orders to purchase and sell securities on
behalf of the portion of the Portfolio it manages. Generally each Adviser does
not accept retention as investment adviser, investment manager or similar
service provider during the pendency of its Advisory Agreement, and for the
period of one year after the termination of the Advisory Agreement, with or for
the benefit of any investment company registered under the Investment Company
Act that seeks as a primary market for its shares asset allocation programs
similar in nature or market to the Target Program. This limitation does not
apply to the continuation of any contractual relationship to which the Adviser
is a party that is in effect on the date of its Advisory Agreement.
The Advisory Agreements were last approved by the Trustees including a
majority of the Trustees who are not parties to such contract or interested
persons of any such party as defined in the Investment Company Act, on April 9,
1996 and were approved by the sole shareholder of the Trust on October 14, 1992
for all of the Portfolios, except the International Bond Portfolio which was
approved by the sole shareholder of the Portfolio, on January 11, 1994. On
October 27, 1994, the shareholders of the Large Capitalization Growth Portfolio,
Large Capitalization Value Portfolio, Small Capitalization Growth Portfolio and
Small Capitalization Value Portfolio approved new subadvisory agreements in
order to have two Advisers, instead of one for each Portfolio. On that same
date, the shareholders of the Intermediate-Term Bond Portfolio and the Total
Return Bond Portfolio approved a successor subadvisory agreement with Pacific
Investment Management Company (PIMCO) in connection with a reorganization in
which PIMCO, four other investment management subsidiaries of Pacific Financial
Asset Management Corporation and Thomson Advisory Group L.P. became subsidiary
partnerships of a limited partnership known as PIMCO Advisors L.P. Its
subsidiary partnership PIMCO is the Adviser for the two Portfolios. On August 8,
1995, shareholders of the Small Capitalization Value Portfolio approved a new
subadvisory agreement with Wood Struthers & Winthrop Management Corp. in the
place of Oak Hall Capital Advisors, Inc. On November 20, 1995 shareholders of
the Large Capitalization Growth Portfolio approved a new subadvisory agreement
with Oak Associates in the place of Roger Engemann Management Co., Inc. On
October 30, 1996 shareholders of the Large Capitalization Value Portfolio
approved a new subadvisory agreement with Hotchkis and Wiley in connection with
the acquisition of Hotchkis and Wiley by Merrill Lynch Asset Management, L.P.
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, PMF 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 October 30, 1996 shareholders voted
affirmatively to give the Trust this ongoing authority. With Board approval, the
Manager is permitted to employ new Advisers for the Portfolios, change the terms
of the
B-34
<PAGE> 129
Portfolios' 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 Portfolio continue to
have the right to terminate an advisory agreement for the Portfolio at any time
by a vote of the majority of the outstanding voting securities of the Portfolio.
Shareholders will be notified of any Adviser changes or other material
amendments to advisory agreements that occur under these arrangements.
ADVISERS
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>
ANNUAL FEE PAID
BY THE MANAGER
TO THE ADVISER ANNUAL FEE
TOTAL AS % OF AVERAGE AMOUNT AS OF DECEMBER 31,
MANAGEMENT DAILY NET ----------------------------
PORTFOLIO FEE ASSETS 1996 1995 1994
- --------------------------------------- ---------- --------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio............................ 0.60% 0.30% $608,208 $488,947 $389,061
Large Capitalization Value Portfolio... 0.60% 0.30% 626,695 489,871 386,595
Small Capitalization Growth
Portfolio............................ 0.60% 0.30% 424,487 322,948 262,210
Small Capitalization Value Portfolio... 0.60% 0.30% 331,692 264,256 251,674
International Equity Portfolio......... 0.70% 0.40% 886,504 733,655 718,458
International Bond Portfolio........... 0.50% 0.30% 116,363 88,529 28,921
Total Return Bond Portfolio............ 0.45% 0.25% 118,114 92,557 77,853
Intermediate-Term Bond Portfolio....... 0.45% 0.25% 204,308 171,571 174,005
Mortgage Backed Securities Portfolio... 0.45% 0.25% 180,534 162,873 165,691
U.S. Government Money Market
Portfolio............................ 0.25% 0.125% 23,915 25,216 18,810
</TABLE>
The Advisers perform all administrative functions associated with serving
as Adviser to a Portfolio. 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 Portfolio it
serves in accordance with the Portfolio's stated investment objective and
policies, making investment decisions for that portion of the Portfolio and
placing orders to purchase and sell securities on behalf of the portion of the
Portfolio it manages.
The following sets forth certain information about each of the Advisers:
LARGE CAPITALIZATION GROWTH PORTFOLIO
Columbus Circle Investors, Metro Center, One Station Place, 8th Floor,
Stamford, Connecticut 06902, serves as one of two Advisers to the Large
Capitalization Growth Portfolio. Columbus Circle Investors (CCI), a Delaware
partnership and a subpartnership of PIMCO Advisors L.P., is a leading
institutional equity investment firm and, as of December 31, 1996, had
approximately $14.2 billion in assets under management for corporate, nonprofit,
government, union, and mutual fund clients.
Oak Associates, Ltd. (Oak), 3875 Embassy Parkway, Suite 250, Akron, Ohio
44333 serves as the other Adviser to the Large Capitalization Growth Portfolio.
It began managing its portion of the
B-35
<PAGE> 130
Portfolio effective November 22, 1995 in the place of Roger Engemann Management
Co. who resigned. The agreement between Oak and PMF, was approved by the
Portfolio's shareholders at a Special Meeting of Shareholders held on March 12,
1996.
Oak was founded in April 1985 and has specialized in the large cap market
since inception. It provides investment management services to both individual
and institutional clients and, as of December 31, 1996, had more than $50
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 PORTFOLIO
INVESCO Capital Management, Inc. (INVESCO), 1315 Peachtree Street, Suite
500, Atlanta, Georgia 30309, serves as one of two Advisers to the Large
Capitalization Value Portfolio of the Trust. INVESCO, a Delaware corporation and
member of INVESCO PLC, a global firm specializing in the management of
institutional portfolios. As of December 31, 1996, the Adviser had approximately
$90 billion of assets under management for clients located throughout the U.S.,
Europe and Japan.
Hotchkis and Wiley, 800 West Sixth Street, Fifth Floor, Los Angeles,
California 90017 is a division of the Capital Management Group of Merrill Lynch
Asset Management, LP. It was established in 1980 and has specialized in the
large-cap market since its inception. As of December 31, 1996, Hotchkis and
Wiley had approximately $10.3 billion in assets under management for corporate,
public, endowment and foundation, and mutual fund clients. Hotchkis and Wiley is
the adviser or subadviser for the American AAdvantage Funds, the Hirtle
Callaghan Trust and the Hotchkis and Wiley Funds.
SMALL CAPITALIZATION GROWTH PORTFOLIO
Nicholas-Applegate Capital Management (Nicholas-Applegate), 600 West
Broadway, 29th floor, San Diego, California 92101 serves as one of two Advisers
to the Small Capitalization Growth Portfolio of the Trust. Nicholas-Applegate
was organized in 1984 as a California limited partnership. Its general partner
is Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership controlled by Arthur E. Nicholas. Mr. Nicholas and fifteen other
partners manage a staff of over 300 employees. As of December 31, 1996 the firm
managed a total of approximately $31 billion of assets for a wide variety of
clients, including employee benefit plans of corporations, public retirement
systems and unions, university endowments, foundations and other institutional
investors.
Investment Advisers, Inc. (IAI), 3700 First Bank Place, P.O. Box 357,
Minneapolis, Minnesota 55440 serves as the second Adviser in addition to
Nicholas-Applegate. IAI was established in 1947 and provides investment advice
to corporate, public, jointly-trusteed, endowment and foundation and mutual fund
clients. As of December 31, 1996, it managed approximately $16 billion in
assets.
SMALL CAPITALIZATION VALUE PORTFOLIO
Lazard Freres Asset Management (LFAM), 30 Rockefeller Plaza, New York, New
York 10020, serves as one of two Advisers to the Small Capitalization Value
Portfolio of the Trust. LFAM is a
B-36
<PAGE> 131
division of Lazard Freres & Co. LLC, a New York limited liability company. LFAM
provides investment management services to both individual and institutional
clients and as of December 31, 1996, had more than $38 billion of assets under
management. In addition to portfolio management, Lazard Freres provides a wide
variety of investment banking and related services.
Wood, Struthers & Winthrop Management Corp. (WSW), 277 Park Avenue, New
York, New York 10172, serves as the other Adviser to the Small Capitalization
Value Portfolio. It began managing its portion of the Portfolio effective April
12, 1995. WSW was founded in 1871 and has specialized in the small-cap market
since 1967. It provides investment management services to both individual and
institutional clients and, as of December 31, 1996, had more than $4 billion in
assets under management. WSW is a subsidiary of Donaldson, Lufkin & Jenrette
Securities Corporation.
INTERNATIONAL EQUITY PORTFOLIO
LFAM serves as the Adviser to the International Equity Portfolio of the
Trust and is more fully described immediately above under "Small Capitalization
Value Portfolio."
INTERNATIONAL BOND PORTFOLIO
Fiduciary International, Inc. (Fiduciary), Two World Trade Center, New
York, NY 10048, serves as the Adviser to the International Bond Portfolio.
Fiduciary is a wholly-owned subsidiary of Fiduciary Investment Corporation which
is a wholly-owned subsidiary of Fiduciary Trust Company International (Fiduciary
Trust). Fiduciary Trust was founded in 1931 and provides investment management
and related services to institutions and individuals around the world. As of
December 31, 1996, Fiduciary Trust had $33 billion of assets under management.
INTERMEDIATE-TERM BOND PORTFOLIO AND TOTAL RETURN BOND PORTFOLIO
Pacific Investment Management Company (PIMCO), 840 Newport Center Drive,
Newport Beach, California 92660, serves as the Adviser to the Intermediate-Term
Bond Portfolio and the Total Return Bond Portfolio of the Trust. PIMCO is a
subsidiary Partnership of PIMCO Advisors, L.P., a Delaware limited partnership.
As of December 31, 1996, PIMCO had approximately $88.2 million of assets under
management.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO AND MORTGAGE BACKED SECURITIES PORTFOLIO
Wellington Management Company, LLP (WMC), 75 State Street, Boston,
Massachusetts 02109, serves as the Adviser to the U.S. Government Money Market
Portfolio and the Mortgage Backed Securities Portfolio of the Trust. WMC is a
Massachusetts limited liability partnership of which the following persons are
managing partners: Robert W. Doran, Duncan M. McFarland and John R. Ryan. WMC is
a professional investment counseling firm which provides investment services to
investment companies, employee benefit plans, endowment funds, foundations and
other institutions and individuals. As of December 31, 1996, WMC had
approximately $133.2 billion of assets under management.
B-37
<PAGE> 132
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Trust.
On October 21, 1993, PSI entered into an omnibus settlement with the
Securities and Exchange Commission (SEC), state securities regulators in 51
jurisdictions and the National Association of Securities Dealers, Inc. (NASD) to
resolve allegations that PSI sold interests in more than 700 limited
partnerships (and a limited number of other types of securities) from January 1,
1980 through December 31, 1990, in violation of securities laws to persons for
whom such securities were not suitable in light of the individuals' financial
condition or investment objectives. It was also alleged that the safety,
potential returns and liquidity of the investments had been misrepresented. The
limited partnerships principally involved real estate, oil and gas producing
properties and aircraft leasing ventures. The SEC Order (i) included findings
that PSI's conduct violated the federal securities laws and that an order issued
by the SEC in 1986 requiring PSI to adopt, implement and maintain certain
supervisory procedures had not been complied with; (ii) directed PSI to cease
and desist from violating the federal securities laws and imposed a $10 million
civil penalty; and (iii) required PSI to adopt certain remedial measures
including the establishment of a Compliance Committee of its Board of Directors.
Pursuant to the terms of the SEC settlement, PSI established a settlement fund
in the amount of $330,000,000 and procedures, overseen by a court approved
Claims Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to
B-38
<PAGE> 133
obtain a mutually acceptable outside director to sit on the Board of Directors
of PSG and the Compliance Committee of PSI. The new director will also serve as
an independent "ombudsman" whom PSI employees can call anonymously with
complaints about ethics and compliance. Prudential Securities shall report any
allegations or instances of criminal conduct and material improprieties to the
new director. The new director will submit compliance reports which shall
identify all such allegations or instances of criminal conduct and material
improprieties every three months for a three-year period.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INCOME PORTFOLIOS
Each Adviser is responsible for decisions to buy and sell securities,
futures contracts and options thereon for the Portfolios, 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
Income Portfolios do not normally incur any brokerage commission expense on
portfolio transactions. The securities purchased by the Portfolios are generally
traded on a "net" basis, with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain money market instruments may be purchased directly from an issuer, in
which case no commissions or discounts are paid.
EQUITY PORTFOLIOS
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 Portfolio will not deal with an
affiliated broker/dealer acting as
B-39
<PAGE> 134
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 Portfolio's order.
In placing orders for securities for the Portfolios 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 merchant who effect or are parties to portfolio transactions of the
Trust, an Adviser or an Adviser's other clients. Such research and investment
services are those which brokerage houses customarily provide to institutional
investors and include statistical and economic data and research reports on
particular companies and industries. Such services are used by an Adviser in
connection with all of its investment activities, and some of such services
obtained in connection with the execution of transactions for an Adviser may be
used in managing other investment accounts. Conversely, brokers, dealers or
futures commission merchants furnishing such services may be selected for the
execution of transactions for such other accounts, whose aggregate assets are
far larger than the Trust's, and the services furnished by such brokers, dealers
or futures commission merchants may be used by an Adviser in providing
investment management for the Trust. Commission rates are established pursuant
to negotiations with the broker, dealer or futures commission merchant based on
the quality and quantity of execution services provided by the broker or futures
commission merchant in the light of generally prevailing rates. Each Adviser's
policy is to pay brokers, dealers and futures commission merchants, other than
to an affiliated broker, higher commissions for particular transactions than
might be charged if a different broker had been selected, on occasions when, in
an Adviser's opinion, this policy furthers the objective of obtaining best price
and execution. In addition, each Adviser is authorized to pay higher commissions
on brokerage transactions for the Trust to brokers, dealers and futures
commission merchants, other than to an affiliated broker, in order to secure
research and investment services described above, subject to review by the
Trustees from time to time as to the extent and continuation of this practice.
The allocation of orders among brokers, dealers and futures commission merchants
and the commission rates paid are reviewed periodically by the Trustees. While
such services are useful and important in supplementing its own research and
facilities, the Advisers believe that the value of such services is not
determinable and does not significantly reduce expenses.
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 Trustees who are not "interested"
persons,
B-40
<PAGE> 135
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,
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 for transactions effected by the Trust during the applicable period.
Brokerage transactions with an affiliated broker are also subject to such
fiduciary standards as may be imposed by applicable law.
The table below presents certain information regarding the payment of
commissions by the Trust, including the amount of such commissions paid to
Prudential Securities or any affiliate of the Trust or the Advisers for the
years ended December 31, 1996, 1995 and 1994. For the years ended December 31,
1996, 1995 and 1994 the Small Capitalization Value Portfolio and International
Equity Portfolio of the Trust did not pay commissions to Prudential Securities
or any affiliate of the Trust or the Adviser. For the years ended December 31,
1996, 1995 and 1994, the Intermediate-Term Bond Portfolio, Total Return Bond
Portfolio, Mortgage Backed Securities Portfolio and the U.S. Government Money
Market Portfolio paid no brokerage commissions. The International Bond Portfolio
was offered for sale as of May 17, 1994 and paid no brokerage commissions for
the years ended December 31, 1996 and 1995 and the period from May 17, 1994
through December 31, 1994.
<TABLE>
<CAPTION>
LARGE SMALL
CAPITALIZATION CAPITALIZATION
GROWTH LARGE CAPITALIZATION GROWTH
PORTFOLIO VALUE PORTFOLIO PORTFOLIO
------------ ---------------------------------------------- ------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total brokerage commissions
paid by the Trust............ $ 21,836 $116,061 $231,159 $ 88,180 $446,917
Total brokerage commissions
paid to Prudential
Securities or affiliates of
the Trust or the Advisers... $ 1,182 $ 5,910 $ 28,400 $ 22,878 $ 20,058
Percentage of total brokerage
commissions paid to
Prudential Securities or
affiliates of the Trust or
the Advisers................ 5.4% 5.1% 12.2% 25.9% 4.5%
Percentage of the aggregate
dollar amount of portfolio
transactions involving the
payment of commissions
through Prudential
Securities or affiliates of
the Trust or the Advisors... 7.0% 4.6% 12.8% 25.6 7.0%
</TABLE>
Of the total brokerage commissions paid during the year ended December 31,
1996, the Large Capitalization Growth Portfolio and the Larger Capitalization
Value Portfolio paid $ ( %) and $ ( %), respectively, to
firms which provided research, statistical or other services to the Advisers.
The Advisers have not separately identified a portion of such brokerage
commissions as applicable to the provision of such research, statistical or
other services.
B-41
<PAGE> 136
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio may be purchased at a price equal to the next
determined net asset value per share.
SPECIMEN PRICE MAKE-UP
Using the net asset value of each portfolio at December 31, 1996, the
maximum offering price of the Portfolios' shares are as follows:
<TABLE>
<CAPTION>
LARGE LARGE SMALL SMALL TOTAL
CAPITALIZATION CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL INTERNATIONAL RETURN
GROWTH VALUE GROWTH VALUE EQUITY BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- -------------- -------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset
value,
offering
price and
redemption
price........ $12.97 $13.97 $14.93 $15.22 $ 14.82 $ 10.17 $ 10.28
====== ====== ====== ====== ====== ====== ======
<CAPTION>
MORTGAGE U.S. GOV'T
INTERMEDIATE BACKED MONEY
TERM BOND SECURITIES MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ---------- ----------
<S> <<C> <C> <C>
Net asset
value,
offering
price and
redemption
price........ $10.30 $10.21 $ 1.00
====== ====== ======
</TABLE>
SHAREHOLDER INVESTMENT ACCOUNT
The Trust makes available to its shareholders the following privileges and
plans:
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of each of the Portfolios
at net asset value per share on the payment date, unless the Trustees determine
otherwise. An investor may direct Prudential Securities in writing not less than
five full business days prior to the payment date to have subsequent dividends
and/or distributions paid in cash rather than reinvested. Any shareholder who
receives a cash payment representing a dividend or distribution may reinvest
such distribution at net asset value by returning the check or the proceeds to
Prudential Securities within 30 days after the payment date. Such investment
will be made at the net asset value per share next determined after receipt of
the check or proceeds by Prudential Securities.
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 beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
B-42
<PAGE> 137
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................... $ 110 $ 165 $ 220 $ 275
20 Years................... 176 264 352 440
15 Years................... 296 444 592 740
10 Years................... 555 833 1,110 1,388
5 Years................... 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
</TABLE>
- ---------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
INDIVIDUAL RETIREMENT ACCOUNTS
An individual retirement account (IRA) permits the deferral of federal
income tax on income earned in the account until the earnings are withdrawn. The
following chart represents a comparison of the earnings in a personal savings
account with those in an IRA, assuming a $2,000 annual contribution, an 8% rate
of return and a 39.6% federal income tax bracket and shows how much more
retirement income can accumulate within an IRA as opposed to a taxable
individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------------ -------- --------
<S> <C> <C>
10 years.............................. $ 26,165 $ 31,291
15 years.............................. 44,675 58,649
20 years.............................. 68,109 98,846
25 years.............................. 97,780 157,909
30 years.............................. 135,346 244,692
</TABLE>
- ---------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Trust or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in the IRA account will be subject to tax when withdrawn from the
account.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders of the Trust through Prudential Securities. Pursuant to the
withdrawal plan, a shareholder may receive monthly or quarterly checks in any
amount up to the value of his or her shares in the Trust.
B-43
<PAGE> 138
The shareholder must instruct Prudential Securities of the amount which he
or she wishes to withdraw under the Plan, whether such withdrawal should occur
monthly or quarterly, and which Target Portfolios should be redeemed in order to
satisfy the request. Prudential Securities will then redeem, monthly or
quarterly as applicable, sufficient full and fractional shares of the applicable
Target Portfolios to provide for the amount of the periodic withdrawal payment.
The 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 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. Each
shareholder should consult his or her tax adviser with regard to the tax
consequences of the systematic withdrawal plan, particularly if used in
connection with a retirement plan. Retirement plan shareholders should also
consult with their plan sponsor to determine if their retirement plan would
permit the shareholder to participate in the systematic withdrawal plan.
NET ASSET VALUE
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of each Portfolio. In
accordance with procedures adopted by the Trustees, the value of securities for
which the primary market is on an exchange shall be valued at the last sales
prices on that exchange on the day of valuation or, if there was no sale on such
day, the average of readily available closing bid and asked prices on such day.
Should an extraordinary event, which is likely to affect the value of the
security, occur after the close of an exchange on which a portfolio security is
traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Trustees. The value of 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
B-44
<PAGE> 139
contracts and options thereon traded on a commodities exchange or board of trade
shall be valued at the last sale price at the close of trading of the applicable
exchange or board of trade or, if there was no sale on the applicable exchange
or board of trade, at the average of quoted bid and asked prices as of the close
of such exchange or board of trade. Over-the-counter options are valued at the
mean between bid and asked prices provided by a dealer. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
current rate obtained by a recognized bank or dealer. Forward currency exchange
contracts are valued at the current cost of covering or offsetting such
contracts.
Each Portfolio other than the U.S. Government Money Market Portfolio will
compute its net asset value at 4:15 P.M., New York time on each day the New York
Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Portfolio shares have been received or days on which
changes in the value of the Portfolio's securities holdings do not affect net
asset value. The U.S. Government Money Market Portfolio will compute its net
asset value at 4:30 P.M., New York time on such days. In the event the New York
Stock Exchange closes early on any business day, the net asset value of the
Fund's shares shall be determined at a time between such closing and 4:15 P.M.,
New York time.
The U.S. Government Money Market Portfolio uses the amortized cost method
to determine the value of its portfolio securities. The amortized cost method
involved valuing a security at its cost and amortizing any discount or premium
over the period until maturity. The method does not take into account unrealized
capital gains and losses which may result from the effect of fluctuating
interest rates on the market value of the security.
The U.S. Government Money Market Portfolio maintains a dollar-weighted
average portfolio maturity of 90 days or less, purchases instruments having
remaining maturities of thirteen months or less and invests only in securities
determined by the investment adviser under the supervision of the Trustees to
present minimal credit risks and to be of "eligible quality" in accordance with
regulations of the Securities and Exchange Commission. The Trustees have
established procedures designed to stabilize, to the extent reasonably possible,
the Portfolio's price per share as computed for the purpose of sales and
redemptions at $1.00. Such procedures include review of the Portfolio's
securities holdings by the Trustees, at such intervals as it may deem
appropriate, to determine whether the Portfolio's net asset value calculated by
using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation will be examined by the Trustees. If
such deviation exceeds 1/2 of 1%, the Trustees will promptly consider what
action, if any, will be initiated. In the event the Trustees determine that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, the Trustees will take such corrective
action which they regard as necessary and appropriate, including the sale of
portfolio instruments prior to maturity to realize capital gains or losses or to
shorten average portfolio maturity, the withholding of dividends, redemptions of
shares in kind, or the use of available market quotations to establish a net
asset value per share.
B-45
<PAGE> 140
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL
Each Portfolio intends to continue to elect to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code for each taxable year. Accordingly, each Portfolio must, among
other things, (a) derive at least 90% of its gross income (without offset 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 foreign currencies,
including, but not limited to, gains derived from options and futures on such
securities or foreign currencies; (b) derive less than 30% of its gross income
from gains (without offset for losses) from the sale or other disposition of
certain securities or options thereon held less than three months; (c) diversify
its holdings so that, at the end of each fiscal quarter, (i) 50% of the value of
a Portfolio'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 Portfolio's assets and no more than 10% of the outstanding voting
securities of any such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities); and (d) distribute to its shareholders at least 90% of
its net investment income and net short-term gains (i.e., the excess of net
short-term capital gains over net long-term capital losses) in each year. These
requirements may limit a Portfolio's ability to engage in transactions
(including closing transactions) involving options on securities, interest rate
futures and options thereon.
As a regulated investment company, each Portfolio will not be subject to
federal income tax on its net investment income and capital gains, if any, that
it distributes to its shareholders. Distributions of net investment income and
net short-term capital gains will be taxable to the shareholder at ordinary
income rates regardless of whether the shareholder receives such distributions
in additional shares or in cash. To the extent a Portfolio's income is derived
from certain dividends received from domestic corporations, a portion of the
dividends paid to corporate shareholders of the Portfolio will be eligible for
the 70% dividends received deduction. Distributions of net capital gains (i.e.,
the excess of net long-term capital gains over net short-term capital losses),
if any, are taxable as long-term capital gains regardless of how long the
investor has held his or her shares. However, if a shareholder holds shares in a
Portfolio for not more than six months, then any loss recognized on the sale of
such shares will be treated as long-term capital loss to the extent any
distribution on the shares was treated as long-term capital gain. Shareholders
will be notified annually by the Trust as to the federal tax status of
distributions made by a Portfolio of the Trust. A 4% nondeductible excise tax
will be imposed on a Portfolio of the Trust to the extent a Portfolio does not
meet certain distribution requirements by the end of each calendar year.
Distributions may be subject to additional state and local taxes. Any
distributions of net investment income or short-term capital gains made to a
foreign shareholder will generally be subject to U.S. withholding tax of 30% (or
a lower treaty rate if applicable to such shareholder). See "Taxes, Dividends
and Distributions" in the Prospectus.
B-46
<PAGE> 141
ORIGINAL ISSUE DISCOUNT
A Portfolio may purchase debt securities that contain original issue
discount. Original issue discount that accrues in a taxable year is treated as
income earned by the Portfolio and therefore is subject to the distribution
requirements of the Internal Revenue Code. Because the original issue discount
income earned by the Portfolio in a taxable year may not be represented by cash
income, the Portfolio may have to dispose of other securities and use the
proceeds to make distributions to satisfy the Internal Revenue Code's
distribution requirements.
OPTIONS AND FUTURES TRANSACTIONS
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts). At
the end of each year, such investments held by a Portfolio will be required to
be "marked-to-market" for federal income tax purposes; that is, treated as
having been sold at market value. Sixty percent of any gain or loss recognized
on these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss.
CURRENCY FLUCTUATIONS
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Portfolio accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Portfolio actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
disposition of debt securities denominated in a foreign currency attributable to
fluctuations in the value of 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 the
Portfolio's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Portfolio's net capital gain. If Section 988 losses exceed other
investment company taxable income during a taxable year, distributions made by
the Portfolio during the year would be characterized as a return of capital to
shareholders, reducing each shareholder's basis in their shares.
FOREIGN WITHHOLDING
Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties may reduce or eliminate such taxes. It is impossible to determine in
advance the effective rate of foreign tax to which the Portfolio will be
subject, since the amount of the Portfolio's assets to be invested in various
countries is not known. Except in the case of the International Equity Portfolio
and the International Bond Portfolio, it is not anticipated that any Portfolio
will qualify to pass-through to the shareholders the ability to claim as a
foreign tax credit the foreign taxes paid by a Portfolio.
B-47
<PAGE> 142
BACKUP WITHHOLDING
With limited exceptions, each Portfolio is required to withhold federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Trust with their correct taxpayer
identification number or to make required certification or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Any amounts withheld may be credited against a shareholder's
federal income tax liability.
OTHER TAXATION
Distributions may also be subject to state, local and foreign taxes
depending on each shareholder's particular situation. Shareholders are advised
to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Trust.
PERFORMANCE INFORMATION
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
CURRENT YIELD AND EFFECTIVE YIELD
The Trust may from time to time advertise the current yield and effective
annual yield of the U.S. Government Money Market Portfolio calculated over a
7-day period. The yield quoted will be the simple annualized yield for an
identified seven calendar day period. The yield calculation will be based on a
hypothetical account having a balance of exactly one share at the beginning of
the seven-day period. The base period return will be the change in the value of
the hypothetical account during the seven-day period, including dividends
declared on any shares purchased with dividends on the shares but excluding any
capital changes divided by the value of the account at the beginning of the base
period. The yield will vary as interest rates and other conditions affecting
money market instruments change. Yield also depends on the quality, length of
maturity and type of instruments in the portfolio, and its operating expenses.
The Portfolio may also prepare an effective annual yield computed by compounding
the unannualized seven-day period return as follows: by adding 1 to the
unannualized 7-day period return, raising the sum to a power equal to 365
divided by 7, and subtracting 1 from the result. The seven-day yield and
effective yield for the U.S. Government Money Market Portfolio as of December
31, 1996 were 4.43% and 4.53%, respectively.
365/7
Effective Yield = [(base period return+1) ]-1]
OTHER PORTFOLIOS
YIELD
The Trust may from time to time advertise the yield of a Portfolio as
calculated over a 30-day period. This yield will be computed by dividing a
Portfolio's net investment income per share earned during this 30-day period by
the maximum offering price per share on the last day of this period. The average
number of shares used in determining the net investment income per share will be
the average daily number of shares outstanding during the 30-day period that
were eligible to receive dividends. In accordance with regulations of the
Securities and Exchange Commission, income will
B-48
<PAGE> 143
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 and distribution fees. The
30-day yield is then annualized on a bond-equivalent basis assuming semi-annual
reinvestment and compounding of net investment income, as described in the
Prospectus. Yield is calculated according to the following formula:
a - b 6
YIELD = 2[(------- +1) - 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 yield for the 30 day period ended December 31, 1996 for each of the
International Bond, Total Return Bond, Intermediate-Term Bond and Mortgage
Backed Securities Portfolios was 5.29%, 5.73%, 5.68%, and 7.01%, respectively.
A Portfolio's yield fluctuates, and an annualized yield quotation is not a
representation by a Portfolio as to what an investment in the Portfolio will
actually yield for any given period. Yields for a Portfolio will vary based on a
number of factors including changes in net asset value, market conditions, the
level of interest rates and the level of income and expenses.
AVERAGE ANNUAL TOTAL RETURN
The Trust may from time to time advertise the average annual total return
of a Portfolio. 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>
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable value of at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.
</TABLE>
B-49
<PAGE> 144
The average annual total returns for the one year period ended December 31,
1996 and the period since inception (January 5, 1993) for each Portfolio except
the International Bond Portfolio which commenced operation May 17, 1994 are set
forth below:
<TABLE>
<CAPTION>
ONE YEAR ENDED
DECEMBER 31, SINCE INCEPTION
1996 -----------------------------------
-------------- SUBSIDY ADJUSTED
AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL
PORTFOLIO TOTAL RETURN TOTAL RETURN TOTAL RETURN
- ------------------------------------ -------------- -------------- ----------------
<S> <C> <C> <C>
Large Capitalization Growth
Portfolio......................... 19.29% 9.16% 9.16%
Large Capitalization Value
Portfolio......................... 17.39% 11.61% 11.61%
Small Capitalization Growth
Portfolio......................... 17.11% 12.86% 12.84%
Small Capitalization Value
Portfolio......................... 20.03% 12.60% 12.58%
International Equity Portfolio...... 13.53% 13.58% 13.58%
International Bond Portfolio........ 3.41% 6.33% 6.21%
Total Return Bond Portfolio......... 3.97% 6.45% 6.27%
Intermediate-Term Bond Portfolio.... 4.17% 6.03% 6.00%
Mortgage Backed Securities
Portfolio......................... 4.50% 6.31% 6.21%
</TABLE>
AGGREGATE TOTAL RETURN
The Trust may from time to time advertise the aggregate total return of a
Portfolio. A Portfolio's aggregate total return figures represent the cumulative
change in the value of an investment in the Portfolio for the specified period
and are computed by the following formula:
ERV-P
-----------
P
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.
</TABLE>
B-50
<PAGE> 145
The aggregate total returns for each portfolio for the one year period
ended December 31, 1996 and the period since inception (January 5, 1993) are set
forth below:
<TABLE>
<CAPTION>
ONE YEAR
ENDED
DECEMBER 31, SINCE INCEPTION
1996 ---------------------------------
------------ SUBSIDY ADJUSTED
AGGREGATE AGGREGATE AGGREGATE
PORTFOLIO TOTAL RETURN TOTAL RETURN TOTAL RETURN
- -------------------------------------------------- ------------ ------------ ----------------
<S> <C> <C> <C>
Large Capitalization Growth
Portfolio....................................... 21.09% 50.55% 50.55%
Large Capitalization Value Portfolio.............. 19.17% 64.51% 64.51%
Small Capitalization Growth
Portfolio....................................... 18.88% 71.96% 71.84%
Small Capitalization Value Portfolio.............. 21.75% 70.40% 70.29%
International Equity Portfolio.................... 15.25% 76.35% 76.35%
International Bond Portfolio...................... 4.45% 20.62% 20.27%
Total Return Bond Portfolio....................... 5.02% 33.53% 32.62%
Intermediate-Term Bond Portfolio.................. 5.22% 31.45% 31.32%
Mortgage Backed Securities
Portfolio....................................... 5.56% 32.81% 32.29%
</TABLE>
Comparative performance information may be used from time to time in
advertising or marketing the Portfolio shares, including data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., Donoghue's Money Fund
Report, The Bank Rate Monitor, other industry publications, business periodicals
and market indices.
B-51
<PAGE> 146
The following charts reflect the effect of taxes and inflation on an
investment in cash equivalent securities during the period 1987 to 1991 and the
average annual return for certain types of investments over varying holding
periods.
<TABLE>
<S> <C>
SAVING IS NO LONGER ENOUGH:
THE COMBINED EFFECTS OF INFLATION AND TAXES
EROSION OF A $10,000 INVESTMENT OVER 5 YEARS.
Initial Investment....................................................... $10,000
Invest for 5 years (1987-1991) in Cash Equivalents.
Average return=46.7%..................................................... +3.838
-------
13,838
Income tax paid on interest.............................................. -1,427
12,411
-------
Adjust for inflation: 5-year average=44.5%............................... -2,464
-------
$ 9,947
=======
THIS INVESTOR RECEIVED A REAL AFTER-TAX RETURN OF -0.1%
</TABLE>
Time is on your side: Reduction of risk overtime
GRAPH TO BE PASTED IN HERE
Each Bar shows the range of compound average
annual returns for the specified holding
period of each type of investment.
Past performance is not indicative of future results.
Source: Ibbotson Associates, Inc., Chicago
B-52
<PAGE> 147
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
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 Service LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Trust.
It is a wholly-owned subsidiary of PMF. 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. 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. For the fiscal year ended December 31, 1996, the
Fund incurred the following fees for the services of PMFS.
<TABLE>
<CAPTION>
PORTFOLIO
- ----------------------------------------------------------------------------------
<S> <C>
Large Capitalization Growth Portfolio............................................. $93,300
Large Capitalization Value Portfolio.............................................. 93,300
Small Capitalization Growth Portfolio............................................. 93,100
Small Capitalization Value Portfolio.............................................. 88,300
International Equity Portfolio.................................................... 93,300
International Bond Portfolio...................................................... 32,200
Total Return Bond Portfolio....................................................... 36,400
Intermediate-Term Bond Portfolio.................................................. 40,400
Mortgage Backed Securities Portfolio.............................................. 49,700
U.S. Government Money Market Portfolio............................................ 7,400
</TABLE>
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, served as the Trust's independent accountants for the fiscal year ended
December 31, 1996 and in that capacity audited the Trust's annual financial
statements. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New
York 10036 currently serves as the Trust's independent accountants and, in that
capacity, will audit the Trust's annual financial statements.
B-53
<PAGE> 148
THE TARGET PORTFOLIO TRUST
Large Capitalization Growth
Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--97.1%
Common Stocks--97.1%
Aerospace--3.7%
38,500 Boeing Co.................. $ 4,095,438
28,800 Honeywell, Inc............. 1,893,600
24,200 Lockheed Martin Corp....... 2,214,300
------------
8,203,338
------------
Apparel & Textiles--0.7%
24,700 NIKE, Inc.................. 1,475,825
------------
Auto Parts--0.5%
44,200 AutoZone, Inc.*............ 1,215,500
------------
Banks--4.2%
27,000 Citicorp................... 2,781,000
65,700 NationsBank Corp........... 6,422,175
------------
9,203,175
------------
Business Services--0.9%
43,600 CUC International Inc.*.... 1,035,500
35,600 Service Corp.
International............ 996,800
------------
2,032,300
------------
Chemicals--0.8%
43,600 IMC Global, Inc............ 1,705,850
------------
Computers & Business Equipment--15.3%
100,000 3Com Corp.*................ 7,337,500
53,600 Apple Computer, Inc........ 1,118,900
143,000 Bay Networks, Inc.*........ 2,985,125
29,600 Cabletron Systems, Inc.*... 984,200
149,900 Cisco Systems, Inc.*....... 9,537,387
71,000 Compaq Computer Corp....... 5,271,750
9,300 International Business
Machines Corp............ 1,404,300
200,000 Sun Microsystems, Inc.*.... 5,137,500
------------
33,776,662
------------
Cosmetics & Toiletries--1.0%
18,600 Avon Products, Inc........ $ 1,062,525
13,500 Gillette Co............... 1,049,625
-----------
2,112,150
-----------
Drugs & Healthcare--12.7%
52,800 American Home Products
Corp.................... 3,095,400
35,100 Cardinal Health, Inc...... 2,044,575
59,800 Columbia/HCA Healthcare
Corp.................... 2,436,850
80,300 Johnson & Johnson Co...... 3,994,925
19,600 Lilly (Eli) & Co.......... 1,430,800
22,000 Medtronic, Inc............ 1,496,000
78,000 Merck & Co., Inc.......... 6,181,500
88,000 Pfizer Inc................ 7,293,000
-----------
27,973,050
-----------
Electronics--10.5%
42,800 Adaptec Inc............... 1,712,000
82,300 Ascend Communications,
Inc.*................... 5,112,887
10,000 Aspect Telecommunications
Corp.*.................. 635,000
106,000 Linear Technology Corp.... 4,650,750
100,000 Maxim Integrated Products,
Inc.*................... 4,325,000
45,000 Motorola, Inc............. 2,761,875
110,000 Xilinx Inc.*.............. 4,049,375
-----------
23,246,887
-----------
Financial Services--3.8%
38,200 Associates First Capital
Corp.................... 1,685,575
34,100 Chase Manhattan Corp...... 3,043,425
57,700 Green Tree Financial
Corp.................... 2,228,663
17,500 Merrill Lynch & Co., Inc.. 1,426,250
-----------
8,383,913
-----------
Gas & Pipeline Utilities--0.8%
33,900 Sonat Inc................. 1,745,850
-----------
Hotels & Restaurants--1.1%
91,700 Hilton Hotels Corp........ 2,395,663
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-54
<PAGE> 149
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
Industrial Machinery--2.2%
136,000 Applied Materials, Inc.*... $ 4,887,500
------------
Insurance--3.8%
57,900 Allstate Corporation....... 3,350,962
47,000 American International
Group, Inc............... 5,087,750
------------
8,438,712
------------
Leisure--0.6%
18,200 Disney (Walt) Co........... 1,267,175
------------
Oil & Gas--2.3%
12,700 Atlantic Richfield Co...... 1,682,750
28,900 Burlington Resources, Inc.. 1,455,838
13,600 Transocean Offshore Inc.... 851,700
45,400 USX - Marathon Group....... 1,083,925
------------
5,074,213
------------
Paper--0.9%
21,200 Kimberly-Clark Corp........ 2,019,300
------------
Petroleum Services--1.5%
33,200 Schlumberger Ltd........... 3,315,850
------------
Retail Grocery--1.0%
51,200 Safeway Inc................ 2,188,800
------------
Retail Trade--3.9%
21,000 Home Depot, Inc............ 1,052,625
70,800 Price / Costco, Inc.*...... 1,778,850
99,100 Staples, Inc.*............. 1,789,994
42,600 TJX Companies Inc.......... 2,018,175
66,900 Toys 'R' Us, Inc.*......... 2,007,000
------------
8,646,644
------------
Semiconductors & Equipment--9.2%
170,000 Atmel Corp.*............... 5,631,250
105,100 Intel Corp................. 13,761,531
37,400 LSI Logic Corp.*........... 1,000,450
------------
20,393,231
------------
Software & Services--9.3%
30,900 Computer Associates $ 1,537,275
International, Inc......
74,384 First Data Corp........... 2,715,016
44,000 HBO & Co.................. 2,612,500
91,000 Microsoft Corp.*.......... 7,518,875
29,000 Netscape Communications
Corp.................... 1,649,375
90,000 Parametric Technology
Corp.*.................. 4,623,750
-----------
20,656,791
-----------
Telecommunication--6.4%
53,700 Lucent Technologies Inc... 2,483,625
30,400 Qualcomm, Inc............. 1,212,200
94,300 U.S. Robotics Corp........ 6,789,600
136,500 WorldCom Inc.*............ 3,557,531
-----------
14,042,956
-----------
Total common stocks
(cost $167,156,566)....... 214,401,335
-----------
SHORT-TERM INVESTMENTS--2.7%
Principal
Amount
(000) Repurchase Agreement--2.7%
- ----------
$ 5,971 State Street Bank & Trust
Co., 4.00%, dated 12/31/96,
due 1/2/97 in the amount
of $5,972,327 (cost
$5,971,000: value of
collateral including
accrued interest
$6,253,899)............. 5,971,000
-----------
Total short-term
investments
(cost $5,971,000)....... 5,971,000
-----------
Total Investments--99.8%
(cost $173,127,566)....... 220,372,335
Other assets in excess of
liabilities--0.2%......... 410,094
-----------
Net Assets--100%.......... $220,782,429
-----------
-----------
</TABLE>
- ---------------
* Non-income producing.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-55
<PAGE> 150
THE TARGET PORTFOLIO TRUST
Large Capitalization Value
Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--97.6%
Common Stocks--97.6%
Aerospace--2.6%
22,000 Boeing Co.................. $ 2,340,250
24,450 Lockheed Martin Corp....... 2,237,175
16,000 Northrop Grumman Corp...... 1,324,000
------------
5,901,425
------------
Agriculture Machinery--1.5%
39,500 Deere & Co................. 1,604,687
82,000 New Holland NV............. 1,711,750
------------
3,316,437
------------
Agriculture Products--0.8%
78,750 Archer-Daniels Midland
Co....................... 1,732,500
------------
Aluminum--1.7%
52,000 Aluminum Company of
America.................. 3,315,000
11,000 Reynolds Metals Co......... 620,125
------------
3,935,125
------------
Apparel & Textiles--2.4%
35,000 Reebok International,
Ltd...................... 1,470,000
45,000 Russell Corp............... 1,338,750
115,000 Shaw Industries, Inc....... 1,351,250
40,000 Unifi, Inc................. 1,285,000
------------
5,445,000
------------
Auto Parts--1.3%
50,000 Dana Corp.................. 1,631,250
30,000 Genuine Parts Co........... 1,335,000
------------
2,966,250
------------
Automobiles--3.7%
142,000 Ford Motor Co.............. 4,526,250
70,000 General Motors Corp........ 3,902,500
------------
8,428,750
------------
Banks--9.8%
105,000 Ahmanson (H.F.) & Co...... $ 3,412,500
9,000 BankAmerica Corp.......... 897,750
40,000 Boatmen's Bancshares...... 2,580,000
9,060 Chase Manhattan Corp...... 808,605
11,000 Comerica, Inc............. 576,125
9,600 First America Bank Corp... 577,200
45,000 First Chicago Nbd Corp.... 2,418,750
75,000 Great Western Financial
Corp.................... 2,175,000
27,000 Keycorp................... 1,363,500
72,000 National City Corp........ 3,231,000
22,000 NationsBank Corp.......... 2,150,500
8,500 Signet Banking Corp....... 261,375
35,000 Wachovia Corp............. 1,977,500
-----------
22,429,805
-----------
Brewery--1.7%
98,600 Anheuser Busch Cos.,
Inc.*................... 3,944,000
-----------
Chemicals--2.8%
36,000 Dow Chemical Co........... 2,821,500
21,000 Du Pont (E.I.) De Nemours
& Co.................... 1,981,875
6,700 Eastman Chemical Co....... 370,175
20,000 Great Lakes Chemical Corp. 935,000
8,785 Millennium Chemicals
Inc.*................... 155,934
-----------
6,264,484
-----------
Computers & Business Equipment--3.5%
30,000 Compaq Computer Corp.*.... 2,227,500
36,000 Hewlett-Packard Co........ 1,809,000
International Business
15,000 Machines Corp........... 2,265,000
30,000 Pitney Bowes, Inc......... 1,635,000
-----------
7,936,500
-----------
Conglomerate--3.5%
58,000 American Brands Inc....... 2,878,250
25,000 Dover Corp................ 1,256,250
223,000 Hanson PLC (ADR).......... 1,505,250
25,000 Textron, Inc.............. 2,356,250
-----------
7,996,000
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-56
<PAGE> 151
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
Domestic Oil--1.5%
16,000 Atlantic Richfield Co...... $ 2,120,000
50,000 USX - Marathon Group....... 1,193,750
------------
3,313,750
------------
Drugs & Healthcare--8.7%
32,500 Abbott Laboratories........ 1,649,375
54,000 American Home Products
Corp..................... 3,165,750
20,000 Baxter International, Inc.. 820,000
33,000 Bristol Myers Squibb Co.... 3,588,750
52,500 Columbia/HCA Healthcare
Corp..................... 2,139,375
34,000 Lilly (Eli) & Co........... 2,482,000
32,000 Merck & Co., Inc........... 2,536,000
87,000 Mylan Laboratories......... 1,457,250
30,000 Schering Plough Corp....... 1,942,500
------------
19,781,000
------------
Electric Utilities--6.8%
20,000 Central & South West Corp.. 512,500
73,000 CMS Energy Corp............ 2,454,625
6,000 DTE Energy Company......... 194,250
139,000 Edison International....... 2,762,625
21,000 General Public Utilities
Corp..................... 706,125
20,000 Illinova Corp.............. 550,000
50,000 New York State Electric &
Gas Corp................. 1,081,250
109,300 Niagara Mohawk Power Corp.. 1,079,337
45,000 PECO Energy Co............. 1,136,250
40,000 Public Service Enterprise
Group Inc................ 1,090,000
80,000 Southern Co................ 1,810,000
80,000 Unicom Corp................ 2,170,000
------------
15,546,962
------------
Electrical Equipment--1.5%
20,000 Emerson Electric Co.*...... 1,935,000
15,000 General Electric Co........ 1,483,125
------------
3,418,125
------------
Electronics--1.6%
40,000 Raytheon Co................ 1,925,000
27,000 Rockwell International
Corporation New.......... 1,643,625
------------
3,568,625
------------
Financial Services--2.9%
17,000 Beneficial Corp........... $ 1,077,375
Federal National Mortgage
104,000 Association............. 3,874,000
18,000 Household International,
Inc..................... 1,660,500
-----------
6,611,875
-----------
Food & Beverages--2.4%
52,500 Heinz (H.J.) Co........... 1,876,875
50,000 PepsiCo, Inc.............. 1,462,500
60,000 Tyson Foods, Inc.......... 2,055,000
-----------
5,394,375
-----------
Forest Products--2.5%
16,000 Georgia-Pacific Corp...... 1,152,000
25,000 Kimberly-Clark Corp....... 2,381,250
47,000 Weyerhaeuser Co........... 2,226,625
-----------
5,759,875
-----------
Gas & Pipeline Utilities--0.4%
27,000 Eastern Enterprises....... 955,125
-----------
Household Appliances & Home
Furnishings--1.3%
70,000 Maytag Corp............... 1,382,500
36,000 Whirlpool Corp............ 1,678,500
-----------
3,061,000
-----------
Insurance--6.6%
55,000 American General Corp..... 2,248,125
27,000 Aon Corp.................. 1,677,375
10,000 General Reinsurance Corp.. 1,577,500
30,000 Jefferson-Pilot Corp...... 1,698,750
22,000 Lincoln National Corp..... 1,155,000
19,000 Marsh & Mclennan Cos.,
Inc..................... 1,976,000
55,000 SAFECO Corp............... 2,169,062
11,000 St. Paul Cos, Inc......... 644,875
14,000 Transamerica Corp......... 1,106,000
23,000 USLIFE Corp............... 764,750
-----------
15,017,437
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-57
<PAGE> 152
THE TARGET PORTFOLIO TRUST
Large Capitalization Value
Portfolio (cont'd)
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
International Oil--4.7%
25,000 Amoco Corp................. $ 2,012,500
30,000 Chevron Corp............... 1,950,000
31,000 Exxon Corp................. 3,038,000
50,000 Repsol S.A. (ADR).......... 1,906,250
11,000 Royal Dutch Petroleum Co... 1,878,250
------------
10,785,000
------------
Mining--0.6%
21,300 Phelps Dodge Corp.......... 1,437,750
------------
Miscellaneous--1.0%
52,000 Tenneco Incorporated New... 2,346,500
------------
Paper--2.1%
59,999 International Paper Co..... 2,422,460
25,000 Union Camp Corp............ 1,193,750
37,500 Westvaco Corp.............. 1,078,125
------------
4,694,335
------------
Petroleum Services--0.2%
7,900 Ashland, Inc............... 346,613
7,000 Ultramar Diamond Shamrock.. 221,375
------------
567,988
------------
Pollution Control--1.9%
115,300 Browning Ferris Industries,
Inc...................... 3,026,625
40,000 WMX Technologies, Inc...... 1,305,000
------------
4,331,625
------------
Publishing--0.2%
16,000 Dun & Bradstreet Corp...... 380,000
------------
Railroads & Equipment--1.3%
8,100 Conrail, Inc............... 806,963
35,000 Illinois Central Corp...... 1,120,000
12,000 Norfolk Southern Corp...... 1,050,000
------------
2,976,963
------------
Retail Trade--2.8%
113,800 Kmart Corp.*.............. $ 1,180,675
41,000 May Department Stores Co.. 1,916,750
37,000 Penney (J.C.) Co., Inc.... 1,803,750
34,400 Sears Roebuck & Co........ 1,586,700
-----------
6,487,875
-----------
Retail - Food & Restaurants--0.8%
40,000 McDonald's Corp........... 1,810,000
-----------
Steel--0.8%
55,000 USX-U.S. Steel Group, Inc. 1,725,625
-----------
Telephone--3.9%
38,000 ALLTEL Corp............... 1,192,250
63,000 AT&T Corp................. 2,740,500
31,000 Pacific Telesis Group..... 1,139,250
Southern New England
Telecommunications,
40,000 Corp.................... 1,555,000
40,000 Telefonos de Mexico, S.A.
(ADR)................... 1,320,000
31,000 U.S. West, Inc............ 999,750
-----------
8,946,750
-----------
Tires & Rubber--0.6%
65,000 Cooper Tire & Rubber Co... 1,283,750
-----------
Tobacco--4.0%
64,700 Imperial Tobacco Group
Plc., (ADR)*............ 824,925
57,000 Philip Morris Cos., Inc... 6,419,625
55,000 UST, Inc.................. 1,780,625
-----------
9,025,175
-----------
Trucking & Freight Forwarding--1.2%
80,000 Hunt J.B.Transport
Services, Inc........... 1,120,000
58,000 Ryder System, Inc......... 1,631,250
-----------
2,751,250
-----------
Total common stocks
(cost $168,442,491)....... 222,275,011
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-58
<PAGE> 153
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
SHORT-TERM INVESTMENTS--2.0%
Other--2.0%
$ 294 Seven Seas Money
Market Fund.............. $ 294,347
4,164 Seven Seas Series
Government Fund.......... 4,163,645
------------
Total other
(cost $4,457,992).......... 4,457,992
------------
Total short-term
investments
(cost $4,457,992).......... 4,457,992
------------
Total Investments--99.6%
(cost $172,900,483)........ 226,733,003
Other assets in excess of
liabilities--0.4%.......... 972,846
------------
Net Assets--100%........... $227,705,849
------------
------------
</TABLE>
- ---------------
* Non-income producing.
ADR--American Depository Receipts.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-59
<PAGE> 154
THE TARGET PORTFOLIO TRUST
Small Capitalization Growth
Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--96.9%
Common Stocks--96.9%
Apparel & Textiles--4.9%
34,600 American Eagle Outfitters.. $ 272,475
56,200 Dress Barn, Inc............ 843,000
9,000 Fila Holding SpA (ADR)..... 523,125
55,200 Finish Line, Inc.*......... 1,166,100
46,200 Goody's Family Clothing,
Inc...................... 825,825
42,000 Nautica Enterprises, Inc.*. 1,060,500
33,300 Stein Mart, Inc. *......... 674,325
64,300 Warnaco Group, Inc......... 1,904,887
------------
7,270,237
------------
Brewery--0.3%
47,400 Redhook Ale Brewery, Inc... 456,225
------------
Building Products--0.5%
18,400 Hughes Supply Inc.......... 793,500
------------
Business Services--7.4%
28,300 Analysts International
Corp..................... 799,475
37,600 Children's Comprehensive
Services, Inc.*.......... 493,500
44,700 Employee Solutions, Inc.... 916,350
33,600 Fiserv, Inc................ 1,234,800
63,400 GTECH Holdings Corp........ 2,028,800
33,700 International Telecomm.
Systems, Inc............. 817,225
37,100 Metro Networks, Inc........ 936,775
33,600 National Education Corp.*.. 512,400
34,600 National TechTeam, Inc..... 692,000
7,600 Robert Half International
Inc.*.................... 261,250
59,700 Scientific Games Holdings
Corp.*................... 1,596,975
13,200 Technology Solutions Co.... 547,800
------------
10,837,350
------------
Chemicals--3.2%
35,000 Carbide / Graphite Group
(The), Inc............... 686,875
79,700 Minerals Technologies,
Inc...................... 3,267,700
34,300 Mississippi Chemical Corp.. 823,200
------------
4,777,775
------------
Communication--3.3%
18,200 Cascade Communications
Corp.*.................. $ 1,003,275
14,700 DSP Communications, Inc... 284,813
56,000 Pairgain Technologies,
Inc.*................... 1,704,500
43,100 Spectran Corp.*........... 937,425
45,100 Xircom, Inc............... 980,925
-----------
4,910,938
-----------
Computers & Business Equipment--5.8%
17,000 Cisco Systems, Inc.*...... 1,081,625
11,100 Compaq Computer Corp...... 824,175
24,000 Dell Computer Corp.*...... 1,275,000
26,900 Encad, Inc................ 1,109,625
16,800 Gateway 2000 Inc.*........ 899,850
28,500 Identix, Inc.............. 233,344
19,600 Medic Computer Systems,
Inc.*................... 790,125
20,600 Sun Microsystems, Inc.*... 529,162
86,100 Wang Laboratories, Inc.... 1,743,525
-----------
8,486,431
-----------
Containers & Glass--0.5%
20,400 Bemis Co., Inc............ 752,250
-----------
Drugs & Healthcare--7.0%
47,000 Biovail Corp.
International........... 1,204,375
31,000 Health Management Systems,
Inc..................... 434,000
6,000 Incyte Pharmaceuticals,
Inc..................... 309,000
37,000 Inphynet Medical
Management, Inc......... 666,000
48,900 Jones Medical Industries,
Inc..................... 1,790,962
37,300 Medeva PLC (ADR).......... 629,438
56,200 NBTY, Inc................. 1,067,800
16,900 Oxford Health Plans, Inc.* 989,706
30,100 Scherer (R.P.) Corp....... 1,512,525
31,800 Sierra Health Services
Inc..................... 783,075
30,000 Sybron International Corp. 990,000
-----------
10,376,881
-----------
Electrical Equipment--0.6%
37,100 Park Electrochemical Corp. 844,025
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-60
<PAGE> 155
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
Electronics--5.2%
22,300 Ascend Communications, $ 1,385,387
Inc.*....................
5,100 Aspect Telecommunications
Corp.*................... 323,850
14,000 Aspen Technology Corp...... 1,123,500
13,700 BMC Industries, Inc........ 431,550
35,000 DII Group, Inc............. 813,750
57,000 Lexmark International
Group, Inc............... 1,574,625
40,000 Peak Technologies Group, 480,000
Inc......................
14,400 Pittway Corp............... 770,400
62,000 Thermospectra Corp......... 759,500
------------
7,662,562
------------
Financial Services--2.9%
22,800 Aames Financial Corp....... 817,950
36,000 Credit Acceptance Corp..... 846,000
19,200 Green Tree Financial Corp.. 741,600
55,600 Imperial Credit Industries,
Inc.*.................... 1,167,600
8,100 Student Loan Marketing
Association.............. 754,313
------------
4,327,463
------------
Gas & Pipeline Utilities--0.5%
41,500 Dreyfus (Louis) Natural Gas
Corp..................... 710,688
------------
Homebuilders--3.1%
68,384 Champion Enterprises, Inc.* 1,333,488
33,700 Coachmen Industries Inc.... 956,237
25,500 Lennar Corp................ 694,875
57,250 Watsco, Inc................ 1,653,094
------------
4,637,694
------------
Hotels & Restaurants--2.7%
14,400 HFS Incorporated *......... 860,400
136,600 Homegate Hospitality, Inc.. 1,144,025
4,200 Marriott International, 232,050
Inc......................
72,900 Renaissance Hotel Group N V 1,713,150
------------
3,949,625
------------
Household Appliances & Home
Furnishings--0.9%
25,600 Ethan Allen Interiors Inc.. 985,600
19,500 O'Sullivan Industries
Holdings, Inc............ 273,000
------------
1,258,600
------------
Industrial Machinery--0.9%
4,300 Graco, Inc................ $ 105,350
80,500 JLG Industries, Inc....... 1,288,000
-----------
1,393,350
-----------
Insurance--3.6%
36,100 Capmac Holdings Inc....... 1,195,812
19,700 Frontier Insurance Group, 753,525
Inc.....................
9,850 HCC Insurance Holdings, 236,400
Inc.....................
61,100 Integon Corp.............. 1,084,525
10,000 PMI Group (The), Inc...... 553,750
25,500 TIG Holdings, Inc......... 863,812
17,700 Vesta Insurance Group,
Inc..................... 555,338
-----------
5,243,162
-----------
Leisure--1.3%
12,900 Anchor Gaming............. 519,225
85,000 Silicon Gaming, Inc....... 1,370,625
-----------
1,889,850
-----------
Manufacturing--0.6%
52,250 Paxar Corp................ 901,313
-----------
Medical & Dental Supplies--1.3%
10,900 Hologic, Inc.*............ 269,775
20,300 Safeskin Corp............. 989,625
34,000 Xomed Surgical Products,
Inc..................... 680,000
-----------
1,939,400
-----------
Metal--1.8%
13,800 Mueller Industries, Inc.*. 531,300
23,000 Oregon Metallurgical
Corp.................... 741,750
41,100 Wolverine Tube, Inc....... 1,448,775
-----------
2,721,825
-----------
Miscellaneous--1.3%
16,900 Blyth Industries Inc...... 771,063
58,600 Metromail Corp............ 1,069,450
-----------
1,840,513
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-61
<PAGE> 156
THE TARGET PORTFOLIO TRUST
Small Capitalization Growth
Portfolio (cont'd)
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
Office Equipment & Services--1.9%
79,400 Danka Business Systems PLC
(ADR).................... $ 2,808,775
------------
Oil & Gas Exploration--6.5%
21,450 Chesapeake Energy Corp.*... 1,193,156
101,700 Comstock Resources, Inc.*.. 1,322,100
33,800 Cross Timbers Oil Co....... 849,225
131,600 Geoscience Corp............ 1,710,800
55,300 Marine Drilling Cos., Inc.. 1,088,719
35,300 Nuevo Energy Co............ 1,835,600
57,000 Reading & Bates Corp.*..... 1,510,500
------------
9,510,100
------------
Oil Field / Equipment & Services--2.0%
19,100 Camco International, Inc... 880,988
47,500 Roper Industries, Inc...... 1,858,437
5,500 Tidewater, Inc............. 248,875
------------
2,988,300
------------
Petroleum Services--3.4%
20,300 Parker & Parsley Petroleum
Co....................... 746,025
88,900 Petroleum Geo-Services A/S
(ADR).................... 3,467,100
39,100 Veritas DGC Inc.*.......... 723,350
------------
4,936,475
------------
Publishing--3.2%
100,500 Big Flower Press Holdings,
Inc...................... 1,884,375
8,300 Gardner Denver Machinery
Inc.*.................... 284,275
15,400 Gartner Group, Inc.*....... 599,638
32,000 Golden Books Family
Entert., Inc............. 356,000
136,500 Hollinger, Inc............. 1,569,750
------------
4,694,038
------------
Retail Trade--4.1%
27,200 Barnes & Noble, Inc.*...... 734,400
4,200 Bed Bath & Beyond, Inc.*... 101,850
47,600 CompUSA Inc.*.............. 981,750
96,000 Heilig Meyers Co........... 1,560,000
39,500 Ross Stores, Inc........... 1,975,000
34,000 Tuesday Morning Corp....... 726,750
------------
6,079,750
------------
Retail/Wholesale--0.7%
39,000 Tech Data Corp.*.......... $ 1,067,625
-----------
Semiconductors & Equipment--0.6%
18,100 Vitesse Semiconductor
Corp.*.................. 823,550
-----------
Software--8.6%
50,500 3Do Company............... 243,031
22,950 Cadence Design Systems, 912,263
Inc.*...................
Computer Associates
17,550 International, Inc...... 873,113
16,400 Compuware Corp.*.......... 822,050
132,100 Decisionone Corp.......... 2,179,650
14,800 HBO & Co.................. 878,750
35,300 Hyperion Software Corp.... 750,125
20,900 Manugistics Group, Inc.... 830,775
45,562 McAfee Associates, Inc.*.. 2,004,728
50,000 Memco Software Ltd........ 881,250
17,400 Microchip Technology, Inc. 885,225
24,200 Peoplesoft, Inc.*......... 1,160,087
12,000 Reynolds & Reynolds Co.... 312,000
-----------
12,733,047
-----------
Steel--1.7%
11,300 Shaw Group Inc............ 264,138
65,000 Shiloh Industries, Inc.... 1,056,250
58,500 Steel Dynamics, Inc....... 1,118,812
-----------
2,439,200
-----------
Telephone--0.3%
22,900 LCI International, Inc.*.. 492,350
-----------
Toys & Amusements--0.5%
38,900 Equity Marketing Inc...... 719,650
-----------
Transportation--3.8%
53,500 Coach USA, Inc............ 1,551,500
69,500 Landstar Systems, Inc..... 1,615,875
41,500 Offshore Logistics, Inc... 804,062
51,300 Teekay Shipping Corp...... 1,680,075
-----------
5,651,512
-----------
Total common stocks
(cost $115,034,187)....... 142,926,029
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-62
<PAGE> 157
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
SHORT-TERM INVESTMENTS--1.1%
Other--1.1%
$ 178 Seven Seas Money Market
Fund..................... $ 178,307
1,434 Seven Seas Series
Government Fund.......... 1,434,495
------------
Total other
(cost $1,612,802)........ 1,612,802
------------
Total short-term
Investments
(cost $1,612,802)........ 1,612,802
------------
Total Investments--98.0%
(cost $116,646,989)........ 144,538,831
Other assets in excess of
liabilities--2.0%........ 2,930,444
------------
Net Assets--100%........... $147,469,275
------------
------------
</TABLE>
- ------------------
* Non-income producing.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-63
<PAGE> 158
THE TARGET PORTFOLIO TRUST
Small Capitalization Value
Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--96.2%
Common Stocks--96.2%
Aerospace--2.2%
28,200 AAR Corp................... $ 853,050
15,300 Alliant Techsystems, Inc... 841,500
44,400 Martin Marietta Materials,
Inc...................... 1,032,300
------------
2,726,850
------------
Airlines--0.6%
31,800 USAir Group Inc.*.......... 743,325
------------
Apparel & Textiles--1.9%
36,500 Interface, Inc............. 734,563
24,900 Unitog Co. (New)........... 678,525
33,700 Warnaco Group, Inc......... 998,362
------------
2,411,450
------------
Auto Parts--1.0%
15,600 Borg-Warner Automotive,
Inc...................... 600,600
44,900 Standard Motor Products,
Inc...................... 622,988
------------
1,223,588
------------
Auto Related--2.7%
32,000 Amcast Industrial Corp..... 792,000
23,800 First Brands Corp.......... 675,325
24,800 Modine Manufacturing Co.... 663,400
40,680 Myers Industries, Inc...... 686,475
20,800 Smith AO Corp.............. 621,400
------------
3,438,600
------------
Banks--5.9%
38,300 First American Corp........ 2,207,037
22,900 First Commerce Corp........ 890,237
18,500 Firstmerit Corp............ 656,750
28,200 Long Island Bancorp, Inc... 987,000
37,300 ML Bancorp, Inc............ 526,863
27,800 North Fork Bancorp, Inc.... 990,375
27,900 People's Bank.............. 805,613
13,200 Susquehanna Bancshares,
Inc...................... 457,050
------------
7,520,925
------------
Broadcasting--0.8%
39,200 International Cabletel,
Inc..................... $ 989,800
-----------
Building & Construction--4.1%
20,100 Carlisle Co., Inc......... 1,216,050
26,650 Clarcor, Inc.............. 589,631
27,800 Donaldson Co., Inc........ 931,300
52,600 Lydall, Inc.*............. 1,183,500
29,150 Osmonics, Inc.*........... 641,300
32,400 Regal Beloit Corp......... 635,850
-----------
5,197,631
-----------
Business Services--0.8%
38,200 Bowne & Company, Inc...... 940,675
3,450 Nichols Research Corp.*... 87,975
-----------
1,028,650
-----------
Chemicals--3.1%
27,700 Ferro Corp................ 785,987
18,100 Furon Co.................. 384,625
46,200 Hanna (M.A.) Co........... 1,010,625
26,700 Learonal, Inc............. 614,100
24,090 Rock-Tenn Co., Cl. A...... 481,800
34,950 RPM, Inc.................. 594,150
-----------
3,871,287
-----------
Communication--1.4%
45,600 Allen Group, Inc.......... 1,014,600
24,400 Associated Group, Inc..... 750,300
-----------
1,764,900
-----------
Computers & Business Equipment--2.7%
73,200 Intelligent Electronics,
Inc..................... 585,600
20,600 MTS Systems Corp.......... 412,000
42,600 Planar Systems, Inc.*..... 500,550
46,400 Stratus Computer, Inc..... 1,264,400
32,800 Wang Laboratories, Inc.... 664,200
-----------
3,426,750
-----------
Diversified Industrials--2.1%
27,200 Applied Power, Inc........ 1,077,800
23,700 Brady (W.H.) Co........... 583,613
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-64
<PAGE> 159
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
Diversified Industrials--(cont'd)
18,800 Teleflex, Inc.............. $ 979,950
------------
2,641,363
------------
Drugs & Healthcare--3.1%
22,200 Bergen Brunswig Corp....... 632,700
38,100 Integrated Health Services,
Inc...................... 928,687
13,600 Scherer (R.P.) Corp.*...... 683,400
49,500 Sunrise Medical, Inc....... 785,813
19,200 Vital Signs, Inc........... 499,200
13,400 West Co., Inc.............. 378,550
------------
3,908,350
------------
Electrical Equipment--5.4%
37,900 American Power Conversion
Co....................... 1,032,775
54,400 Anixter International,
Inc...................... 877,200
21,750 Bearings, Inc.............. 606,281
51,200 Belden, Inc................ 1,894,400
25,200 Berg Electronics Corp.*.... 740,250
38,500 Core Industries, Inc....... 635,250
28,200 Oak Industries, Inc........ 648,600
32,900 Woodhead Industries, Inc... 452,375
------------
6,887,131
------------
Electronics--4.2%
54,700 Amphenol Corp.............. 1,217,075
34,200 Dallas Semiconductor Corp.. 786,600
26,400 Esterline Technologies
Corp.*................... 689,700
43,550 Methode Eletronics, Inc.... 881,887
46,000 Pioneer Standard
Electronics, Inc......... 603,750
30,200 Wyle Electronics........... 1,192,900
------------
5,371,912
------------
Financial Services--1.4%
22,000 CMAC Investment Corp....... 808,500
48,700 Rollins Truck Leasing
Corp..................... 614,837
13,300 United Companies Financial
Corp..................... 354,113
------------
1,777,450
------------
Food - Service/Lodging--1.7%
23,700 Luby's Cafeterias, Inc..... 471,038
28,800 Marcus Corp................ $ 612,000
39,300 Sbarro, Inc................ 1,002,150
-----------
2,085,188
-----------
Foods--1.5%
27,500 Flowers Industries, Inc.... 591,250
14,600 Lancaster Colony Corp...... 671,600
17,600 Universal Foods Corp....... 620,400
-----------
1,883,250
-----------
Gas & Pipeline Utilities--0.5%
16,200 Wicor, Inc................. 581,175
-----------
Hospital Supplies & Services--2.7%
17,800 Beckman Instruments, Inc... 683,075
47,100 Magellan Health Services,
Inc...................... 1,053,863
63,100 Sierra Health Services
Inc.*.................... 1,553,837
9,000 SpaceLabs Medical, Inc..... 184,500
-----------
3,475,275
-----------
Household Appliances & Home
Furnishings--3.3%
21,000 Chromcraft Revington, Inc.* 582,750
26,500 Department 56, Inc.*....... 655,875
21,700 Ethan Allen Interiors
Inc...................... 835,450
16,600 Hon Industries, Inc........ 547,800
42,500 Linens N Things, Inc....... 834,062
26,400 Rival Co................... 656,700
4,200 Stanhome, Inc.............. 111,300
-----------
4,223,937
-----------
Industrial Machinery--9.7%
26,400 Alltrista Corp............. 679,800
24,000 Briggs & Stratton Corp..... 1,056,000
45,150 Crane Co................... 1,309,350
50,000 Duriron, Inc............... 1,356,250
27,700 Graco, Inc................. 678,650
25,100 Kennametal, Inc............ 975,762
57,723 Mark IV Industries, Inc.... 1,305,983
33,100 Measurex Corp.............. 794,400
18,200 NN Ball & Roller, Inc...... 277,550
28,500 Polaris Industries, Inc..... 676,875
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-65
<PAGE> 160
THE TARGET PORTFOLIO TRUST
Small Capitalization Value
Portfolio (cont'd)
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
Industrial Machinery--(cont'd)
19,800 Scotsman Industries, Inc... $ 467,775
16,500 Standex International Corp. 509,438
12,000 Stewart & Stevenson
Services, Inc............ 349,500
34,900 United Dominion Industries,
Ltd...................... 820,150
45,500 Watts Industries, Inc...... 1,086,312
------------
12,343,795
------------
Insurance--6.9%
18,200 American Bankers Insurance
Group, Inc............... 930,475
35,700 Blanch (E.W.) Holdings,
Inc...................... 718,462
12,700 Capmac Holdings, Inc....... 420,688
27,000 Enhance Financial Services
Group, Inc............... 985,500
21,300 Equitable of Iowa Co....... 977,137
14,900 Hartford Steam Boiler
Inspection & Insurance
Co....................... 690,988
44,700 Horace Mann Educators
Corp..................... 1,804,762
500 Liberty Corp............... 19,625
22,900 NAC Re Corp................ 775,737
21,300 Poe & Brown, Inc........... 564,450
14,600 Protective Life Corp....... 582,175
9,900 Vesta Insurance Group,
Inc...................... 310,613
------------
8,780,612
------------
Leisure And Recreation--0.8%
36,500 K2, Inc.................... 1,003,750
------------
Manufacturing--2.3%
38,200 Input/Output, Inc.......... 706,700
76,800 International Rectifier
Corp.*................... 1,171,200
26,700 Trinova Corp............... 971,212
------------
2,849,112
------------
Miscellaneous--1.4%
18,600 AptarGroup, Inc............ 655,650
46,900 Calpine Corp............... 938,000
11,700 Cuno, Inc.................. 174,038
------------
1,767,688
------------
Office Equipment--2.9%
38,500 Hunt Manufacturing Co..... $ 697,812
29,000 Lexmark International
Group, Inc.............. 801,125
37,800 Miller (Herman), Inc...... 2,140,425
-----------
3,639,362
-----------
Oil & Gas--2.2%
39,600 Devon Energy Corp......... 1,376,100
12,500 Helmerich & Payne, Inc.... 651,562
25,400 Ultramar Diamond Shamrock
Corp.................... 803,275
-----------
2,830,937
-----------
Oil & Gas - Production/pipeline--0.6%
17,700 Barrett Resources Corp.... 754,463
1,200 Production Operators
Corp.................... 55,800
-----------
810,263
-----------
Oil-Supplies & Construction--0.9%
7,400 BJ Services Co............ 377,400
16,900 Tidewater, Inc............ 764,725
-----------
1,142,125
-----------
Paper--0.8%
16,100 Caraustar Industries,
Inc..................... 535,325
27,600 Wausau Paper Mills Co..... 510,600
-----------
1,045,925
-----------
Pollution Control--0.3%
24,500 Safety-Kleen Corp......... 401,188
-----------
Printing & Publishing--2.3%
30,350 American Business
Products, Inc........... 762,544
66,150 Banta Corp................ 1,513,181
28,400 Lee Enterprises, Inc...... 660,300
-----------
2,936,025
-----------
Professional Services--1.1%
13,100 CDI Corp.*................ 371,713
10,000 Interim Services, Inc.*... 355,000
29,800 Jacobs Engineering Group,
Inc.*................... 704,025
-----------
1,430,738
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-66
<PAGE> 161
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
Railroads & Equipment--0.5%
31,500 ABC Rail Products Corp.*... $ 626,063
------------
Real Estate--2.6%
41,500 Arden Reality, Inc......... 1,151,625
46,300 Liberty Property........... 1,192,225
30,000 RFS Hotel Investors, Inc... 592,500
9,000 Sun Communities, Inc....... 310,500
------------
3,246,850
------------
Retail - Food & Drugs--1.0%
35,775 Arbor Drugs, Inc........... 621,591
44,400 Ruddick Corp............... 621,600
------------
1,243,191
------------
Retailing--2.7%
31,400 Carson Pirie Scott & Co.... 792,850
27,300 Lands End, Inc............. 723,450
21,900 Meyer (Fred), Inc.......... 777,450
30,700 Proffitt's, Inc.*.......... 1,132,062
------------
3,425,812
------------
Steel--0.7%
42,100 Lukens, Inc................ 847,263
------------
Telephone--0.3%
19,400 Cellular Communications
Puerto Rico, Inc......... 383,150
------------
Tobacco--0.2%
19,200 Swisher International
Group, Inc............... 304,800
------------
Toys & Amusements--0.4%
26,000 Russ Berrie & Co., Inc..... 468,000
------------
Transportation--0.7%
38,000 Harper Group, Inc.......... 902,500
------------
Trucking & Freight Forwarding--1.1%
37,600 Pittston Co............... $ 752,000
22,500 The Pittston Co........... 607,500
-----------
1,359,500
-----------
Trucking & Shipping--0.7%
48,600 Werner Enterprises, Inc... 880,875
-----------
Total common stocks
(cost $100,892,040)..... 121,848,311
-----------
SHORT-TERM INVESTMENTS--2.8%
Principal
Amount
(000) U.S. Government Securities--2.8%
- ----------
Federal Home Loan Mortgage
Discount Notes
$ 2,000 5.42%, 1/22/97.......... 1,993,677
United States Treasury
Bills
40 5.045%, 2/6/97.......... 39,798
United States Treasury
Bills
53 4.84%, 2/13/97.......... 52,694
United States Treasury
Bills
1,050 4.855%, 2/13/97......... 1,043,911
United States Treasury
Bills
430 4.935%, 2/13/97......... 427,465
------------
Total U.S. Government
Securities
(cost $3,557,545)....... 3,557,545
------------
Total short-term
investments
(cost $3,557,545)....... 3,557,545
------------
Total Investments--99.0%
(cost $104,449,585)....... 125,405,856
Other assets in excess of
liabilities--1.0%....... 1,266,047
------------
Net Assets--100%.......... $126,671,903
------------
------------
</TABLE>
- ---------------
* Non-income producing
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-67
<PAGE> 162
THE TARGET PORTFOLIO TRUST
International Equity Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--98.3%
Common Stocks--97.2%
Australia--2.7%
299,547 Coles Myer Ltd. .......... $ 1,233,331
(Retail)
911,700 Westpac Banking Corp. .... 5,188,595
(Banking) ------------
6,421,926
------------
Denmark--1.1%
50,700 Unidanmark A.S. .......... 2,625,025
(Banking) ------------
Finland--1.1%
120,380 UPM Kymmene Oy* .......... 2,525,363
(Forest Products) ------------
France--15.2%
19,625 Accor, S.A. .............. 2,485,039
(Lodging)
72,100 Alcatel Alsthom Compagnie
Generale d' Electricite . 5,791,901
(Energy)
103,960 Banque Nationale de Paris . 4,023,353
(Banking)
34,600 Cie De St Gobain ......... 4,894,748
(Manufacturing)
44,800 Eaux Cie Generale ........ 5,551,971
(Utilities)
171,977 Rhone Poulenc S.A. ....... 5,863,493
(Chemicals)
58,000 Societe Nationale Elf
Aquitaine .............. 5,279,638
(Energy)
31,932 Total Francaise Petroleum
Ltd. ................... 2,597,148
(Oil & Gas-Domestic) ------------
36,487,291
------------
Germany--13.9%
89,500 Daimler-Benz A.G. ........ 6,165,194
(Automobiles)
102,400 Deutsche Bank A.G. ...... $ 4,784,611
(Banking)
91,100 Deutsche Telekom A.G.
(ADR)* ................ 1,856,162
(Telecommunications)
164,600 Hoechst A.G. ............ 7,776,462
(Steel)
9,200 Mannesmann A.G. (ADR) ... 3,981,807
(Industrials)
25,900 Metro A.G. .............. 2,087,081
(Retail)
14,000 Thyssen A.G. ............ 2,483,754
(Manufacturing)
73,000 VEBA A.G. ............... 4,222,121
(Utilities) -----------
33,357,192
-----------
Hong Kong--3.2%
247,535 HSBC Holdings PLC ....... 5,296,664
(Banking)
262,000 Swire-Pacific, Ltd. ``A'' 2,498,222
(Diversified Industries) -----------
7,794,886
-----------
Italy--2.0%
500,100 Eni Spa ................. 2,566,433
(Oil & Gas Services)
436,800 Fiat Spa ................ 1,321,629
(Automobiles)
747,600 Istituto Nazionale
Assicuraz ............. 973,802
(Insurance) -----------
4,861,864
-----------
Japan--22.3%
157,000 Honda Motor Co., Ltd. ... 4,487,264
(Automobiles)
251,000 Matsushita Electric
Industrial Co., Ltd. ... 4,096,278
(Electrical Equipment)
589,000 Mitsubishi Heavy Inds.,
Ltd. .................. 4,679,043
(Electrical Equipment)
145,000 Mitsui Marine & Fire
Insurance Co., Ltd. 780,028
(Insurance)
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-68
<PAGE> 163
<TABLE>
<CAPTION>
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
Japan--(cont'd)
55,700 Nintendo Co., Ltd. ....... $ 3,987,160
(Software)
700,000 NKK Corp. ................ 1,577,584
(Steel)
100,000 Omron Corp. .............. 1,882,394
(Manufacturing)
77,000 Orix Corp. ............... 3,204,732
(Leasing)
38,400 Promise Co., Ltd. ........ 1,889,992
(Financial Services)
414,000 Ricoh Corp., Ltd. ........ 4,754,512
(Office Equipment &
Supplies)
81,000 Rohm Co., Ltd. ........... 5,315,603
(Technology)
259,000 Sekisui Chemical Corp.,
Ltd. ................... 2,616,613
(Chemicals)
114,900 Sony Corp. ............... 7,530,360
(Consumer Durable Goods)
359,000 Sumitomo Trust & Banking
Co., Ltd. ............... 3,595,890
(Banking)
111,000 Toyota Motor Corp. ....... 3,191,693
(Automobiles) ------------
53,589,146
------------
Korea--0.0%
1 Samsung Electronics Co.,
Ltd. ................... 18
(GDR) (Technology) ------------
Netherlands--3.5%
15,700 Heineken N.V. ............ 2,780,805
(Food & Beverage)
33,700 Royal Dutch Petroleum Co. . 5,754,275
(Energy) ------------
8,535,080
------------
New Zealand--0.5%
467,500 Lion Nathan Ltd. ........ 1,120,414
(Consumer Goods) ------------
Spain--2.3%
79,100 Empresa Nacional de
Electricidad .......... 5,629,763
S.A. (Energy) ------------
Sweden--3.2%
50,300 Astra AB ................ $ 2,426,531
(Pharmaceuticals)
44,400 Electrolux AB ........... 2,578,102
(Consumer Durable Goods)
97,800 Svenska Handelsbanken ... 2,810,716
(Banking) -----------
7,815,349
-----------
Switzerland--6.3%
1,125 Baloise Hldgs. .......... 2,260,927
(Financial Services)
3,200 Elecktrowatt A.G. ....... 1,274,262
(Utilities)
4,110 Nestle S.A. ............. 4,412,454
(Consumer Goods)
4,010 Novartis A.G.* .......... 4,592,701
(Pharmaceuticals)
Societe Generale
Surveillance
1,100 Holding S.A. .......... 2,703,773
(Business & Public -----------
Services)
15,244,117
-----------
United Kingdom--19.9%
416,800 Allied-Domecq PLC ....... 3,270,420
(Food & Beverage)
472,400 B.A.T Industries PLC .... 3,917,108
(Tobacco)
303,357 British Aerospace PLC ... 6,641,944
(Aerospace/Defense)
797,100 BTR PLC ................. 3,891,956
(Diversified Industries)
550,306 Cadbury Schweppes PLC ... 4,647,950
(Food & Beverage)
342,000 General Electric Co. PLC . 2,244,064
(Electrical Equipment)
630,600 Grand Metropolitan PLC ... 4,948,001
(Food & Beverage)
456,300 Mirror Group Newspapers
PLC ................... 1,680,735
(Printing)
448,800 National Power PLC ...... 3,752,174
(Utilities)
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-69
<PAGE> 164
THE TARGET PORTFOLIO TRUST
International Equity Portfolio
(cont'd)
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
<C> <S> <C>
United Kingdom--(cont'd)
299,750 Rank Group PLC ........... $ 2,249,280
(Recreation)
405,800 Redland PLC .............. 2,565,362
(Miscellaneous)
2,067,700 Sears PLC ................ 3,329,858
(Retail)
194,600 Unilever PLC ............. 4,717,475
(Conglomerate) ------------
47,856,327
------------
Total common stocks
(cost $195,801,241)...... 233,863,761
------------
Preferred Stocks--1.1%
Italy--1.1%
1,570,400 Fiat Spa
(Automobiles)
(cost $4,100,237)........ 2,593,179
------------
Total long-term investments
(cost $199,901,478)........ 236,456,940
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
SHORT-TERM INVESTMENTS--2.6%
U. S. Government Securities--2.6%
United States Treasury
Bills
$ 4,632 Zero Coupon, 2/6/97........ $ 4,609,063
1,580 Zero Coupon, 2/13/97....... 1,570,687
------------
Total U. S. government
securities
(cost $6,179,750).......... 6,179,750
------------
Total Investments--100.9%
(cost $206,081,228; Note 4) 242,636,690
Liabilities in excess of
other assets--(0.9%)..... (2,073,764)
------------
Net Assets--100%........... $240,562,926
------------
------------
</TABLE>
- ------------------
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
* Non-income producing securities.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-70
<PAGE> 165
International Bond Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--88.3%
Australia--1.6%
Australian Gov't. Bonds,
A$ 562 10.00%, 2/15/06............ $ 521,082
145 10.00%, 10/15/07........... 137,013
----------
658,095
----------
Canada--3.2%
Canadian Gov't. Bonds,
C$ 881 7.50%, 12/1/03............. 695,831
860 6.50%, 6/1/04.............. 640,996
----------
1,336,827
----------
Denmark--3.8%
Danish Gov't. Bonds,
DKr 8,540# 8.00%, 3/15/06............. 1,592,081
----------
France--4.9%
Caisse Autonome, Corporate
Bonds,
FF 5,810 7.75%, 12/6/99............. 1,231,203
Credit Foncier de France,
Corporate Bonds,
3,750 8.625%, 2/20/02............ 830,081
----------
2,061,284
----------
Germany--15.0%
Deutsche Pfandbriefe
Hypobk,
DM 240 5.625%, 2/7/03, Ser. G1.... 158,149
Deutsche Pfandbriefe
Hypobk,
875 5.625%, 2/7/03............. 576,586
Deutsche Bundespost,
2,000# 7.50%, 12/2/02............. 1,440,083
German Gov't. Bonds,
360 5.875%, 5/15/00............ 245,880
2,010# 7.125%, 12/20/02........... 1,433,568
1,210 6.00%, 1/5/06.............. 797,336
440 6.25%, 1/4/24.............. 270,782
Treuhandanstalt,
1,900# 7.125%, 1/29/03............ 1,353,262
----------
6,275,646
----------
Ireland--4.9%
Irish Gov't. Bonds,
IEP 570 6.25%, 4/1/99.............. $ 971,251
610 6.50%, 10/18/01............ 1,050,262
----------
2,021,513
----------
Italy--17.9%
Italian Gov't. Bonds,
L 7,450,000# 10.50%, 7/15/98............ 5,193,883
3,060,000# 10.50%, 7/15/00............ 2,259,196
----------
7,453,079
----------
Japan--8.2%
Int'l. Bank Recon. & Dev.,
Yen 60,000 4.50%, 6/20/00............. 575,857
Japanese Gov't. Bonds,
263,300# 3.20%, 3/20/06............. 2,372,815
52,000 3.80%, 9/20/16............. 474,114
----------
3,422,786
----------
Netherlands--1.1%
Dutch Gov't. Bonds,
NLG 780 6.25%, 7/15/98............. 470,756
----------
Spain--7.1%
Spanish Gov't. Bonds,
Pts 242,590# 10.25%, 11/30/98........... 2,018,080
113,670 8.40%, 4/30/01............. 957,428
----------
2,975,508
----------
Sweden--2.4%
Swedish Gov't. Bonds,
Skr 7,100 6.00%, 2/9/05.............. 1,008,069
----------
United Kingdom--18.2%
European Investment Bank,
Bonds,
(Pounds) 200 8.00%, 6/10/03............. 351,036
Province Of Ontario,
Provincial Bonds,
1,050 6.875%, 9/15/00............ 1,768,289
Treasury Corp. Victoria,
915# 8.75%, 7/9/03.............. 1,639,225
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-71
<PAGE> 166
THE TARGET PORTFOLIO TRUST
International Bond Portfolio
(cont'd)
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
United Kingdom--(cont'd)
United Kingdom Treasury
Bonds,
(Pounds) 280 10.00%, 2/26/01............ $ 525,605
980# 9.75%, 8/27/02............. 1,860,489
752 7.50%, 12/7/06............. 1,287,122
100 8.00%, 12/7/15............. 177,855
----------
7,609,621
----------
Total long-term investments
(cost US$36,066,657)..... 36,885,265
SHORT-TERM INVESTMENTS--9.3%
U.S. Government Securities--5.9%
United States Treasury
Bills,
US$ 2,500# 5.14%**, 4/24/97
(cost US$2,461,000)...... 2,459,945
----------
Repurchase Agreement--3.4%
US$ 1,434 State Street Bank & Trust
Company, 4.00%, dated
12/31/96, due 1/2/97 in
the amount of $1,434,319
(cost US$1,434,000; the
value of the collateral
including interest is
US$1,496,565)............ $1,434,000
----------
Total short-term
investments
(cost US$3,895,000)...... 3,893,945
----------
Total Investments--97.6%
(cost US$39,961,657; Note
4)....................... 40,779,210
Other assets in excess of
liabilities--2.4%........ 1,000,490
----------
Net Assets--100%........... $41,779,700
----------
----------
</TABLE>
- ------------------
# Principal amount segregated as collateral for forward currency contracts.
Aggregate value of segregated securities--$23,622,626.
** Percentage quoted represent yield-to-maturity as of purchase date.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-72
<PAGE> 167
Total Return Bond Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
LONG-TERM
INVESTMENTS--80.6%
Corporate Bonds--14.3%
Airlines--2.5%
United Airlines,
Inc.,
Baa1 $ 1,000@ 10.85%, 2/19/15...... $ 1,228,610
------------
Banking--1.1%
Kansallis Osake
Pankki,
(Finland)
A3 500++ 8.65%, 12/29/49...... 522,734
------------
Financial Services--0.5%
PaineWebber Group,
Inc.,
Baa1 250@ 6.75%, 2/1/06........ 236,673
------------
Industrials--2.0%
TCI Communications,
Inc.,
Baa3 1,000@ 7.25%, 6/15/99....... 1,002,820
------------
Manufacturing--0.8%
First Brands Corp.,
Ba1 400@ 9.125%, 4/1/99....... 409,625
------------
Miscellaneous--1.6%
CTC Mansfield Funding
Corp.,
Ba3 300@ 11.125%, 9/30/16..... 316,500
PDV America, Inc.,
Baa3 450@ 7.25%, 8/1/98........ 449,203
------------
765,703
------------
Publishing--2.8%
Time Warner, Inc.,
Baa3 87++@ 6.46%, 8/15/00....... 87,486
Baa3 262@ 8.11%, 8/15/06....... 268,595
Baa3 1,000@ 8.18%, 8/15/07....... 1,026,070
------------
1,382,151
------------
Tobacco--2.0%
RJR Nabisco, Inc.,
Baa3 $ 1,000@ 8.00%, 7/15/01....... $ 1,003,210
------------
Utilities--1.0%
El Paso Electric Co.,
Ba3 500@ 7.25%, 2/1/99........ 498,770
------------
Total corporate bonds
(cost
$6,988,335)........ 7,050,296
------------
U.S. Government Agency Mortgage
Backed Securities--52.6%
Federal Home Loan
Mortgage Corp.,
3,500 6.00%, 1/1/99........ 3,253,880
6.50%, 1/1/99 -
7,056@ 2/1/26, I/O........ 4,655,209
2,047 7.00%, 8/15/26....... 1,766,238
1,409 7.636%, 1/1/24....... 1,464,675
27@ 9.25%, 1/1/10........ 28,680
Federal National Mortgage Assn.,
1,387 6.679%, 3/1/26....... 1,396,965
2,388 7.135%, 1/1/20....... 2,448,595
17@ 8.50%, 4/1/99........ 17,715
Government National
Mortgage Assn.,
2,440@ 5.50%, 2/20/26....... 2,462,658
6.00%, 8/20/25 -
1,934@ 9/20/25............ 1,943,320
6.50%, 1/20/24 -
2,240@ 4/15/26............ 2,239,137
7.125%, 6/20/21 -
2,979@ 9/20/24............ 3,044,357
400 7.50%, 12/15/99...... 400,124
Resolution Trust
Corp.,
Aa2 406++@ 6.7625%, 6/25/23..... 409,558
Aaa## 163@ 8.35%, 6/25/29....... 164,404
Baa2 204@ 9.25%, 6/25/23....... 209,680
------------
Total U.S. gov't.
agency
mortgage backed
securities
(cost $25,714,204)... 25,905,195
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-73
<PAGE> 168
THE TARGET PORTFOLIO TRUST
Total Return Bond Portfolio
(cont'd)
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
Foreign Securities--8.0%
Canadian Real Return Bond,
Aaa## C$ 3,044@ 4.25%, 12/1/26....... $ 2,306,165
Petroleas Mexicano
(Mexico),
Ba2 US$1,000++@ 6.50%, 3/8/99........ 977,500
Republic of
Argentina,
Ba3 ARP 735++@ 6.625%, 3/31/05...... 639,450
------------
Total foreign
securities
(cost
US$3,757,362)...... 3,923,115
------------
Collateralized Mortgage
Obligations--5.5%
American Housing
Trust 1,
Senior Mortgage
Pass Through
Certificate,
Series 1-5 Class A,
Aaa## 23 8.625%, 8/25/18...... 23,583
Champion Home Loan Equity,
Series 1995, Class A2-3,
Aaa## 1,524++ 8.4297%, 2/25/28..... 1,555,652
Countrywide
Collateralized
Mortgage
Obligation,
Aaa## 500++@ 8.09204%, 11/25/24... 513,261
Mortgage Obligation
Structured Trust,
Mortgage Pass
Through
Certificate, Series
93-1 Class A-1,
Aaa 277@ 6.35%, 10/25/18...... 277,423
PaineWebber Mortgage
Acceptance Corp.,
Aaa 244@ 7.00%, 10/25/23...... 244,185
Sears Savings Bank, Series
1992A Class A
Aaa 89++@ 8.68%, 5/25/32....... 89,981
------------
Total collateralized
mortgage
obligations
(cost
$2,702,659)........ 2,704,085
------------
U.S. Government Securities--0.2%
United States
Treasury Bond,
$ 100@ 6.75%, 8/15/26
(cost $104,276).... $ 100,750
------------
Total long-term
investments
(cost
$39,266,836)....... 39,683,441
------------
SHORT-TERM
INVESTMENTS--30.1%
Corporate Bonds--20.5%
Electronics--2.0%
Motorola, Inc.
A1 1,000@ 5.33%, 1/16/97....... 997,779
------------
Financial Services--11.2%
Advanta National
Bank,
Baa2 1,000@ 6.31%, 10/15/97...... 1,001,910
General Electric
Capital Corp.,
A1 1,800@ 5.42%, 1/28/97....... 1,792,683
KFW International
Finance, Inc.,
A1 2,000@ 5.40%, 2/18/97....... 1,985,600
National Rural
Utilities
Cooperative Finance
Corp.,
A1 700@ 5.35%, 2/19/97....... 694,257
------------
5,474,450
------------
Publishing--2.0%
Dow Jones & Co., Inc.
A1 1,000 5.45%, 2/19/97....... 992,582
------------
Utilities--5.3%
BellSouth
Telecommunica-
tions, Inc.
A1 2,000@ 5.43%, 2/13/97....... 1,987,028
Cleveland Electric
Illuminating Co.,
Ba2 600@ 9.45%, 12/1/97....... 615,318
------------
2,602,346
------------
Total corporate bonds
(cost
$10,071,355)....... 10,067,157
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-74
<PAGE> 169
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
U.S. Government Agency Mortgaged
Backed Securities--0.6%
Federal Home Loan
Mortgage Corp.,
$ 300@ 5.41%, 2/3/97
(cost $298,512).... $ 298,512
------------
Foreign Securities--6.7%
Canadian Wheat Board,
A1 C$ 1,400@ 5.35%, 1/16/97....... 1,396,879
Kingdom Of Sweden,
A1 SEK 1,600@ 5.38%, 1/21/97....... 1,595,218
A1 300@ 5.40%, 2/4/97........ 298,470
------------
Total foreign
securities
(cost
US$3,290,567)...... 3,290,567
------------
U.S. Treasury Obligations--0.5%
United States
Treasury Bills,
50+ 4.66%, 1/23/97....... 49,835
170+ 4.96%, 3/6/97........ 168,477
30+ 4.97%, 3/13/97....... 29,702
------------
Total U.S. Treasury
Obligations
(cost $248,033).... 248,014
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
Repurchase Agreement--1.0%
State Street Bank & Trust Co.,
$ 510@ Repurchase Agreement,
2.00%, dated
12/31/96, due
1/2/97 in the
amount of $510,057
(cost $510,000;
value of collateral
including
accrued interest
$520,662).......... $ 510,000
------------
Outstanding Call Options
Purchased*--0.8%
<CAPTION>
Contracts
(000) United States Treasury Notes,
---------
expiring 1/6/97 @
$90.89
5,000 (cost $393,359).... 389,844
------------
Total short-term
investments
(cost
$14,811,826)....... 14,804,094
------------
Total Investments--110.7%
(cost US$54,078,662;
Note 4)............ 54,487,535
Liabilities in excess
of other
assets--(10.7%).... (5,269,740)
------------
Net Assets--100%..... $ 49,217,795
------------
------------
</TABLE>
- ---------------
* Non-income producing securities.
+ Pledged as initial margin on financial futures contracts.
++ Rate shown reflects current rate on variable rate instrument.
## Standard & Poor's Rating.
@ Principal amount of securities rated A or better segregated as collateral
for forward currency contracts. Aggregate value of segregated securities
$40,024,649.
I/O--Interest Only.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-75
<PAGE> 170
THE TARGET PORTFOLIO TRUST
Intermediate-Term Bond
Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
LONG-TERM
INVESTMENTS--68.2%
Corporate Bonds--14.7%
Airlines--1.8%
United Airlines, Inc.,
Baa1 $ 1,500@ 10.85%, 2/19/15........ $ 1,842,915
------------
Financial Services--2.0%
Salomon, Inc.,
Baa1 2,000@ 6.47%, 3/19/98......... 2,008,820
------------
Industrials--2.5%
TCI Communications,
Inc.,
Ba1 2,500@ 6.82%, 9/15/10......... 2,487,300
------------
Miscellaneous--1.1%
PDV America, Inc.,
Baa3 1,050@ 7.25%, 8/1/98.......... 1,048,142
------------
Publishing--1.2%
Time Warner, Inc.,
Ba1 300++@ 6.46%, 8/15/00......... 301,677
Ba1 900@ 8.11%, 8/15/06......... 922,653
------------
1,224,330
------------
Tobacco--1.9%
RJR Nabisco, Inc.,
Baa3 1,250@ 8.00%, 7/15/01......... 1,254,012
Baa3 600@ 8.625%, 12/1/02........ 612,444
------------
1,866,456
------------
Utilities--4.2%
CTC Mansfield Funding
Corp.,
Ba3 1,000@ 11.125%, 9/30/16....... 1,055,000
Long Island Lighting
Co.,
Ba3 1,535@ 7.30%, 7/15/99......... 1,548,262
Texas-New Mexico
Power Company,
Ba3 $ 1,500@ 12.50%, 1/15/99........ $ 1,629,525
------------
4,232,787
------------
Total corporate bonds
(cost
$14,617,583)....... 14,710,750
------------
U.S. Government Agency Mortgage
Backed Securities--38.5%
Federal Home Loan
Mortgage Corp.,
Aaa 157@ 6.00%, 4/1/24........ 147,055
6.50%, 9/15/18,
Aaa 1,604 I/O................ 182,461
6.50%, 12/15/21,
Aaa 2,609 I/O................ 383,467
Aaa 974@ 6.50%, 2/1/26........ 932,128
Aaa 4,800 6.50%, 1/14/27....... 4,588,464
Aaa 136@ 9.25%, 1/1/10........ 144,836
Federal National
Mortgage Assn.,
Aaa 208++@ 6.084%, 12/1/30...... 207,052
Aaa 3,000 6.50%, 1/30/27....... 2,973,750
Aaa 2,775++@ 6.678%, 3/1/26....... 2,793,929
Aaa 1,430++@ 6.875%, 8/1/24....... 1,430,428
Aaa 2,172++@ 7.48%, 8/1/25........ 2,246,179
Aaa 49@ 8.50%, 7/1/99........ 49,904
Aaa 54@ 8.50%, 4/1/99........ 55,587
Government National
Mortgage Assn.,
Aaa 2,440++@ 5.50%, 2/20/26....... 2,462,658
Aaa 1,549++@ 6.50%, 1/20/24....... 1,580,291
Aaa 1,516++@ 7.00%, 10/20/24...... 1,551,226
Aaa 879++@ 7.125%, 6/20/21...... 897,773
Aaa 2,079++@ 7.125%, 5/20/23...... 2,117,992
Aaa 1,279++@ 7.125%, 6/20/23...... 1,305,542
Aaa 2,202++@ 7.125%, 7/20/24...... 2,250,899
Aaa 8,300 8.00%, 1/21/27....... 8,466,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-76
<PAGE> 171
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
U.S. Government Agency Mortgage
Backed Securities (cont'd.)
Resolution Trust Corp.,
Aa2 $ 642++@ 6.7625%, 6/25/23....... $ 647,102
AAA## 816@ 8.35%, 6/25/29......... 822,020
Baa2 408@ 9.25%, 6/25/23......... 419,359
------------
Total U.S. Government
agency mortgage
backed securities
(cost $38,637,607)... 38,656,102
------------
Collateralized Mortgage
Obligations--10.8%
Champion Home Loan Equity,
Series 1995, Class A2,
Aaa 2,287++ 8.4297%, 2/25/28....... 2,333,478
Countrywide
Collateralized
Mortgage Obligation,
Aaa 834@ 6.75%, 2/25/24......... 831,504
Aa1 500@ 8.09204%, 11/25/24..... 513,262
Government National
Mortgage Association
Remic Trust 1995 2
Class Kq,
Aaa 3,000@ 8.50%, 3/20/25......... 3,150,000
Mortgage Obligation
Structured Trust,
Mortgage Pass Through
Certificate, Series
B-1, Class A-1
Aaa 416@ 6.35%, 10/25/18........ 416,134
PaineWebber Mortgage
Acceptance Corp.,
Aaa 488@ 7.00%, 10/25/23........ 488,370
Residential Asset Securities Corp.,
Ser 1996 Ks4 Class A2
Aaa 2,854++@ 5.745%, 10/25/27....... 2,854,473
Sears Savings Bank,
Series 1992-A, Class
A
Aaa 257++@ 8.68%, 5/25/32......... 259,395
------------
Total collateralized
mortgage obligations
(cost $10,872,088)... 10,846,616
------------
Foreign Government
Obligations--4.2%
Canadian Real Return
Bond,
AAA## $ 4,057@ 4.25%, 12/1/26..... $ 3,073,573
Republic of
Argentina,
B1 1,372++@ 6.625%, 3/31/05.... 1,193,640
------------
Total Foreign
Government
obligations
(cost
$4,037,200)........ 4,267,213
------------
Total long-term
investments
(cost
$68,164,478)....... 68,480,681
------------
SHORT-TERM
INVESTMENTS--47.0%
Corporate Bonds--23.1%
Advanta National
Bank,
Baa2 3,000@ 6.09%, 11/10/97...... 2,998,200
Baa2 2,000@ 6.31%, 10/15/97...... 2,003,820
Banco De La Nacional,
B1 275DD@ 6.4375%, 10/15/97.... 277,777
Banponce Financial
Corp.,
A3 1,000@ 7.73%, 8/15/97....... 1,010,710
Cleveland Electric Illuminating
Co.,
Ba2 1,500@ 9.45%, 12/1/97....... 1,538,295
Coca Cola Company,
P1 4,500@ 5.45%, 1/10/97....... 4,493,869
Electricite De France
P1 1,100@ 5.39%, 1/13/97....... 1,098,024
General Electric Capital Corp.,
P1 3,300@ 5.42%, 2/3/97........ 3,283,604
General Motors
Acceptance Corp.,
A3 1,000@ 7.125%, 3/27/97...... 1,003,310
A3 250@ 8.125%, 1/13/97...... 250,120
KFW International Finance Inc.,
P1 4,000@ 5.40%, 2/21/97....... 3,966,760
Kimberly Clark Corp.,
P1 1,300@ 5.42%, 2/12/97....... 1,291,780
------------
Total corporate bonds
(cost
$23,217,462)....... 23,216,269
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-77
<PAGE> 172
THE TARGET PORTFOLIO TRUST
Intermediate-Term Bond
Portfolio (cont'd)
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
<C> <C> <S> <C>
U.S. Government Agency Mortgage
Backed Securities--4.1%
Federal Home Loan Bank
P1 $ 4,000@ 5.40%, 1/16/97......... $ 3,991,000
Federal Home Loan
Mortgage Corporation,
P1 100@ 5.41%, 2/3/97.......... 99,504
------------
Total U.S. Government
agency mortgage
backed securities
(cost $4,090,504).... 4,090,504
------------
Collateralized Mortgage
Obligations--4.0%
New Center Asset Trust,
5.44%, 2/12/97
P1 4,000@ (cost $3,974,613).... 3,974,613
------------
Commercial Paper--7.9%
BellSouth
Telecommunications,
Inc.,
P1 4,000@ 5.36%, 2/18/97......... 3,970,341
Canadian Wheat Board,
P1 4,000@ 5.35%, 1/16/97......... 3,991,084
------------
Total commercial paper
(cost $7,962,497).... 7,961,425
------------
Corporate Notes--4.2%
AT&T Corp.,
P1 4,000@ 5.35%, 2/4/97.......... 3,979,789
Ford Motor Credit Co.,
P1 200@ 6.09%, 1/9/97.......... 199,729
------------
Total corporate notes
(cost $4,179,518).... 4,179,518
------------
U.S. Government Securities--0.3%
United States Treasury
Bills,
Aaa 100+ 4.66%, 1/23/97......... 99,670
Aaa 140+ 4.97%, 3/13/97......... 138,608
Aaa 110+ 4.96%, 3/6/97.......... 109,015
------------
Total U.S. Government
securities
(cost $347,332)...... 347,293
------------
Repurchase Agreement--0.9%
$ 907@ State Street Bank &
Trust Co.,
2.00%, dated
12/31/96, due
1/02/97 in the
amount of $907,101
(cost $907,000;
value of collat-
eral including
accrued interest
$929,727).......... $ 907,000
------------
Foreign Government
Obligations--2.5%
Kingdom Of Sweden,
P1 900@ 5.38%, 1/21/97....... 897,310
P1 400@ 5.40%, 1/29/97....... 398,320
P1 1,200@ 5.40%, 2/4/97........ 1,193,880
------------
Total Foreign
Government
obligations
(cost
$2,489,510)........ 2,489,510
------------
Total short-term
investments
(cost
$47,168,436)....... 47,166,132
------------
Total
Investments--115.2%
(cost US$115,332,914;
Note 4)............ 115,646,813
Liabilities in excess
of other
assets--(15.2%).... (15,254,796)
------------
Net Assets--100%..... $100,392,017
------------
------------
</TABLE>
- ---------------
I/O--Interest Only Security.
## Standard & Poor's Rating.
+ Pledged as initial margin on futures contracts.
++ Rate shown reflects current rate on variable rate instrument.
@ Principal amount of securities segregated as collateral for forward
currency contracts. Aggregate value of segregated securities $96,371,900.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-78
<PAGE> 173
Mortgage Backed Securities
Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
LONG-TERM INVESTMENTS--98.9%
Collateralized Mortgage
Obligations--22.0%
Federal Home Loan Mortgage
Corp.,
<C> <S> <C>
$ 652 4.25%, 12/15/21, PAC....... $ 504,074
2,763 4.50%, 9/15/21, PAC........ 2,263,070
225 5.25%, 12/15/22............ 192,302
100 5.95%, 6/15/19, PAC........ 96,968
1,396 6.00%, 10/15/20 - 8/15/21,
PAC...................... 1,325,584
743 6.25%, 10/15/21, PAC....... 711,146
2,300 6.50%, 2/15/23, PAC I/O.... 577,875
500 6.50%, 8/15/06 - 2/15/23,
PAC...................... 497,655
9,141 7.50%, 6/15/22, PAC I/O.... 1,285,411
500 8.00%, 12/15/06, PAC....... 515,935
662 8.00%, 10/15/07 -
7/15/21.................. 671,803
242 9.00%, 10/15/20............ 252,191
81 10.00%, 6/15/19, PAC....... 82,764
Federal National Mortgage
Assn.,
2,267 5.00%, 8/1/10 - 3/25/21.... 2,059,970
302 6.00%, 10/25/21............ 291,360
1,969 6.50%, 7/25/20............. 1,906,386
5,591 7.00%, 9/25/19, PAC I/O.... 651,754
300 8.00%, 8/25/06, PAC........ 310,593
392 8.50%, 6/25/21............. 404,250
First Boston Mortgage
Securities,
1,389 Zero Coupon, 4/25/17,
P/O...................... 1,020,145
822 10.965%, 5/25/17, I/O...... 265,473
1,389 8.985%, 4/25/17, I/O....... 405,278
----------
Total collateralized
mortgage obligations
(cost $15,853,078)....... 16,291,987
----------
U.S. Government Securities--0.4%
United States Treasury
Notes,
250 8.875%, 11/15/98
(cost $263,903).......... 263,048
----------
U.S. Government Agency Mortgage
Pass - Through Obligations--76.5%
Federal Home Loan Mortgage
Corp.,
12 6.50%, 1/1/98.............. 11,907
7,159 7.00%, 2/1/99 - 12/1/25.... 7,087,427
Federal Home Loan Mortgage
Corp.,
$ 36 7.25%, 7/1/06.............. $ 36,695
274 7.50%, 3/1/08.............. 278,586
121 8.00%, 1/1/02 - 2/1/02..... 124,084
155 8.25%, 12/1/05 - 5/1/08.... 159,953
514 8.50%, 6/1/03 - 7/1/21..... 539,137
153 8.75%, 12/1/08............. 161,522
1,240 9.00%, 1/1/02 - 3/1/11..... 1,311,896
53 10.00%, 1/1/04............. 56,117
49 10.50%, 11/1/19............ 54,346
76 11.50%, 3/1/16............. 86,154
55 12.75%, 11/1/13............ 63,376
28 13.25%, 5/1/13............. 32,153
46 14.00%, 9/1/10 - 6/1/11.... 54,518
Federal National Mortgage
Assn.,
158 6.077%, 6/1/29............. 157,215
1,852 6.089%, 8/1/26 - 10/1/28... 1,843,358
886 7.00%, 12/1/00 - 7/1/25.... 866,546
249 7.75%, 10/1/19............. 254,025
24 8.00%, 3/1/07 - 6/1/07..... 24,694
247 8.50%, 6/1/10.............. 257,589
533 9.75%, 8/1/10 - 10/1/17.... 574,988
Government National
Mortgage Assn.,
1,277 6.50%, 7/15/08 -
11/15/23................. 1,240,817
14,824 7.00%, 7/15/08 -
11/15/24................. 14,584,370
9,295 7.50%, 3/15/07 -
11/15/26................. 9,362,416
5,418 8.00%, 4/15/02 - 8/15/26... 5,594,883
1,535 8.25%, 6/20/17 - 7/20/17... 1,591,090
2,044 8.50%, 3/15/05 -
12/15/26................. 2,125,876
5,230 9.00%, 10/20/01 -
1/15/20.................. 5,566,416
1,815 9.50%, 9/15/02 - 1/15/21... 1,960,066
1 13.00%, 2/15/11............ 1,410
35 13.25%, 7/15/14............ 41,159
111 13.50%, 6/15/10 -
11/15/12................. 133,379
125 14.00%, 6/15/11 -
4/15/12.................. 152,182
87 16.00%, 4/15/12 -
5/15/12.................. 108,870
----------
Total U.S. Government
agency
mortgage pass - through
obligations
(cost $55,960,375)....... 56,499,220
----------
Total long-term investments
(cost $72,077,356)....... 73,054,255
----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-79
<PAGE> 174
THE TARGET PORTFOLIO TRUST
Mortgage Backed Securities
Portfolio (cont'd)
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
SHORT-TERM INVESTMENTS--0.3%
$241 Lehman Brothers Holdings,
Inc., Repurchase
Agreement, 6.85%, dated
12/31/96, due 1/2/97 in
the amount of $241,092
(cost $241,000; the value
of the collateral including
interest is $247,575).... $ 241,000
------------
OUTSTANDING CALL
Contracts OPTIONS PURCHASED*--0.1%
- ----------
50 United States Treasury
Notes,
5.875%, 2/15/04
expiring 2/22/97 @
$108.00
(cost $98,162)........... 86,719
------------
Total Investments Before
Outstanding Call Options Written--99.3%
(cost $72,416,518; Note 4). 73,381,974
------------
OUTSTANDING CALL OPTIONS
WRITTEN*
50 United States Treasury
Notes,
5.875%, 2/15/04
expiring 2/22/97 @
$112.00
(premiums received
$24,494)................. (9,375)
------------
Total Investments, Net of
Outstanding Call Options
Written--99.3%........... 73,372,599
Other assets in excess of
liabilities--0.7%.......... 494,477
------------
Net Assets--100%........... $ 73,867,076
------------
------------
</TABLE>
- ---------------
I/O--Interest Only Security.
PAC--Planned Amortization Class.
P/O--Principal Only.
* Non-income producing security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-80
<PAGE> 175
U.S. Government Money Market
Portfolio
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
Federal Home Loan Bank--10.9%
$ 3,000 5.21%, 1/9/97.............. $ 2,996,527
------------
Federal Home Loan Mortgage
Corporation--27.2%
1,500 5.27%, 2/3/97.............. 1,492,754
3,000 5.20%, 2/19/97............. 2,978,766
3,000 5.38%, 2/28/97............. 2,973,997
------------
7,445,517
------------
Federal National Mortgage
Association--25.0%
2,420 5.26%, 1/28/97............. 2,410,453
2,000 5.21%, 3/4/97.............. 1,982,055
2,500 5.25%, 5/2/97.............. 2,455,885
------------
6,848,393
------------
Tennessee Valley Authority--9.1%
2,500 5.27%, 2/25/97............. 2,479,871
------------
United States Treasury Notes--5.5%
1,500 7.50%, 1/31/97............. 1,502,790
------------
Repurchase Agreement--4.7%
1,295 PaineWebber Inc., 6.70%,
dated 12/31/96, due
1/2/97 in the amount of
$1,295,482, (cost
$1,295,000; value of
collateral including
accrued interest-
$1,321,156).............. 1,295,000
------------
Total Investments--82.4%
(amortized cost
$22,568,098@@)........... 22,568,098
------------
Other assets in excess of
liabilities--17.6%....... 4,829,258
------------
Net Assets--100%........... $ 27,397,356
------------
------------
</TABLE>
- ---------------
@@ Federal income tax basis of portfolio securities is the same as for financial
reporting purposes.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-81
<PAGE> 176
THE TARGET PORTFOLIO TRUST
Statements of Assets and
Liabilities
December 31, 1996
<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO
<S> <C> <C> <C>
ASSETS
Investments, at value* $220,372,335 $226,733,003 $144,538,831
Cash 1,493 65,489 1,499,398
Foreign currency, at value -- -- --
Receivable for Fund shares sold 333,135 378,286 265,460
Receivable for investments sold 497,598 446,150 1,509,260
Dividends and interest receivable 71,406 493,309 42,899
Deferred expenses and other assets 11,388 11,411 6,045
Due from broker - variation margin -- -- --
Forward currency contracts-net amount
receivable from counterparties -- -- --
Total assets 221,287,355 228,127,648 147,861,893
LIABILITIES
Bank overdraft -- -- --
Payable for investments purchased -- -- --
Payable for Fund shares reacquired 222,800 218,193 186,047
Accrued expenses and other liabilities 217,327 76,742 126,186
Dividends payable -- -- --
Outstanding options written (premiums
received $24,494) -- -- --
Withholding taxes payable -- 3,427 1,302
Deferred trustees' fees 6,750 6,750 6,750
Due to broker-variation margin payable -- --
Due to Manager 58,049 116,687 72,333
Forward currency contracts-net amount
payable to counterparties -- -- --
Total liabilities 504,926 421,799 392,618
NET ASSETS $220,782,429 $227,705,849 $147,469,275
Net assets were comprised of:
Shares of beneficial interest, at par $ 17,023 $ 16,299 $ 9,879
Paid-in capital in excess of par 169,682,972 170,277,465 117,195,561
169,699,995 170,293,764 117,205,440
Under (over) distribution of net
investment income (loss) 58,870 -- (1,302)
Accumulated net realized gains
(losses) 3,778,795 3,579,564 2,373,295
Net unrealized
appreciation/depreciation 47,244,769 53,832,521 27,891,842
Net assets, December 31, 1996 $220,782,429 $227,705,849 $147,469,275
Shares of beneficial interest issued
and outstanding 17,023,217 16,298,861 9,879,416
Net asset value per share $12.97 $13.97 $14.93
*Identified cost. $173,127,566 $172,900,483 $116,646,989
<CAPTION>
SMALL CAPITALIZATION
VALUE PORTFOLIO
<S> <C>
ASSETS
Investments, at value* $125,405,856
Cash 238,093
Foreign currency, at value --
Receivable for Fund shares sold 239,081
Receivable for investments sold 1,124,405
Dividends and interest receivable 163,889
Deferred expenses and other assets 8,878
Due from broker - variation margin --
Forward currency contracts-net amount
receivable from counterparties --
Total assets 127,180,202
LIABILITIES
Bank overdraft --
Payable for investments purchased 173,431
Payable for Fund shares reacquired 137,137
Accrued expenses and other liabilities 117,632
Dividends payable --
Outstanding options written (premiums
received $24,494) --
Withholding taxes payable 262
Deferred trustees' fees 6,750
Due to broker-variation margin payable
Due to Manager 73,087
Forward currency contracts-net amount
payable to counterparties --
Total liabilities 508,299
NET ASSETS $126,671,903
Net assets were comprised of:
Shares of beneficial interest, at par $ 8,322
Paid-in capital in excess of par 103,371,260
103,379,582
Under (over) distribution of net
investment income (loss) 8,398
Accumulated net realized gains
(losses) 2,327,652
Net unrealized
appreciation/depreciation 20,956,271
Net assets, December 31, 1996 $126,671,903
Shares of beneficial interest issued
and outstanding 8,322,158
Net asset value per share $15.22
*Identified cost. $104,449,585
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-82
<PAGE> 177
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM MORTGAGE BACKED
EQUITY PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO SECURITIES PORTFOLIO
<S> <C> <C> <C> <C> <C>
$242,636,690 $ 40,779,210 $ 54,487,535 $ 115,646,813 $ 73,381,974
-- 380 666 504 992
-- 208,147 -- -- --
726,781 182,594 103,741 481,412 138,803
505,082 -- 3,820,527 -- --
703,905 1,096,442 385,290 782,785 566,609
11,780 26,200 -- 8,011 7,777
-- -- 7,133 -- --
-- 147,461 402,833 406,578 --
244,584,238 42,440,434 59,207,725 117,326,103 74,096,155
185,650 -- -- -- --
331,620 -- 9,449,647 16,122,021 --
3,193,436 90,203 35,655 212,699 83,839
130,338 12,953 66,194 46,639 88,597
-- 2,666 7,170 15,066 12,293
-- -- -- -- 9,375
32,096 2,830 -- -- --
6,750 5,062 6,750 6,750 6,750
-- -- 8,330 186,878 --
141,422 17,598 142,969 35,159 28,225
-- 529,422 273,215 308,874 --
4,021,312 660,734 9,989,930 16,934,086 229,079
$240,562,926 $ 41,779,700 $ 49,217,795 $ 100,392,017 $ 73,867,076
$ 16,236 $ 4,110 $ 4,786 $ 9,746 $ 7,236
200,284,101 41,276,593 49,156,861 100,221,711 74,137,237
200,300,337 41,280,703 49,161,647 100,231,457 74,144,473
102,946 59,414 328,137 81,990 23,140
3,607,116 -- (619,422) (152,462) (1,281,112)
36,552,527 439,583 347,433 231,032 980,575
$240,562,926 $ 41,779,700 $ 49,217,795 $ 100,392,017 $ 73,867,076
16,236,488 4,109,948 4,786,311 9,746,047 7,236,318
$14.82 $10.17 $10.28 $10.30 $10.21
$206,081,228 $ 39,961,657 $ 54,078,662 $ 115,332,914 $ 72,416,518
<CAPTION>
U.S. GOVERNMENT MONEY
MARKET PORTFOLIO
<S> <C>
$22,568,098
--
--
5,576,734
--
47,320
6,350
--
--
28,198,502
653
--
771,406
19,534
2,803
--
--
6,750
--
--
--
801,146
$27,397,356
$ 27,397
27,369,959
27,397,356
--
--
--
$27,397,356
27,397,356
$1.00
$22,568,098
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-83
<PAGE> 178
THE TARGET PORTFOLIO TRUST
Statements of Operations
For The Year Ended December
31, 1996
<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO
<S> <C> <C> <C>
NET INVESTMENT INCOME
- ---------------------------------------------------------------------------------------------------------------
Income
Interest $ 497,522 $ 391,604 $ 368,489
- ---------------------------------------------------------------------------------------------------------------
Dividends 1,566,689 6,072,665 448,654
- ---------------------------------------------------------------------------------------------------------------
Less: Foreign withholding taxes (5,259) (52,283) (4,156)
- ---------------------------------------------------------------------------------------------------------------
Total income 2,058,952 6,411,986 812,987
- ---------------------------------------------------------------------------------------------------------------
Expenses
Management fee 1,216,415 1,253,390 848,974
- ---------------------------------------------------------------------------------------------------------------
Custodian's fees and expenses 129,000 115,000 175,000
- ---------------------------------------------------------------------------------------------------------------
Transfer agent's fees and expenses 93,300 93,300 92,100
- ---------------------------------------------------------------------------------------------------------------
Registration fees 80,000 25,000 33,000
- ---------------------------------------------------------------------------------------------------------------
Reports to shareholders 107,000 53,000 68,000
- ---------------------------------------------------------------------------------------------------------------
Audit fees and expenses 15,200 15,200 15,200
- ---------------------------------------------------------------------------------------------------------------
Legal fees and expenses 8,000 8,000 8,000
- ---------------------------------------------------------------------------------------------------------------
Trustees' fees and expenses 4,250 4,250 4,250
- ---------------------------------------------------------------------------------------------------------------
Amortization of organization expenses 5,786 5,786 5,786
- ---------------------------------------------------------------------------------------------------------------
Insurance 4,400 4,800 3,000
- ---------------------------------------------------------------------------------------------------------------
Miscellaneous 5,485 4,464 5,433
- ---------------------------------------------------------------------------------------------------------------
Total expenses 1,668,836 1,582,190 1,258,743
- ---------------------------------------------------------------------------------------------------------------
Net investment income (loss) 390,116 4,829,796 (445,756)
- ---------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Investment transactions 11,243,006 11,707,935 16,882,644
- ---------------------------------------------------------------------------------------------------------------
Financial futures contracts -- -- --
- ---------------------------------------------------------------------------------------------------------------
Foreign currency transactions -- -- --
- ---------------------------------------------------------------------------------------------------------------
Options written -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total net realized gain (loss) 11,243,006 11,707,935 16,882,644
- ---------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation on:
Investments 27,653,840 20,366,798 6,803,397
- ---------------------------------------------------------------------------------------------------------------
Financial futures contracts -- -- --
- ---------------------------------------------------------------------------------------------------------------
Foreign currency transactions -- -- --
- ---------------------------------------------------------------------------------------------------------------
Options written -- -- --
- ---------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation 27,653,840 20,366,798 6,803,397
- ---------------------------------------------------------------------------------------------------------------
Net gain (loss) 38,896,846 32,074,733 23,686,041
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 39,286,962 $ 36,904,529 $ 23,240,285
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
SMALL CAPITALIZATION
VALUE PORTFOLIO
<S> <C>
NET INVESTMENT INCOME
- -----------------------------------------------------------------------------------
Income
Interest $ 194,619
- --------------------------------------------------------------------------------------------------------
Dividends 1,667,319
- ---------------------------------------------------------------------------------------------------------------
Less: Foreign withholding taxes (1,045)
- ---------------------------------------------------------------------------------------------------------------
Total income 1,860,893
- ---------------------------------------------------------------------------------------------------------------
Expenses
Management fee 663,383
- ---------------------------------------------------------------------------------------------------------------
Custodian's fees and expenses 130,000
- ---------------------------------------------------------------------------------------------------------------
Transfer agent's fees and expenses 88,300
- ---------------------------------------------------------------------------------------------------------------
Registration fees 30,000
- ---------------------------------------------------------------------------------------------------------------
Reports to shareholders 64,000
- ---------------------------------------------------------------------------------------------------------------
Audit fees and expenses 15,200
- ---------------------------------------------------------------------------------------------------------------
Legal fees and expenses 8,000
- ---------------------------------------------------------------------------------------------------------------
Trustees' fees and expenses 4,250
- ---------------------------------------------------------------------------------------------------------------
Amortization of organization expenses 5,786
- ---------------------------------------------------------------------------------------------------------------
Insurance 1,906
- ---------------------------------------------------------------------------------------------------------------
Miscellaneous 2,496
- ---------------------------------------------------------------------------------------------------------------
Total expenses 1,013,321
- ---------------------------------------------------------------------------------------------------------------
Net investment income (loss) 847,572
- ---------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Investment transactions 10,384,665
- ---------------------------------------------------------------------------------------------------------------
Financial futures contracts --
- ---------------------------------------------------------------------------------------------------------------
Foreign currency transactions --
- ---------------------------------------------------------------------------------------------------------------
Options written --
- ---------------------------------------------------------------------------------------------------------------
Total net realized gain (loss) 10,384,665
- ---------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation on:
Investments 11,237,645
- ---------------------------------------------------------------------------------------------------------------
Financial futures contracts --
- ---------------------------------------------------------------------------------------------------------------
Foreign currency transactions --
- ---------------------------------------------------------------------------------------------------------------
Options written --
- ---------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation 11,237,645
- ---------------------------------------------------------------------------------------------------------------
Net gain (loss) 21,622,310
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 22,469,882
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-84
<PAGE> 179
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM MORTGAGE BACKED
EQUITY PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO SECURITIES PORTFOLIO
<C> <C> <C> <C> <C>
$ 656,640 $ 2,465,375 $ 3,125,856 $ 5,247,889 $ 5,310,118
6,372,612 -- -- -- --
(918,206) -- -- -- --
6,111,046 2,465,375 3,125,856 5,247,889 5,310,118
1,551,382 193,939 212,605 367,755 324,962
403,000 191,000 124,400 119,000 189,000
93,300 32,200 36,400 40,400 49,700
35,000 25,000 18,000 18,000 29,000
67,200 30,000 18,300 18,300 31,000
25,200 15,200 15,200 15,200 15,200
5,000 12,000 5,000 5,000 5,000
4,250 4,250 4,250 4,250 4,250
5,786 10,625 5,786 5,786 5,786
3,887 900 814 1,411 1,800
3,544 3,664 4,837 999 3,251
2,197,549 518,778 445,592 596,101 658,949
3,913,497 1,946,597 2,680,264 4,651,788 4,651,169
12,088,732 1,247,895 (30,724) (715,006) 271,285
-- -- 170,742 145,680 18,176
(273,753) (1,376,360) (206,259) 565,811 --
-- -- 38,957 56,559 37,717
11,814,979 (128,465) (27,284) 53,044 327,178
16,999,508 31,949 (121,548) (228,099) (1,124,991)
-- -- (338,375) (338,625) --
(24,417) (66,476) 166,706 172,531 --
-- -- -- -- 19,899
16,975,091 (34,527) (293,217) (394,193) (1,105,092)
28,790,070 (162,992) (320,501) (341,149) (777,914)
$ 32,703,567 $ 1,783,605 $ 2,359,763 $ 4,310,639 $ 3,873,255
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY
MARKET PORTFOLIO
<S> <C>
$ 1,030,474
--
--
1,030,474
47,830
62,000
7,400
18,300
12,100
6,200
5,000
4,250
5,786
378
1,269
170,513
859,961
2,578
--
--
--
2,578
--
--
--
--
--
2,578
$ 862,539
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-85
<PAGE> 180
THE TARGET PORTFOLIO TRUST
Statements of Changes in Net
Assets
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION
LARGE CAPITALIZATION LARGE CAPITALIZATION GROWTH
GROWTH PORTFOLIO VALUE PORTFOLIO PORTFOLIO
---------------------------- ---------------------------- ------------
Year Ended
Year Ended December 31, Year Ended December 31, December 31,
---------------------------- ---------------------------- ------------
1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
Operations
Net investment income (loss) $ 390,116 $ 1,438,204 $ 4,829,796 $ 4,478,126 $ (445,756)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on
investment and foreign currency
transactions 11,243,006 19,526,858 11,707,935 6,876,322 16,882,644
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/
depreciation of investments 27,653,840 15,296,515 20,366,798 33,534,250 6,803,397
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 39,286,962 36,261,577 36,904,529 44,888,698 23,240,285
- ---------------------------------------------------------------------------------------------------------------------------
Net equalization (debits)/credits -- 23,852 -- 137,234 --
- ---------------------------------------------------------------------------------------------------------------------------
Dividends and Distributions
Dividends from net investment
income (329,698) (1,438,204) (4,829,796) (4,180,840) --
- ---------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net
investment income -- (172,473) (435,227) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Distributions from net
realized gains (23,349,943) (146,425) (9,766,690) (5,166,575) (16,337,409)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (23,679,641) (1,757,102) (15,031,713) (9,347,415) (16,337,409)
- ---------------------------------------------------------------------------------------------------------------------------
Fund share transactions(a)
Net proceeds from shares sold 63,352,161 56,432,734 67,051,579 54,585,252 52,292,568
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions 23,329,793 1,723,164 14,708,918 9,096,375 16,090,077
- ---------------------------------------------------------------------------------------------------------------------------
Cost of shares reacquired (61,584,086) (54,679,344) (63,523,667) (53,982,606) (49,348,968)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net
assets from Fund share
transactions 25,097,868 3,476,554 18,236,830 9,699,021 19,033,677
- ---------------------------------------------------------------------------------------------------------------------------
Total increase/(decrease) 40,705,189 38,004,881 40,109,646 45,377,538 25,936,553
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
Beginning of year 180,077,240 142,072,359 187,596,203 142,218,665 121,532,722
- ---------------------------------------------------------------------------------------------------------------------------
End of year $220,782,429 $180,077,240 $227,705,849 $187,596,203 $147,469,275
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SMALL
CAPITALIZATION
GROWTH SMALL CAPITALIZATION
PORTFOLIO VALUE PORTFOLIO
------------ ----------------------------
Year Ended
December 31, Year Ended December 31,
------------ ----------------------------
1995 1996 1995
<S> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
Operations
Net investment income (loss) $ 131,644 $ 847,572 $ 1,007,405
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on
investment and foreign currency
transactions 15,587,518 10,384,665 (1,276,385)
- ---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/
depreciation of investments 7,737,858 11,237,645 15,684,311
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 23,457,020 22,469,882 15,415,331
- ---------------------------------------------------------------------------------------------------------------------------
Net equalization (debits)/credits 5,006 -- (6,129)
- ---------------------------------------------------------------------------------------------------------------------------
Dividends and Distributions
Dividends from net investment
income (126,023) (837,683) (1,001,120)
- ---------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net
investment income -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Distributions from net
realized gains (2,310,413) (4,467,642) --
- ---------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (2,436,436) (5,305,325) (1,001,120)
- ---------------------------------------------------------------------------------------------------------------------------
Fund share transactions(a)
Net proceeds from shares sold 43,301,027 44,712,582 33,516,882
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions 2,409,004 5,207,885 976,655
- ---------------------------------------------------------------------------------------------------------------------------
Cost of shares reacquired (41,665,163) (38,007,600) (35,469,754)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net
assets from Fund share
transactions 4,044,868 11,912,867 (976,217)
- ---------------------------------------------------------------------------------------------------------------------------
Total increase/(decrease) 25,070,458 29,077,424 13,431,865
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
Beginning of year 96,462,264 97,594,479 84,162,614
- ---------------------------------------------------------------------------------------------------------------------------
End of year $121,532,722 $126,671,903 $97,594,479
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Fund share transactions are at $1 per share for the U.S. Government Money
Market Portfolio.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-86
<PAGE> 181
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
EQUITY BOND TOTAL RETURN INTERMEDIATE-TERM
PORTFOLIO PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
--------------------------- --------------------------- ------------------------- ---------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31, Year Ended December 31,
--------------------------- --------------------------- ------------------------- ---------------------------
1996 1995 1996 1995 1996 1995 1996 1995
<C> <C> <C> <C> <C> <C> <C> <C>
$ 3,913,497 $ 2,424,043 $ 1,946,597 $ 1,640,903 $ 2,680,264 $ 2,302,300 $ 4,651,788 $ 4,178,990
11,814,979 5,756,251 (128,465) 1,246,953 (27,284) 2,690,163 53,044 3,510,267
16,975,091 17,986,578 (34,527) 654,522 (293,217) 1,575,397 (394,193) 2,967,954
32,703,567 26,166,872 1,783,605 3,542,378 2,359,763 6,567,860 4,310,639 10,657,211
-- (305,576) -- -- -- -- -- --
(3,405,100) (1,548,526) (812,023) (1,640,903) (2,614,993) (2,138,946) (4,651,788) (4,081,709)
-- -- -- (21,207) -- -- (47,210) --
(9,899,724) (493,586) (922,057) (642,900) (1,230,625) (335,308) (1,051,696) (188,877)
-- -- -- -- -- -- -- --
(13,304,824) (2,042,112) (1,734,080) (2,305,010) (3,845,618) (2,474,254) (5,750,694) (4,270,586)
354,553,935 140,908,056 18,342,835 20,469,941 20,202,045 23,640,083 44,780,207 29,966,150
13,089,510 1,993,113 1,705,126 2,145,942 3,603,260 2,334,835 5,507,246 4,022,268
(338,076,828) (163,147,872) (12,977,726) (10,640,585) (18,219,385) (16,141,734) (25,580,092) (26,174,351)
29,566,617 (20,246,703) 7,070,235 11,975,298 5,585,920 9,833,184 24,707,361 7,814,067
48,965,360 3,572,481 7,119,760 13,212,666 4,100,065 13,926,790 23,267,306 14,200,692
191,597,566 188,025,085 34,659,940 21,447,274 45,117,730 31,190,940 77,124,711 62,924,019
$240,562,926 $191,597,566 $41,779,700 $34,659,940 $49,217,795 $45,117,730 $100,392,017 $77,124,711
<CAPTION>
U.S. GOVERNMENT
MORTGAGE BACKED MONEY
SECURITIES PORTFOLIO MARKET PORTFOLIO
-------------------------- ---------------------------
Year Ended December 31, Year Ended December 31,
-------------------------- ---------------------------
1996 1995 1996 1995
<C> <C> <C> <C>
$ 4,651,169 $ 4,423,653 $ 859,961 $ 1,044,138
327,178 2,132,636 2,578 548
(1,105,092) 3,284,752 -- --
3,873,255 9,841,041 862,539 1,044,686
-- -- -- --
(4,503,951) (4,423,653) (862,539) (1,044,686)
-- (196,430) -- --
-- -- -- --
-- -- -- --
(4,503,951) (4,620,083) (862,539) (1,044,686)
21,388,848 19,667,652 339,835,083 139,918,716
3,841,153 3,702,170 776,187 945,815
(20,491,299) (20,802,368) (332,068,470) (143,448,009)
4,738,702 2,567,454 8,542,800 (2,583,478)
4,108,006 7,788,412 8,542,800 (2,583,478)
69,759,070 61,970,658 18,854,556 21,438,034
$73,867,076 $69,759,070 $ 27,397,356 $ 18,854,556
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-87
<PAGE> 182
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
LARGE
CAPITALIZATION
LARGE CAPITALIZATION VALUE
GROWTH PORTFOLIO(e) PORTFOLIO(e)
--------------------------------------------------------------------- ------------
January 5,
1993(a) Year Ended
Year Ended December 31, Through December 31,
-------------------------------------------------- December 31, ------------
1996 1995 1994 1993 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.13 $9.74 $9.91 $10.00 $12.57
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (loss) .02 .10 .10 .07(c) .31
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on
investment transactions 2.33 2.41 (.16) (.12) 2.07
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 2.35 2.51 (.06) (.05) 2.38
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment
income (.02) (.10) (.10) (.04) (.31)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- (.01) (.01) -- (.03)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gains (1.49) (.01) -- -- (.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net realized
gains -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.51) (.12) (.11) (.04) (.98)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.97 $12.13 $9.74 $9.91 $13.97
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(d) 21.09% 25.76% (.68)% (.46)% 19.17%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $220,782 $180,077 $142,072 $98,089 $227,706
- ---------------------------------------------------------------------------------------------------------------------------------
Average net assets (000) $202,736 $162,982 $129,687 $48,033 $208,898
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .82% .78% .81% 1.05%(b)(c) .77%
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .19% .88% 1.08% .84%(b)(c) 2.33%
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 65% 154% 24% 4% 22%
- ---------------------------------------------------------------------------------------------------------------------------------
Average commission rate per share $ .0572 $ .0578 N/A N/A $ .0509
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LARGE CAPITALIZATION
VALUE PORTFOLIO
---------------------------------------------------
January 5,
1993(a)
Year Ended December 31, Through
----------------------- December 31,
1995 1994 1993
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.02 $10.11 $10.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (loss) .33 .26 .21(c)
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on
investment transactions 2.89 (.04) .02
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 3.22 .22 .23
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment
income (.30) (.25) (.11)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gains (.37) (.06) (.01)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net realized
gains -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.67) (.31) (.12)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.57 $10.02 $10.11
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(d) 32.08% 2.18% 2.29%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $187,596 $142,219 $96,074
- ---------------------------------------------------------------------------------------------------------------------------------
Average net assets (000) $163,124 $128,865 $46,623
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .76% .81% 1.05%(b)(c)
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 2.83% 2.66% 2.12%(b)(c)
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 59% 6% 3%
- ---------------------------------------------------------------------------------------------------------------------------------
Average commission rate per share $ .0514 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidies.
(d) 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 return for periods of
less than a full year are not annualized.
(e) Calculated based upon average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-88
<PAGE> 183
<TABLE>
<CAPTION>
SMALL CAPITALIZATION SMALL CAPITALIZATION
GROWTH VALUE
PORTFOLIO PORTFOLIO(e)
- --------------------------------------------------------------- ---------------------------------------------------------------
January 5, January 5,
1993(a) 1993(a)
Year Ended December 31, Through Year Ended December 31, Through
- ---------------------------------------------- December 31, ---------------------------------------------- December 31,
1996 1995(e) 1994(e) 1993(e) 1996 1995 1994 1993
<C> <C> <C> <C> <C> <C> <C> <C>
$14.15 $11.59 $11.86 $10.00 $13.07 $11.07 $12.72 $10.00
(.02) .02 .01 .01(c) .11 .14 .11 (.01)(c)
2.63 2.84 (.27) 1.86 2.71 2.00 (1.49) 3.19
2.61 2.86 (.26) 1.87 2.82 2.14 (1.38) 3.18
-- (.02) (.01) (.01) (.11) (.14) -- --
-- -- -- -- -- -- -- --
(1.83) (.28) -- -- (.56) -- (.27) (.46)
-- -- -- -- -- -- -- --
(1.83) (.30) (.01) (.01) (.67) (.14) (.27) (.46)
$14.93 $14.15 $11.59 $11.86 $15.22 $13.07 $11.07 $12.72
18.88% 24.62% (2.19)% 18.66% 21.75% 19.21% (11.03)% 31.86%
$147,469 $121,533 $96,462 $63,917 $126,672 $97,594 $84,163 $64,430
$141,496 $107,649 $87,403 $29,313 $110,564 $88,085 $83,891 $29,039
.89% .85% .93% 1.05(b)(c) .92% 1.00% .93% 1.05%(b)(c)
(.32)% .12% .10% .11(b)(c) .77% 1.14% .88% (.11)%(b)(c)
108% 120% 97% 72% 60% 110% 97% 112%
$ .0590 $ .0586 N/A N/A $ .0610 $ .0561 N/A N/A
<CAPTION>
INTERNATIONAL
EQUITY PORTFOLIO
---------------------------------------------------------------
January 5,
1993(a)
Year Ended December 31, Through
---------------------------------------------- December 31,
1996 1995(e) 1994(e) 1993(e)
<C> <C> <C> <C>
$13.64 $11.95 $13.09 $10.00
.25 .17 .06 .07
1.79 1.67 (.01) 3.16
2.04 1.84 .05 3.23
(.22) (.11) (.01) (.01)
-- -- --
(.64) (.04) (1.07) (.05)
(.11) (.08)
(.86) (.15) (1.19) (.14)
$14.82 $13.64 $11.95 $13.09
15.25% 15.38% .18% 32.38%
$240,563 $191,598 $188,025 $127,121
$221,626 $183,414 $179,614 $49,769
.99% 1.02% 1.07% 1.40%(b)
1.77% 1.32% .47% .64%(b)
39% 76% 116% 65%
$ .0240 $ .0250 N/A N/A
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-89
<PAGE> 184
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
INTERNATIONAL TOTAL RETURN
BOND BOND
PORTFOLIO PORTFOLIO
------------------------------------------------------ ------------
May 17,
1994(a) Year Ended
Year Ended December 31, Through December 31,
-------------------------------- December 31, ------------
1996 1995 1994 1996
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $10.19 $9.57 $10.00 $10.62
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income .51 .57(c) .27(c) .57
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investment
transactions (.08) .82 (.19) (.09)
- --------------------------------------------------------------------------------------------------------------------
Total from investment
operations .43 1.39 .08 .48
- --------------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment
income (.21) (.57) (.27) (.56)
- --------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- -- (.24) --
- --------------------------------------------------------------------------------------------------------------------
Distributions from net realized
gains (.24) (.20) -- (.26)
- --------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.77) (.51) (.82)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.17 $10.19 $9.57 $10.28
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(d) 4.45% 14.66% .71% 5.02%
- --------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $41,780 $34,660 $21,447 $49,218
- --------------------------------------------------------------------------------------------------------------------
Average net assets (000) $38,788 $29,510 $15,366 $47,246
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses 1.34% 1.00%(c) 1.00%(b)(c) .94%
- --------------------------------------------------------------------------------------------------------------------
Net investment income 5.02% 5.56%(c) 4.84%(b)(c) 5.67%
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 226% 456% 361% 340%
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL RETURN
BOND PORTFOLIO
---------------------------------------------
January 5,
1993(a)
Year Ended December 31, Through
----------------------- December 31,
1995 1994 1993
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $9.48 $10.28 $10.00
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income .62(c) .47(c) .44(c)
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investment
transactions 1.18 (.82) .56
- --------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.80 (.35) 1.00
- --------------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment
income (.58) (.45) (.44)
- --------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- -- (.02)
- --------------------------------------------------------------------------------------------------------------------
Distributions from net realized
gains (.08) -- (.19)
- --------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- (.07)
- --------------------------------------------------------------------------------------------------------------------
Total distributions (.66) (.45) (.72)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.62 $9.48 $10.28
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(d) 19.63% (3.54)% 10.18%
- --------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $45,118 $31,191 $25,917
- --------------------------------------------------------------------------------------------------------------------
Average net assets (000) $37,023 $31,141 $12,594
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .85%(c) .85%(c) .85%
- --------------------------------------------------------------------------------------------------------------------
Net investment income 6.21%(c) 4.90%(c) 3.87%
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 141% 121% 171%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidies.
(d) 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 return for periods of
less than a full year are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-90
<PAGE> 185
<TABLE>
<CAPTION>
INTERMEDIATE-TERM MORTGAGE BACKED
BOND PORTFOLIO SECURITIES PORTFOLIO
- --------------------------------------------------------------- ---------------------------------------------------------------
January 5, January 5,
1993(a) 1993(a)
Year Ended December 31, Through Year Ended December 31, Through
- ---------------------------------------------- December 31, ---------------------------------------------- December 31,
1996 1995 1994 1993 1996 1995 1994 1993
<C> <C> <C> <C> <C> <C> <C> <C>
$10.51 $9.56 $10.26 $10.00 $10.31 $9.51 $10.18 $10.00
.59 .63 .49 .46(c) .65 .68(c) .61(c) .57(c)
(.07) .94 (.71) .46 (.12) .83 (.66) .28
.52 1.57 (.22) .92 .53 1.51 (.05) .85
(.59) (.60) (.48) (.45) (.63) (.68) (.61) (.57)
-- -- -- -- -- (.03) (.01) (.02)
(.14) (.02) -- (.18) -- -- -- (.08)
-- -- -- (.03) -- -- -- --
(.73) (.62) (.48) (.66) (.63) (.71) (.62) (.67)
$10.30 $10.51 $9.56 $10.26 $10.21 $10.31 $9.51 $10.18
5.22% 16.87% (2.23)% 9.33% 5.56% 16.18% (.51)% 8.56%
$100,392 $77,125 $62,924 $60,651 $73,867 $69,759 $61,971 $60,100
$81,723 $68,628 $69,602 $32,441 $72,214 $65,149 $66,276 $29,710
.73% .79% .80% .85%(b)(c) .91% .85%(c) .85%(c) .85%(b)(c)
5.69% 6.09% 5.06% 4.27%(b)(c) 6.44% 6.79%(c) 6.19%(c) 5.30%(b)(c)
311% 93% 77% 129% 102% 154% 380% 134%
<CAPTION>
U.S. GOVERNMENT
MONEY
MARKET PORTFOLIO
-------------------------------------------------------------------
January 5,
1993(a)
Year Ended December 31, Through
------------------------------------------------ December 31,
1996 1995 1994 1993
<C> <C> <C> <C>
$1.00 $1.00 $1.00 $1.00
.045 .051(c) .037(c) .025(c)
-- -- -- --
.045 .051 .037 .025
(.045) (.051) (.037) (.025)
-- -- -- --
-- -- -- --
-- -- -- --
(.045) (.051) (.037) (.025)
$1.00 $1.00 $1.00 $1.00
4.53% 5.25% 3.79% 2.56%
$27,397 $18,855 $21,438 $2,997
$19,132 $20,173 $15,048 $1,407
.89% .75%(c) .50%(c) .50%(b)(c)
4.49% 5.18%(c) 4.03%(c) 2.51%(b)(c)
-- -- -- --
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 46
B-91
<PAGE> 186
THE TARGET PORTFOLIO TRUST
Notes to Financial Statements
The Target Portfolio Trust (the "Fund") is an open-end management investment
company. The Fund was established as a Delaware business trust on July 29, 1992
and consists of ten separate portfolios (the "Portfolio" or "Portfolios"): Large
Capitalization Growth Portfolio, Large CapiTtalization Value Portfolio, Small
Capitalization Growth Portfolio, Small Capitalization Value Portfolio,
International Equity Portfolio, International Bond Portfolio, Total Return Bond
Portfolio, Intermediate-Term Bond Portfolio, Mortgage Backed Securities
Portfolio and U.S. Government Money Market Portfolio. All the Portfolios are
diversified as defined under the Investment Company Act of 1940 except for the
International Bond Portfolio. Investment operations commenced on January 5, 1993
with the exception of the International Bond Portfolio which commenced on
May 17, 1994.
The Portfolios' investment objectives are as follows: Large Capitalization
Growth Portfolio--long-term capital appreciation through investment primarily in
common stocks that, in the investment adviser's opinion, are characterized by a
growth of earnings faster than that of the S&P 500; Large Capitalization Value
Portfolio--total return of capital appreciation and dividend income through
investment primarily in common stocks that, in the adviser's opinion, have above
average price appreciation potential; Small Capitalization Growth
Portfolio--maximum capital appreciation through investment primarily in common
stocks of "emerging growth" companies; Small Capitalization Value
Portfolio--above average capital appreciation through investment in common
stocks that, in the adviser's opinion, are undervalued or overlooked in the
marketplace; International Equity Portfolio--capital appreciation through
investment primarily in common stocks of companies domiciled outside the United
States; International Bond Portfolio--high total return through investment
primarily in high quality foreign debt securities denominated primarily in
foreign currencies; Total Return Bond Portfolio--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; Intermediate-Term Bond
Portfolio--current income and reasonable stability of principal through
investment primarily in high quality fixed-income securities of varying
maturities with a dollar-weighted average portfolio maturity of more than three
years but not more than ten years; Mortgage Backed Securities Portfolio--high
current income primarily and capital appreciation secondarily each consistent
with the protection of capital through investment primarily in mortgage related
securities; U.S. Government Money Market Portfolio--maximum current income
consistent with maintenance of liquidity and preservation of principal through
investment exclusively in short-term securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
The ability of issuers of debt securities (other than those issued or
guaranteed by the U.S. Government) held by the Portfolios 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 Fund 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 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.
Securities held by the U.S. Government Money Market Portfolio are valued
at amortized cost, which approximates market value. Short-term securities held
by the other portfolios which mature in 60 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 held by the other portfolios
which mature in more than 60 days are valued at current market quotations.
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. If the seller defaults, and the value
of the collateral declines or, if bankruptcy proceedings are
- --------------------------------------------------------------------------------
B-92
<PAGE> 187
commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
All securities (except those of the U.S. Government Money Market
Portfolio) are valued as of 4:15 P.M., New York time. The U.S. Government Money
Market Portfolio calculates net asset value as of 4:30 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 Fund
amortizes 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. The cost of portfolio
securities for federal income tax purposes is substantially the same as for
financial reporting purposes.
Financial Futures Contracts: A financial futures contract is an agreement
to purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Portfolio is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the "initial margin." Subsequent payments, known as "variation
margin," are made or received by the Portfolio each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Portfolio invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Portfolio intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Portfolio may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets. The International Equity Portfolio, International Bond Portfolio,
Intermediate-Term Bond Portfolio, Mortgage-Backed Securities Portfolio and Total
Return Bond Portfolio are the only portfolios that may invest in financial
futures contracts.
Foreign Currency Translation: The books and records of the Portfolios 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 Portfolios are presented at the foreign
exchange rates and market values at the close of the fiscal period, the
Portfolios 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
froms changes in the market prices of securities held at the end of the fiscal
period. Similarly, the Portfolios 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.
Forward Currency Contracts: The International Equity Portfolio,
International Bond Portfolio, Intermediate-Term Bond Portfolio and Total Return
Bond Portfolio may enter into forward currency contracts in order to hedge their
exposure to changes in foreign currency exchange rates on their foreign
portfolio holdings. A forward currency contract is a commitment to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The
Portfolio enters into forward currency contracts in order to hedge its exposure
to changes in foreign currency exchange rates on its foreign portfolio holdings
or on specific receivables and payables denominated in a foreign currency. 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 counter parties to meet the terms
of their contracts.
Options: The International Equity Portfolio, the International Bond
Portfolio, the Intermediate-Term Bond Portfolio, the Total Return Bond Portfolio
and the Mortgage-Backed Securities Portfolio 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 Portfolio
currently owns or intends to purchase. When the Portfolio purchases an option,
it pays a premium and an amount equal to that premium is recorded as an
investment. When the Portfolio 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, the Fund realizes a gain or 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
- --------------------------------------------------------------------------------
B-93
<PAGE> 188
from the sale or the cost basis of the purchase in determining whether the
Portfolio 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 Portfolio, 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, the Portfolio bears the market risk of an unfavorable change in the
price of the security or currency underlying the written option. The Portfolio,
as purchaser of an option, bears the risk of the potential inability of the
counterparties to meet the terms of their contracts.
Equalization: Effective January 1, 1996, the Portfolios discontinued the
accounting practice known as equalization by which a portion of the proceeds
from sales and costs of reacquisitions of Portfolio shares, equivalent on a per
share basis to the amount of distributable net investment income on the date of
the transaction, is credited or charged to undistributed net investment income.
The following balances of undistributed net investment income at December 31,
1995, resulting from equalization, were transferred to paid-in capital in excess
of par.
<TABLE>
<CAPTION>
Portfolio Amount
- ----------------------------------------- ----------
<S> <C>
Large Capitalization Growth Portfolio $ 682,397
Large Capitalization Value Portfolio 1,690,441
Small Capitalization Growth Portfolio 91,762
Small Capitalization Value Portfolio 25,342
International Equity Portfolio 1,094,130
</TABLE>
Such reclassifications have no effect on net assets, results of
operations, or net asset value per share.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with AICPA Statement of Position
93-2: Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this Statement of Position, on the International Equity
Portfolio, International Bond Portfolio, Total Return Bond Portfolio and
Intermediate-Term Bond Portfolio was to reclassify $(302,524), $(971,362),
$(50,758) and $(141,496), respectively, of net foreign currency losses to
undistributed net investment income from accumulated net realized gains
(losses). In addition, the Large Capitalization Growth Portfolio and Total
Return Bond Portfolio reclassified $227,589 and $47,955, respectively of
overdistributed income to paid-in capital in excess of par from overdistributed
net investment income. Lastly, the Small Capitalization Growth Portfolio
reclassified $439,497 of net operating losses to paid-in capital in excess of
par from overdistributed net investment income. Current year net investment
income, net realized gains (losses) and net assets were not affected by this
statement.
Dividends and Distributions: The International Bond Portfolio, Total
Return Bond Portfolio, Intermediate-Term Bond Portfolio and Mortgage Backed
Securities Portfolio declare dividends of their net investment income daily and
pay such dividends monthly. The U.S. Government Money Market Portfolio declares
net investment income and any net capital gain (loss) daily and pays such
dividends monthly. Each other Portfolio declares and pays a dividend of its net
investment income, if any, at least annually. Each Portfolio except for the U.S.
Government Money Market Portfolio 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 portfolio in the Fund is
treated as a separate taxpaying entity. It is the intent of each portfolio to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its taxable net income
to its shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign interest and dividends have been provided for
in accordance with the Portfolios' understanding of the applicable country's tax
rules and rates.
Deferred Organizational Expenses: A total of $279,000 was incurred in
connection with the organization of the Fund. These costs have been deferred and
are being amortized ratably over a period of sixty months from the date the
Portfolio commenced investment operations.
- ----------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management
LLC ("PMF") pursuant to which PMF manages the investment operations of the
Fund, administers the Fund's affairs and is responsible for the selection,
subject to review and approval of the Trustees, of the advisers. PMF 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. PMF 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.
PMF has subadvisory agreements with the advisers noted below pursuant to
which each adviser furnishes investment advisory services in connection with the
management of the Portfolios. Each of the two Advisers of the domestic equity
Portfolios--the Large Capitalization Growth Portfolio, Large Capitalization
Value Portfolio, Small Capitalization Growth Portfolio and Small Capitalization
Value Portfolio--manages approximately 50% of the assets of the respective
Portfolio. 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)
will be divided between the two Advisers as PMF deems it appropriate. In
addition, there will be a periodic rebalancing of each Portfolio's assets to
take account of market fluctuations in order to maintain the approximately equal
allocation. As a consequence, each Portfolio will allocate assets from the
better performing of the two Advisers to the other.
- --------------------------------------------------------------------------------
B-94
<PAGE> 189
<TABLE>
<CAPTION>
Portfolio Adviser
- ----------------- ------------------------------------------
<S> <C>
Large
Capitalization
Growth......... Oak Associates and
Columbus Circle Investors
Large
Capitalization
Value.......... INVESCO MIM Inc. and
Hotchkis and Willey
Small
Capitalization
Growth......... Nicholas-Applegate Capital Management and
Investment Advisors, Inc.
Small
Capitalization
Value.......... Wood, Struthers & Winthrop and
Lazard Freres Asset Management
International
Equity......... Lazard Freres Asset Management
International
Bond........... Fiduciary International, Inc.
Total Return Bond
and Intermediate-
Term Bond...... Pacific Investment Management Co.
Mortgage Backed
Securities and
U.S. Government
Money Market... Wellington Management Co.
</TABLE>
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of the average daily net assets of the Portfolios specified below
and PMF, in turn, pays each adviser a fee for its services.
<TABLE>
<CAPTION>
Total
Portfolio Management Fee Adviser Fee
- ------------------------- -------------- -----------
<S> <C> <C>
Large Capitalization
Growth................. .60% .30%
Large Capitalization
Value.................. .60% .30%
Small Capitalization
Growth................. .60% .30%
Small Capitalization
Value.................. .60% .30%
International Equity..... .70% .40%
International Bond....... .50% .30%
Total Return Bond........ .45% .25%
Intermediate-Term Bond... .45% .25%
Mortgage Backed
Securities............. .45% .25%
U.S. Government Money
Market................. .25% .125%
</TABLE>
The Fund has entered into a distribution agreement with Prudential
Securities Incorporated ("PSI") for distribution of the Fund's shares. PSI
serves the Fund without compensation.
PMF and PSI are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- ----------------------------------------------------------
Note 3. Other Transactions
with Affiliates
Prudential Mutual Fund Services LLC (``PMFS''), a wholly-owned subsidiary
of PMF, serves as the Fund's transfer agent. The following amounts represent the
fees PMFS charged for the year ended December 31, 1996 as well as the fees due
PMFS as of December 31, 1996.
<TABLE>
<CAPTION>
Amount incurred
for the
year Amount Due
ended as of
December 31, December 31,
Portfolio 1996 1996
- ------------------------- ---------------- -------------
<S> <C> <C>
Large Capitalization
Growth................. $ 93,300 $ 8,600
Large Capitalization
Value.................. 93,300 8,600
Small Capitalization
Growth................. 93,100 8,600
Small Capitalization
Value.................. 88,300 8,200
International Equity..... 93,300 8,600
International Bond....... 32,200 3,100
Total Return Bond........ 36,400 3,300
Intermediate-Term Bond... 40,400 3,800
Mortgage Backed
Securities............. 49,700 4,500
U.S. Government Money
Market................. 7,400 700
</TABLE>
For the year ended December 31, 1996, PSI earned approximately $1,200 and
$5,900 in brokerage commissions on behalf of certain portfolio transactions
executed with the Large Capitalization Growth Portfolio and Large Capitalization
Value Portfolio, respectively.
- ----------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments and written options, for the year ended December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Portfolio Purchases Sales
- ----------------------------- ------------ ------------
<S> <C> <C>
Large Capitalization
Growth..................... $134,645,456 $127,086,409
Large Capitalization Value... 50,869,036 43,548,514
Small Capitalization
Growth..................... 148,511,086 144,104,461
Small Capitalization Value... 69,546,350 64,779,045
International Equity......... 102,446,314 80,921,596
International Bond........... 83,398,854 74,144,918
Total Return Bond............ 167,864,286 169,996,627
Intermediate-Term Bond....... 247,349,401 236,129,643
Mortgage Backed Securities... 78,650,256 71,993,367
</TABLE>
The federal income tax basis and unrealized appreciation/
depreciation of each of the Portfolios' investments, excluding
written options as of December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation Gross Unrealized
Portfolio Basis (Depreciation) Appreciation Depreciation
- --------------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Large
Capitalization
Growth....... $173,131,254 $47,241,081 $ 52,148,606 $4,907,525
Large
Capitalization
Value........ 173,048,592 53,684,411 59,549,452 5,865,041
Small
Capitalization
Growth....... 116,668,107 27,870,724 34,293,241 6,422,517
Small
Capitalization
Value........ 104,449,585 20,956,271 22,976,898 2,020,627
International
Equity....... 206,680,959 35,955,731 42,612,257 6,656,526
International
Bond......... 39,970,371 808,839 1,030,199 221,360
Total Return
Bond......... 54,078,662 408,873 541,350 132,477
Intermediate-Term
Bond......... 115,332,914 313,899 582,209 268,310
Mortgage Backed
Securities... 72,416,518 965,456 1,111,388 145,932
</TABLE>
- --------------------------------------------------------------------------------
B-95
<PAGE> 190
For federal income tax purposes, the Mortgage Backed Securities Portfolio
had a capital loss carryforward as of December 31, 1996. Accordingly, no capital
gain distributions are expected to be paid to shareholders of the Mortgage
Backed Securities Portfolio until future net gains have been realized in excess
of such carryforward. In addition, certain portfolios have either partially or
fully utilized prior year capital losses and/or are electing to treat net
currency losses incurred in the two month period ended December 31, 1996 as
having been incurred in the following year.
<TABLE>
<CAPTION>
Utilization Net Losses
of in two
Prior Year months ended
Capital Loss Expiration Capital Loss December 31,
Portfolio Carryforward Year Carryforward 1996
- ---------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Small
Capitalization
Value
Portfolio..... -- -- $ 3,493,800 --
International
Equity
Portfolio -- -- -- $ 39,900
International
Bond
Portfolio..... -- -- -- 306,300
Total Return
Bond Portfolio -- -- -- 349,000
Intermediate-Term
Bond Portfolio -- -- -- 138,200
Mortgage Backed
Securities
Portfolio..... $ 1,277,400 2002 262,500 --
</TABLE>
At December 31, 1996, the Total Return and Intermediate-Term Bond
Portfolios bought 166 and 300 financial futures contracts, respectively, on U.S.
Treasury Bonds expiring in September 1996.
The unrealized appreciation on such contracts as of December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
Value on Unrealized
Value at December 31, Appreciation
Portfolio Disposition 1996 (Depreciation)
- ---------------------- ----------- ------------ --------------
<S> <C> <C> <C>
Total Return Bond..... $18,401,750 $18,210,750 $ (191,000)
Intermediate-Term
Bond................ 32,523,750 32,343,250 (180,500)
</TABLE>
At December 31, 1996, the International Bond Portfolio had outstanding
forward currency contracts, both to purchase and sell foreign currencies, as
follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current Appreciation
Purchase Contracts Payable Value (Depreciation)
- ------------------- --------------- ----------- --------------
<S> <C> <C> <C>
Australian Dollars,
expiring
1/17/97.......... $ 141,764 $ 143,038 $ 1,274
British Pounds,
expiring
5/8/97........... 241,632 245,876 4,244
Canadian Dollars,
expiring
1/21/97.......... 1,512,029 1,502,168 (9,861)
Deutschemarks,
expiring
2/21/97.......... 7,669,822 7,493,329 (176,493)
French Francs,
expiring
1/17/97.......... 2,480,921 2,480,554 (367)
Japanese Yen,
expiring
1/9/97........... 3,470,296 3,383,673 (86,623)
Spanish Pesetas,
expiring
1/13/97.......... 926,698 928,748 2,050
Swedish Krona,
expiring
2/12/97.......... 2,354,085 2,328,109 (25,976)
--------------- ----------- --------------
$18,797,247 $18,505,495 $ (291,752)
=============== =========== ==============
<CAPTION>
Value at
Foreign Currency Settlement Date Current Appreciation
Sale Contracts Receivable Value (Depreciation)
- ------------------- --------------- ----------- --------------
<S> <C> <C> <C>
British Pounds,
expiring
5/8/97........... $ 4,338,641 $ 4,487,230 $ (148,589)
Danish Kroner,
expiring
2/13/97.......... 41,667 41,005 662
Deutschemarks,
expiring
2/21/97.......... 2,371,287 2,353,491 17,796
French Francs,
expiring
1/17/97.......... $ 4,668,016 $ 4,598,240 $ 69,776
Irish Punts,
expiring
1/10/97.......... 1,980,748 2,031,728 (50,980)
Italian Lira,
expiring
1/21/97.......... 3,805,590 3,828,345 (22,755)
Japanese Yen,
expiring
1/9/97........... 2,077,504 2,060,929 16,575
Netherlands
Guilder,
expiring
1/21/97.......... 469,400 471,569 (2,169)
Spanish Pesetas,
expiring
1/13/97.......... 227,481 223,338 4,143
Swedish Krona,
expiring
2/12/97.......... 843,707 818,375 25,332
--------------- ----------- --------------
$20,824,041 $20,914,250 $ (90,209)
=============== =========== ==============
</TABLE>
At December 31, 1996, the Total Return Bond Portfolio had outstanding
forward currency contracts, both to purchase and sell foreign currencies, as
follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Purchase Contracts Payable Value Depreciation
- -------------------- --------------- ---------- --------------
<S> <C> <C> <C>
Deutschemarks,
expiring 1/16/97 -
3/26/97........... $ 6,063,970 $5,791,521 $ (272,449)
=============== ========== ==============
</TABLE>
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Sale Contracts Receivable Value Appreciation
- -------------------- --------------- ---------- --------------
<S> <C> <C> <C>
Canadian Dollars,
expiring 3/26/97 -
9/5/97............ $ 2,280,226 $2,255,424 $ 24,802
Deutschemarks,
expiring 1/16/97 -
3/26/97........... 6,168,787 5,791,522 377,265
--------------- ---------- --------------
$ 8,449,013 $8,046,946 $ 402,067
=============== ========== ==============
</TABLE>
At December 31, 1996, the Intermediate-Term Bond Portfolio had outstanding
forward currency contracts, both to purchase and sell foreign currencies, as
follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Purchase Contracts Payable Value Depreciation
- --------------------- --------------- ---------- ------------
<S> <C> <C> <C>
Deutschemarks,
expiring 3/26/97... $ 6,877,265 $6,568,391 $ (308,874)
=============== =========== ==============
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Sale Contracts Receivable Value Appreciation
- --------------------- --------------- ---------- ------------
<S> <C> <C> <C>
Canadian Dollars,
expiring 3/26/97 -
9/5/97............. $ 2,973,578 $2,949,542 $ 24,036
Deutschemarks,
expiring 3/26/97... 6,950,933 6,568,391 382,542
--------------- ---------- ------------
$ 9,924,511 $9,517,933 $ 406,578
=============== ========== ============
</TABLE>
Transactions in options written during the year ended December 31, 1996,
were as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
Total Return Bond Portfolio (000) Received
- -------------------------------------- --------- --------
<S> <C> <C>
Options outstanding at December 31,
1995................................ -- --
Options written....................... 1,569 55,062
Options terminated in closing purchase
transactions........................ (11) (4,582 )
Options exercised..................... (35) (15,874 )
Options expired....................... (1,523) (34,606 )
--------- --------
Options outstanding at December 31,
1996................................ -- $ --
========= ========
</TABLE>
- --------------------------------------------------------------------------------
B-96
<PAGE> 191
Transactions in options written during the year ended December 31, 1996,
were as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
Intermediate-Term Bond Portfolio (000) Received
- -------------------------------------- --------- --------
<S> <C> <C>
Options outstanding at December 31,
1995................................ -- $ --
Options written....................... 96 72,947
Options terminated in closing purchase
transactions........................ (19) (7,913 )
Options exercised..................... (37) (15,989 )
Options expired....................... (40) (49,045 )
--------- --------
Options outstanding at December 31,
1996................................ -- $ --
========= ========
<CAPTION>
Number of Premiums
Mortgage Backed Securities Portfolio Contracts Received
- -------------------------------------- --------- --------
<S> <C> <C>
Options outstanding at December 31,
1995................................ 40,000 $14,595
Options written....................... 200 93,289
Options terminated in closing purchase
transactions........................ (40,150) (83,390 )
--------- --------
Options outstanding at December 31,
1996................................ 50 $24,494
========= ========
</TABLE>
- --------------------------------------------------------------------------------
Note 5. Capital
The Fund has authorized an unlimited number of shares of beneficial
interest at $.001 par value per share. Of the shares outstanding at December 31,
1996, PMF owned 1,125 shares of each portfolio, except for the International
Bond Portfolio, of which it owns 237,179 shares.
Transactions in shares of beneficial interest during the year ended
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase/
of Dividends (Decrease)
Shares and Shares in Shares
Portfolio Sold Distributions Reacquired Outstanding
- -------------------------------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio........................... 5,104,185 1,992,947 (4,916,826) 2,180,306
Large Capitalization Value
Portfolio........................... 4,977,765 1,077,960 (4,680,804) 1,374,921
Small Capitalization Growth
Portfolio........................... 3,362,005 1,099,203 (3,168,065) 1,293,143
Small Capitalization Value
Portfolio........................... 3,200,088 356,460 (2,704,301) 852,247
International Equity Portfolio........ 24,759,385 913,832 (23,486,609) 2,186,608
International Bond Portfolio.......... 1,851,839 170,401 (1,313,693) 708,547
Total Return Bond Portfolio........... 1,977,896 356,327 (1,796,916) 537,307
Intermediate-Term Bond Portfolio...... 4,363,436 539,430 (2,495,825) 2,407,041
Mortgage Backed Securities Portfolio.. 2,108,789 378,715 (2,018,658) 468,846
</TABLE>
Transactions in shares of beneficial interest during the year ended
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase/
of Dividends (Decrease)
Shares and Shares in Shares
Portfolio Sold Distributions Reacquired Outstanding
- -------------------------------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio........................... 5,088,274 140,781 (4,979,073) 249,982
Large Capitalization Value
Portfolio........................... 4,775,800 734,989 (4,779,753) 731,036
Small Capitalization Growth
Portfolio........................... 3,325,532 172,318 (3,236,827) 261,023
Small Capitalization Value
Portfolio........................... 2,807,377 76,421 (3,018,792) (134,994)
International Equity Portfolio........ 11,209,899 150,197 (13,045,509) (1,685,413)
International Bond Portfolio.......... 1,976,236 208,497 (1,025,274) 1,159,459
Total Return Bond Portfolio........... 2,317,689 227,833 (1,588,241) 957,281
Intermediate-Term Bond Portfolio...... 2,958,764 396,173 (2,600,802) 754,135
Mortgage Backed Securities Portfolio.. 1,971,802 371,098 (2,094,123) 248,777
</TABLE>
- --------------------------------------------------------------------------------
B-97
<PAGE> 192
THE TARGET PORTFOLIO TRUST
Independent Auditors' Report
The Shareholders and Trustees of
The Target Portfolio Trust:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of The Target Portfolio Trust
(consisting of the Large Capitalization Growth Portfolio, Large Capitalization
Value Portfolio, Small Capitalization Growth Portfolio, Small Capitalization
Value Portfolio, International Equity Portfolio, International Bond Portfolio,
Total Return Bond Portfolio, Intermediate-Term Bond Portfolio, Mortgage Backed
Securities Portfolio and U.S. Government Money Market Portfolio) as of December
31, 1996, the related statements of operations and of changes in net assets, and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of each of the
respective portfolios constituting The Target Portfolio Trust as of December 31,
1996, the results of their operations, the changes in their net assets, and
their financial highlights for the periods presented in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 21, 1997
- --------------------------------------------------------------------------------
B-98
<PAGE> 193
APPENDIX--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(VALUE OF $1 INVESTED ON 12/31/25)
[LINE GRAPH -- PLOT POINTS TO COME]
<TABLE>
<S> <C>
Small Stocks $3,822
Common Stocks $1,114
Long-Term Bonds $ 34
Treasury Bills $ 13
Inflation $ 9
</TABLE>
Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Illinois. Used with permission. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any portfolio.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P 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 represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. 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).
Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
A-1
<PAGE> 194
Set forth below is historical performance data relating to various
sectors of the fixed-income securities markets. The chart shows the historical
total returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 through 1995. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying securities
during the period mentioned. The data is provided to illustrate the varying
historical total returns and investors should not consider this performance
data as an indication of the future performance of the Trust or of any sector
in which the Trust invests.
All information relies on data obtained from statistical services,
reports and other services believed by the Manager to be reliable. Such
information has not been verified. The figures do not reflect the operating
expenses and fees of a mutual fund. See "Fund Expenses" in the prospectus. The
net effect of the deduction of the operating expenses of a mutual fund on these
historical total returns, including the compounded effect over time, could be
substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
Year '87 '88 '89 '90 '91 '92 '93 '94 '95
- ---- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Bonds 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4%
Mortgage Securities 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8%
U.S. Corporate Bonds 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3%
U.S. High Yield
Corporate Bonds 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2%
World Government Bonds 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
---- ---- ---- ---- ---- ---- ---- ---- ----
Difference between highest
and lowest return in percent 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</TABLE>
LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over 750
public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by Moody's
Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON-U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
A-2
<PAGE> 195
This chart illustrates the performance of major world stock markets for the
period from 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS
OF MAJOR WORLD STOCK MARKETS
(1986-1995) (IN U.S. DOLLARS)
<TABLE>
<S> <C>
Hong Kong 23.8%
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Switzerland 17.1%
France 15.3%
U.K. 15.0%
U.S. 14.8%
Japan 12.8%
Austria 10.9%
Germany 10.7%
</TABLE>
Source: Morgan Stanley Capital International (MSCI). Used with permission.
Morgan Stanley Country indices are unmanaged indices which include those stocks
making up the largest two-thirds of each country's total stock market
capitalization. Returns reflect the reinvestment of all distributions. This
chart is for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment. Investors cannot
invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
<TABLE>
<CAPTION>
1969 1995
------- --------
<S> <C> <C>
Capital Appreciation and Reinvesting Dividends $10,000 $186,208
Capital Appreciation Only $10,000 $ 66,913
</TABLE>
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based
in the Standard & Poor's 500 Stock Index, a market-value-weighted index made up
of 500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
WORLD STOCK MARKET
CAPITALIZATION BY REGION
World Total: $9.2 Trillion
<TABLE>
<S> <C>
U.S. 40.8%
Pacific Basin 28.7%
Europe 28.3%
Canada 2.2%
</TABLE>
Source: Morgan Stanley Capital International, December 1995. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of 1579 companies
in 22 countries (representing approximately 60% of the aggregate market value
of the stock exchanges). This chart is for illustrative purposes only and does
not represent the allocation of any Prudential Mutual Fund.
A-3
<PAGE> 196
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)
[CHART -- PLOT POINTS TO COME]
- -------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1994. Yields
represent that of an annually renewed one-bond portfolio with a remaining
maturity of approximately 20 years. This chart is for illustrative purposes and
should not be construed to represent the yields of any Prudential Mutual Fund.
The following chart, although not relevant to share ownership in the
Trust, may provide useful information about the effects of a hypothetical
investment diversified over different asset portfolios. The chart shows the
range of annual total returns for major stock and bond
indices for the period from December 31, 1975 through December 31, 1995. The
horizontal "Best Returns Zone" band shows that a hypothetical blended portfolio
constructed of one-third U.S. stocks (S&P 500), one-third foreign stocks (EAFE
Index), and one-third U.S. bonds (Lehman Index) would have eliminated the
"highest highs" and "lowest lows" of any single asset class.
"BEST RETURNS ZONE"
WITH A DIVERSIFIED BLEND
1/3 S&P 500 INDEX
1/3 EAFE INDEX
1/3 LEHMAN AGGREGATE INDEX
The Range of Annual Total Returns for Major Stock &
Bond Indices Over the Past 20 Years
(12/31/75 - 12/31/95)*
<TABLE>
<CAPTION>
Low High
-------- --------
<S> <C> <C>
S&P 500 -7.2% 37.6%
EAFE -23.2% 69.9%
Lehman Aggregate -2.9% 32.6%
</TABLE>
* Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes
all publicly-issued investment grade debt with maturities over one year,
including U.S. government and agency issues, 15 and 30 year fixed-rate
government agency mortgage securities, dollar denominated SEC registered
corporate and government securities, as well as asset-backed securities.
Investors cannot invest directly in stock or bond market indices.
A-4
<PAGE> 197
APPENDIX -- GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk,
providing "balance" to an overall portfolio and potentially achieving more
stable returns. Owning a portfolio of securities mitigates the individual risks
(and returns) of any one security. Additionally, diversification among types of
securities reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates.
As interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a
bond portfolio) to interest rate changes. It measures the weighted average
maturity of a bond's (or a bond portfolio's) cash flows, 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.
A-5
<PAGE> 198
APPENDIX--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Trust.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1995, Institutional Investor ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1994. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential Investments,
(of which Prudential Mutual Funds is a key part) manages over $190 billion in
assets of institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States.(2)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management LLC is one of the fifteen largest mutual
fund companies in the country, with over 2.5 million shareholders invested in
more than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.
- ---------------
1 Prudential Investments, a business group of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate
Fund, Inc. Jennison Associates Capital Corp. as the subadviser to Prudential
Jennison Series Fund, Inc. and Prudential Active Balanced Fund, a portfolio of
Prudential Dryden Fund and BlackRock Financial Management, Inc. as subadviser
to The BlackRock Government Income Trust. There are multiple subadvisers for
The Target Portfolio Trust.
2 As of December 31, 1994.
A-6
<PAGE> 199
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Growth Fund, a growth-style
equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's
- ---------------
3 As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
A-7
<PAGE> 200
portfolio managers met with several senior U.S. and foreign government
officials, on issues ranging from economic conditions in foreign countries to
the viability of index-linked securities in the United States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
- ---------------
4 Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Investments, a business group of PIC, for the year ended December
31, 1995.
5 Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage funds.
6 As of December 31, 1994.
7 As of December 31, 1994.
A-8
<PAGE> 201
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect(SM), a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------------
8 On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores are
produced by taking the number of votes awarded to an individual analyst and
weighting them based on the size of the voting institution. In total, the
magazine sends its survey to approximately 2,000 institutions and a group of
European and Asian institutions.
A-9
<PAGE> 202
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) Financial Statements:
(1) Financial statements included in the Prospectus constituting Part A of
this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Independent Auditors' Report.
Portfolio of Investments at December 31, 1996.
Statement of Assets and Liabilities at December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statement of Changes in Net Assets for the year ended December
31, 1996 and 1995.
Financial Highlights.
Notes to Financial Statements.
(B) Exhibits:
<TABLE>
<S> <C>
1. (a) Certificate of Trust. Originally filed as Exhibit No. 1(a) to the Registration
Statement on Form N-1A (File No. 33-50476) filed on July 31, 1992.*
(b) Declaration of Trust. Originally filed as Exhibit No. 1(b) to the Registration
Statement on Form N-1A (File No. 33-50476) filed on July 31, 1992.*
2. By-Laws. Originally filed as Exhibit No. 2 to the Registration Statement on
Form N-1A (File No. 33-50476) filed on July 31, 1992.*
3. Not Applicable.
4. Not Applicable.
5. (a) Management Agreement, between the Registrant and Prudential Mutual Fund
Management, Inc. Originally filed as Exhibit No. 5(a) to the Registration
Statement on Form N-1A (File No. 33-50476) filed on May 13, 1993.*
(a) (i) Amendment to Management Agreement. Originally filed as Exhibit 5(a)(i) to
Amendment No. 3 to the Registration Statement on Form N-1A (File No. 33-50476)
filed on April 1, 1994.*
(b) (i) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
INVESCO MIM Inc. Originally filed as Exhibit No. 5(b)(ii) to the Registration
Statement on Form N-1A (File No. 33-50476) filed on May 13, 1993.*
(ii) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Nicholas-Applegate Capital Management, Inc. Originally filed as Exhibit No.
5(b)(iii) to the Registration Statement on Form N-1A (File No. 33-50476) filed
on May 13, 1993.*
(iii) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Lazard Freres Asset Management for the International Equity Portfolio.
Originally filed as Exhibit No. 5(b)(v) to the Registration Statement on Form
N-1A (File No. 33-50476) filed on May 13, 1993.*
</TABLE>
C-1
<PAGE> 203
<TABLE>
<C> <C> <S> <C>
(iv) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Wellington Management Company. Originally filed as Exhibit No. 5(b)(vii) to the
Registration Statement on Form N-1A (File No. 33-50476) filed on May 13, 1993.*
(v) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Fiduciary International, Inc. Originally filed as Exhibit 5(a)(viii) to
Amendment No. 3 to the Registration Statement on Form N-1A (File No. 33-50476)
filed on April 1, 1994.*
(vi) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Columbus Circle Investors. Originally filed as Exhibit No. 5(b)(ix) to
Amendment No. 5 to the Registration Statement on Form N-1A (File No. 33-50476)
filed on March 2, 1995.*
(vii) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Pacific Investment Management Company. Originally filed as Exhibit No. 5(b)(x)
to Amendment No. 5 to the Registration Statement on Form N-1A (File No.
33-50476) filed on March 2, 1995.*
(viii) Subadvisory Agreement between Prudential Mutual Fund Management and Hotchkis
and Wiley.*
(ix) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Investment Advisers, Inc. Originally filed as Exhibit No. 5(b)(xii) to
Amendment No. 5 to the Registration Statement on Form N-1A (File No. 33-50476)
filed on March 2, 1995.*
(x) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Lazard Freres Asset Management for the Small Capitalization Value Portfolio.
Originally filed as Exhibit No. 5(b)(xiii) to Amendment No. 5 to the
Registration Statement on Form N-1A (File No. 33-50476) filed on March 2,
1995.*
(xi) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and Wood,
Struthers & Winthrop Management Corp. incorporated by reference to Exhibit No.
5(b)(xi) to Amendment No. 6 to the Registration Statement on Form N-1A (File
No. 33-50476) filed via EDGAR on March 1, 1996.
(xii) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and Oak
Associates, Ltd. incorporated by reference to Exhibit No. 5(b)(xii) to
Amendment No. 6 to the Registration Statement Form N-1A (File No. 33-50476)
filed via EDGAR on March 1, 1996.
6. Distribution Agreement between the Registrant and Prudential Securities
Incorporated. Originally filed as Exhibit No. 6 to the Registration Statement
on Form N-1A (File No. 33-50476) filed on May 13, 1993.*
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and Trust
Company. Originally filed as Exhibit No. 8 to the Registration Statement on
Form N-1A (File No. 33-50476) filed on May 13, 1993.*
9. Transfer Agency and Service Agreement between the Registrant and Prudential
Mutual Fund Services, Inc. Originally filed as Exhibit No. 9 to the
Registration Statement on Form N-1A (File No. 33-50476) filed on May 13, 1993.*
</TABLE>
C-2
<PAGE> 204
<TABLE>
<C> <C> <S> <C>
10. Opinion of Shereff, Friedman, Hoffman & Goodman dated November 4, 1992.
Originally filed as Exhibit No. 10 to the Registration Statement on Form N-1A
(File No. 33-50476) filed on November 4, 1992.*
11. Consent of Independent Auditors.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Schedule of Computation of Performance Quotations.*
18. Not Applicable.
27. Financial Data Schedules.*
</TABLE>
- ---------------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 28, 1997 the Trust had the following record holders of
shares of beneficial interest outstanding and entitled to vote in each
Portfolio, $.001 par value per share:
<TABLE>
<CAPTION>
NUMBER OF
PORTFOLIO HOLDERS
-------------------------------------------------------------------------- ---------
<S> <C>
Large Capitalization Growth Portfolio..................................... 16,602
Large Capitalization Value Portfolio...................................... 16,598
Small Capitalization Growth Portfolio..................................... 16,560
Small Capitalization Value Portfolio...................................... 15,726
International Equity Portfolio............................................ 16,492
International Bond Portfolio.............................................. 5,828
Intermediate-Term Bond Portfolio.......................................... 7,146
Total Return Bond Portfolio............................................... 6,260
Mortgage Backed Securities Portfolio...................................... 8,391
U.S. Government Money Market Portfolio.................................... 1,511
</TABLE>
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended, (the Investment Company Act) and pursuant to Article VI of the
Fund's By-Laws (Exhibit 2 to the Registration Statement), officers, trustees,
employees and agents of the Registrant will not be liable to the Registrant, any
stockholder, officer, director, employee, agent or other person for any action
or failure to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be indemnified
against liabilities in connection with the Registrant, subject to the same
exceptions. Section 3817 of the Delaware Business Trust Act permits
indemnification of trustees who acted in good faith and reasonably believed that
the conduct was in
C-3
<PAGE> 205
the best interest of the Registrant. As permitted by Section 17(i) of the
Investment Company Act, pursuant to Section 8 of the Distribution Agreement
(Exhibit 6 to the Registration Statement), the Distributor of the Registrant may
be indemnified against liabilities which it may incur, except liabilities
arising from bad faith, gross negligence, willful misfeasance or reckless
disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, (Securities Act) may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Investment Company Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Investment Company Act and will be governed by the
final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreements (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund Management
LLC (PMF) and each Adviser, respectively, to liabilities arising from willful
misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard by them of their respective
obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the
Investment Company Act as long as the interpretation of Section 17(h) and 17(i)
of such Act remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(A) Prudential Mutual Fund Management LLC
See "Management of the Trust -- Manager" in the Prospectus constituting
Part A of this Registration Statement and "Manager" in the Statement of
Additional Information constituting Part B of this Registration Statement.
C-4
<PAGE> 206
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, as most recently amended (File No. 801-31104).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------
<S> <C> <C>
Brian Storms................. Officer-in Charge, Officer-in Charge, President, Chief
President, Chief Executive Officer and Chief
Executive Officer and Operating Officer, PMF
Chief Operating Officer
Robert F. Gunia.............. Executive Vice President Comptroller, Prudential
and Treasurer Investments; Executive Vice
President and Treasurer, PMF;
Senior Vice President of
Prudential Securities
Incorporated (Prudential
Securities)
Thomas A. Early.............. Executive Vice President, Executive Vice President, Secretary
Secretary and General and General Counsel, PMF; Vice
Counsel President and General Counsel,
Prudential Retirement Services
Susan C. Cote................ Executive Vice President, Executive Vice President, Chief
Chief Financial Officer Financial Officer, PMF, PIC
Neil A. McGuinness........... Executive Vice President Executive Vice President, PMF
Robert J. Sullivan........... Executive Vice President Executive Vice President, PMF
</TABLE>
(B) Columbus Circle Investors (CCI)
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to Thomson Advisors L.P.'s directors and executive officers
is included in its Form ADV filed with the Securities and Exchange Commission
(File No. 801-31227), as most recently amended, the text of which is
incorporated herein by reference.
(C) Invesco Capital Management, Inc. (Invesco)
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to INVESCO's directors and executive officers is included in
its Form ADV filed with the Securities and Exchange Commission (File No.
801-33949), as most recently amended, the text of which is incorporated herein
by reference.
C-5
<PAGE> 207
(D) Hotchkis and Wiley
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to Hotchkis and Wiley is included in the Form ADV of Merrill
Lynch Asset Management, L.P. filed with the Securities and Exchange Commission
(File No. 801-11583), as most recently amended, the text of which is
incorporated herein by reference.
(E) Nicholas-Applegate Capital Management (Nicholas-Applegate)
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Nicholas-Applegate Capital Management is a registered investment adviser
primarily engaged in the investment advisory business. Its general partner is
Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership,which is engaged only in the business of acting as such general
partner of certain investment limited partnerships.
Information as to Nicholas-Applegate's general partners is included in its
Form ADV filed with the Securities and Exchange Commission (File No. 801-21442),
as most recently amended, the text of which is incorporated by reference.
(F) Investment Advisers, Inc. (IAI)
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to IAI's directors and executive officers is included in its
Form ADV filed with the Securities and Exchange Commission (File No. 801-3784),
as most recently amended, the text of which is incorporated herein by reference.
(G) Lazard Freres Asset Management
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to the general partners of Lazard Freres Asset Management is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-6568), as most recently amended, the text of which is incorporated
herein by reference.
(H) Fiduciary International, Inc. (Fiduciary)
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
C-6
<PAGE> 208
Information as to Fiduciary's directors and executive officers is included
in its Form ADV filed with the Securities and Exchange Commission (File No.
801-18352), as most recently amended, the text of which is incorporated herein
by reference.
(I) Pacific Investment Management Company (PIMCO)
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to PIMCO's directors and executive officers is included in
its Form ADV filed with the Securities and Exchange Commission (File No.
801-7260), as most recently amended, the text of which is incorporated herein by
reference.
(J) Wellington Management Company (WMC)
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to WMC's general partners is included in its Form ADV filed
with the Securities and Exchange Commission (File No. 801-15908), as most
recently amended, the text of which is incorporated herein by reference.
(K) Wood, Struthers & Winthrop Management, Corp.
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to Wood, Struthers & Winthrop Management, Corp.'s directors
and executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-9952), as most recently amended, the text of
which is incorporated herein by reference.
(L) Oak Associates, Ltd.
See "Management of the Trust -- Advisers" in the Prospectus constituting
Part A of this Registration Statement and "Advisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to Oak Associates, Ltd.'s directors and executive officers
is included in its Form ADV filed with the Securities and Exchange Commission
(File No. 801-23632), as most recently amended, the text of which is
incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Prudential Securities Incorporated
Prudential Securities is distributor for the BlackRock Government Income
Trust, Command Government Fund, Command Money Fund, Command Tax-Free Fund, The
Global Government Plus
C-7
<PAGE> 209
Fund, Inc., The Global Total Return Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Allocation Fund, Prudential California Municipal Fund, Prudential
Diversified Bond Fund, Inc., Prudential Distressed Securities Fund, Inc.,
Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc., Prudential Equity
Fund, Inc., Prudential Equity Income Fund, Inc., Prudential Europe Growth Fund,
Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity
Fund, Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust, Prudential High Yield Fund, Inc., Prudential Institutional
Liquidity Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc.,
Prudential Jennison Series Fund, Inc., Prudential MoneyMart Assets, Inc.,
Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Small Companies Fund, Inc.,
Prudential Special Money Market Fund, Inc., Prudential Structured Maturity Fund,
Inc., Prudential Tax-Free Fund, Inc., Prudential Utility Fund, Inc., Prudential
World Fund, Inc., and The Target Portfolio Trust. Prudential Securities is also
a depositor for the following unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND
NAME(1) WITH UNDERWRITER OFFICES WITH REGISTRANT
- --------------------------------- -------------------------------------- -----------------------
<S> <C> <C>
Robert Golden.................... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Alan D. Hogan.................... Executive Vice President, Chief None
Administrative Officer and Director
George A. Murray................. Executive Vice President and Director None
Leland B. Paton.................. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff................ Executive Vice President, Chief None
Financial Officer and Director
</TABLE>
C-8
<PAGE> 210
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND
NAME(1) WITH UNDERWRITER OFFICES WITH REGISTRANT
- --------------------------------- -------------------------------------- -----------------------
<S> <C> <C>
Vincent T. Pica, II.............. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons................. Chief Executive Officer, President and None
Director
Lee B. Spencer, Jr............... Executive Vice President, General None
Counsel and Director
</TABLE>
- ---------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act and the Rules thereunder are
maintained at the offices of State Street Bank and Trust Company, One Heritage
Drive, North Quincy, Massachusetts 02171, The Registrant, Gateway Center Three,
Newark, New Jersey 07102, and Prudential Mutual Fund Services LLC, Raritan Plaza
One, Edison, New Jersey 08837. Documents required by Rules 31a-1(b)(4) and (11)
and 31a-1(d) and the remaining accounts, books and other documents required by
such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "Management of the
Trust -- Manager" and "Management of the Trust -- Distributor" in the Prospectus
and the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
The Registrant hereby undertakes to furnish to each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-9
<PAGE> 211
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newark and
State of New Jersey, on the 7th day of March, 1997.
THE TARGET PORTFOLIO TRUST
/s/ RICHARD A. REDEKER
--------------------------------------
(Richard A. Redeker, President)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ------------------
<C> <S> <C>
/s/ GRACE C. TORRES Treasurer, Controller and March 7, 1997
- ------------------------------------------ Principal Financial and
Grace C. Torres Accounting Officer
/s/ EUGENE C. DORSEY Trustee March 7, 1997
- ------------------------------------------
Eugene C. Dorsey
/s/ DOUGLAS H. MCCORKINDALE Truste March 7, 1997
- ------------------------------------------
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY Trustee March 7, 1997
- ------------------------------------------
Thomas T. Mooney
/s/ RICHARD A. REDEKER President and Trustee March 7, 1997
- ------------------------------------------
Richard A. Redeker
</TABLE>
C-10
<PAGE> 212
EXHIBIT INDEX
<TABLE>
<C> <S> <C> <C>
1. (a) Certificate of Trust. Originally filed as Exhibit No. 1(a) to the Registration
Statement on Form N-1A (File No. 33-50476) filed on July 31, 1992.*
(b) Declaration of Trust. Originally filed as Exhibit No. 1(b) to the Registration
Statement on Form N-1A (File No. 33-50476) filed on July 31, 1992.*
2. By-Laws. Originally filed as Exhibit No. 2 to the Registration Statement on
Form
N-1A (File No. 33-50476) filed on July 31, 1992.*
3. Not Applicable.
4. Not Applicable.
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund Manage-
ment, Inc. Originally filed as Exhibit No. 5(a) to the Registration Statement on
Form N-1A (File No. 33-50476) filed on May 13, 1993.*
(a) (i) Amendment to Management Agreement. Originally filed as Exhibit 5(a)(i) to Amend-
ment No. 3 to the Registration Statement on Form N-1A (File No. 33-50476) filed
on April 1, 1994.*
(b) (i) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and IN-
VESCO MIM Inc. Originally filed as Exhibit No. 5(b)(ii) to the Registration
Statement on Form N-1A (File No. 33-50476) filed on May 13, 1993.*
(ii) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Nicholas-Applegate Capital Management, Inc. Originally filed as Exhibit No.
5(b)(iii) to the Registration Statement on Form N-1A (File No. 33-50476) filed
on May 13, 1993.*
(iii) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and La-
zard Freres Asset Management for the International Equity Portfolio. Originally
filed as Exhibit No. 5(b)(v) to the Registration Statement on Form N-1A (File
No. 33-50476) filed on May 13, 1993.*
(iv) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and Wel-
lington Management Company. Originally filed as Exhibit No. 5(b)(vii) to the
Registration Statement on Form N-1A (File No. 33-50476) filed on May 13, 1993.*
(v) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and Fidu-
ciary International, Inc. Originally filed as Exhibit 5(a)(viii) to Amendment
No. 3 to the Registration Statement on Form N-1A (File No. 33-50476) filed on
April 1, 1994.*
(vi) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Columbus Circle Investors. Originally filed as Exhibit No. 5(b)(ix) to Amendment
No. 5 to the Registration Statement on Form N-1A (File No. 33-50476) filed on
March 2, 1995.*
(vii) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Pacific Investment Management Company. Originally filed as Exhibit No. 5(b)(x)
to Amendment No. 5 to the Registration Statement on Form N-1A (File No.
33-50476) filed on March 2, 1995.*
(viii) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and
Hotchkis and Wiley.*
</TABLE>
<PAGE> 213
<TABLE>
<S> <C> <C>
(ix) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and In-
vestment Advisers, Inc. Originally filed as Exhibit No. 5(b)(xii) to Amendment
No. 5 to the Registration Statement on Form N-1A (File No. 33-50476) filed on
March 2, 1995.*
(x) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and La-
zard Freres Asset Management for the Small Capitalization Value Portfolio.
Originally filed as Exhibit No. 5(b)(xiii) to Amendment No. 5 to the
Registration Statement on Form N-1A (File No. 33-50476) filed on March 2, 1995.*
(xi) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and Wood,
Struthers & Winthrop Management Corp. incorporated by reference to Exhibit No.
5(b)(xi) to Amendment No. 6 to the Registration Statement on Form N-1A (File No.
33-50476) filed via EDGAR on March 1, 1996.
(xii) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and Oak
Associates, Ltd. incorporated by reference to Exhibit No. 5(b)(xii) to Amendment
No. 6 to the Registration Statement on Form N-1A (File No. 33-50476) filed via
EDGAR on March 1, 1996.
6. Distribution Agreement between the Registrant and Prudential Securities
Incorporated. Originally filed as Exhibit No. 6 to the Registration Statement on
Form N-1A (File No. 33-50476) filed on May 13, 1993.*
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and Trust
Company. Originally filed as Exhibit No. 8 to the Registration Statement on Form
N-1A (File No. 33-50476) filed on May 13, 1993.*
9. Transfer Agency and Service Agreement between the Registrant and Prudential
Mutual Fund Services, Inc. Originally filed as Exhibit No. 9 to the Registration
Statement on Form N-1A (File No. 33-50476) filed on May 13, 1993.*
10. Opinion of Shereff, Friedman, Hoffman & Goodman dated November 4, 1992.
Originally filed as Exhibit No. 10 to Registration Statement on Form N-1A (File
No. 33-50476) filed on March 4, 1992*.
11. Consent of Independent Auditors.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Schedule of Computation of Performance Quotations.*
18. Not Applicable.
27. Financial Data Schedules.*
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 1(a)
CERTIFICATE OF TRUST
OF
THE TARGET PORTFOLIO TRUST
This Certificate of Trust is being executed as of July 29, 1992 for the
purpose of organizing a business trust pursuant to the Delaware Business Trust
Act, 12 Del. C. Sections 3801 et seq. (the "Act") .
The undersigned hereby certify as follows:
1. Name. The name of the business trust is The Target Portfolio Trust
(the "Trust").
2. Registered Investment Company. The Trust is or will become a
registered investment company under the Investment Company Act of 1940, as
amended.
3. Registered Office and Registered Agent. The registered office of the
Trust in the State of Delaware is located at 1209 Orange Street, Wilmington,
Delaware 19801. The name of the registered agent of the Trust for service of
process at such location is The Corporation Trust Company.
4. Notice of Limitation of Liabilities of Series. Notice is hereby
given that the Trust is or may hereafter be constituted a series trust. The
debts, liabilities, obligations and expenses incurred, contracted for or
otherwise existing with respect to any particular series shall be enforceable
against the assets of such series only, and not against the assets of the Trust
generally.
IN WITNESS WHEREOF, the undersigned, being all of the trustees of the
Trust, have duly executed this Certificate of Trust as of the day and year first
above written.
/s/ Frank W. Giordano
---------------------
Frank W. Giordano
/s/ S. Jane Rose
---------------------
S. Jane Rose
<PAGE> 1
EXHIBIT 1(b)
AGREEMENT AND DECLARATION OF TRUST
----------------------------------
of
The Target Portfolio Trust
a Delaware Business Trust
Principal Place of Business:
One Seaport Plaza
New York, New York 10292
<PAGE> 2
TABLE OF CONTENTS
AGREEMENT AND DECLARATION OF TRUST
<TABLE>
<S> <C>
ARTICLE I Name and Definitions...............................................1
1. Name...............................................................1
2. Definitions........................................................1
(a) By-Laws.....................................................1
(b) Certificate of Trust........................................1
(c) Class.......................................................1
(d) Commission and Principal Underwriter........................1
(e) Declaration of Trust........................................1
(f) Delaware Act................................................2
(g) Interested Person...........................................2
(h) Manager.....................................................2
(i) 1940 Act....................................................2
(j) Person......................................................2
(k) Series......................................................2
(l) Shareholder.................................................2
(n) Trust.......................................................2
(o) Trust Property..............................................2
(p) Trustees....................................................2
ARTICLE II Purpose of Trust..................................................2
ARTICLE III Shares...........................................................3
1. Division of Beneficial Interest....................................3
2. Ownership of Shares................................................4
3. Transfer of Shares.................................................4
4. Investments in the Trust...........................................4
5. Status of Shares and Limitation of Personal Liability..............4
6. Establishment and Designation of Series............................5
(a) Assets Held with Respect to a Particular Series.............5
(b) Liabilities Held with Respect to a Particular Series........5
(c) Dividends, Distributions, Redemptions, and Repurchases......6
(d) Equality....................................................6
(e) Fractions...................................................6
(f) Exchange Privilege..........................................6
(g) Combination of Series.......................................6
(h) Elimination of Series.......................................6
7. Indemnification of Shareholders....................................7
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV Trustees..........................................................7
1. Number, Election and Tenure........................................7
2. Effect of Death, Resignation, etc. of a Trustee....................7
3. Powers.............................................................8
4. Payment of Expenses by the Trust..................................11
5. Payment of Expenses by Shareholders...............................11
6. Ownership of Assets of the Trust..................................11
7. Service Contracts.................................................12
8. Trustees and Officers as Shareholders.............................13
ARTICLE V Shareholders' Voting Powers and Meetings..........................13
1. Voting Powers, Meetings, Notice and Record Dates..................13
2. Quorum and Required Vote..........................................14
3. Record Dates......................................................14
4. Additional Provisions.............................................15
ARTICLE VI Net Asset Value, Distributions and Redemptions...................15
1. Determination of Net Asset Value, Net Income, and Distributions...15
2. Redemptions and Repurchases.......................................15
ARTICLE VII Compensation and Limitation of Liability of Trustees............16
1. Compensation......................................................16
2. Indemnification and Limitation of Liability.......................16
3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.....17
4. Insurance.........................................................17
ARTICLE VIII Miscellaneous.................................................18
1. Liability of Third Persons Dealing with Trustees..................18
2. Termination of Trust or Series....................................18
3. Reorganization....................................................18
4. Amendments........................................................19
5. Filing of Copies, References, Headings............................19
6. Applicable Law....................................................20
7. Provisions in Conflict with Law or Regulations....................20
8. Business Trust Only...............................................21
</TABLE>
<PAGE> 4
AGREEMENT AND DECLARATION OF TRUST
OF
The Target Portfolio Trust
THIS AGREEMENT AND DECLARATION OF TRUST is made and entered into as of
the date set forth below by the Trustees named hereunder for the purpose of
forming a Delaware business trust in accordance with the provisions hereinafter
set forth,
NOW, THEREFORE, the Trustees hereby direct that the Certificate of
Trust be filed with Office of the Secretary of State of the State of Delaware
and do hereby declare that the Trustees will hold IN TRUST all cash, securities
and other assets which the Trust now possesses or may hereafter acquire from
time to time in any manner and manage and dispose of the same upon the following
terms and conditions for the benefit of the holders of Shares in this Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as The Target
Portfolio Trust and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) "By-Laws" shall mean the By-Laws of the Trust as amended from time
to time, which By-Laws are expressly herein incorporated by reference as part of
the "governing instrument" within the meaning of the Delaware Act;
(b) "Certificate of Trust" means the certificate of trust, as amended
or restated from time to time, filed by the Trustees in the Office of the
Secretary of State of the State of Delaware in accordance with the Delaware Act;
(c) "Class" means a class of Shares of a Series of the Trust
established in accordance with the provisions of Article III hereof;
(d) "Commission" and "Principal Underwriter" shall have the meanings
given them in the 1940 Act;
(e) "Declaration of Trust" means this Agreement and Declaration of
Trust, as amended or restated from time to time;
1
<PAGE> 5
(f) "Delaware Act" means the Delaware Business Trust Act, 12 Del. C.
Sections 3801 et seq., as amended from time to time;
(g) "Interested Person" shall have the meaning given it in Section
2(a)(19) of the 1940 Act;
(h) "Manager" means a party furnishing services to the Trust pursuant
to any contract described in Article IV, Section 7(a) hereof;
(i) "1940 Act" means the Investment Company Act of 1940 and the Rules
and Regulations thereunder, all as amended from time to time;
(j) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof, whether domestic or foreign;
(k) "Series" means each Series of Shares established and designated
under or in accordance with the provisions of Article III;
(l) "Shareholder" means a record owner of outstanding Shares;
(m) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and includes
fractions of Shares as well as whole Shares;
(n) "Trust" means the Delaware Business Trust established under the
Delaware Act by this Declaration of Trust and the filing of the Certificate of
Trust in the Office of the Secretary of State of the State of Delaware;
(o) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is from time to time owned or held by or for the
account of the Trust; and
(p) "Trustees" means the persons who have signed this Declaration of
Trust and all other Persons who may from time to time be duly elected or
appointed to serve as Trustees in accordance with the provisions hereof, in each
case so long as such Person shall continue in office in accordance with the
terms of this Declaration of Trust, and reference herein to a Trustee or the
Trustees shall refer to such Person or Persons in his or her or their capacity
as trustees hereunder.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the
business of a
2
<PAGE> 6
management investment company registered under the 1940 Act through one or more
Series investing primarily in securities, and to carry on such other business as
the Trustees may from time to time determine pursuant to their authority under
this Declaration of Trust.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial
interest in the Trust shall be divided into one or more Series. Each Series may
be divided into two or more Classes. Subject to the further provisions of this
Article III and any applicable requirements of the 1940 Act, the Trustees shall
have full power and authority, in their sole discretion, and without obtaining
any authorization or vote of the Shareholders of any Series or Class thereof,
(i) to divide the beneficial interest in each Series or Class thereof into
Shares, with or without par value as the Trustees shall determine, (ii) to issue
Shares without limitation as to number (including fractional Shares), to such
Persons and for such amount and type of consideration, subject to any
restriction set forth in the By-Laws, including cash or securities, at such time
or times and on such terms as the Trustees may deem appropriate, (iii) to
establish and designate and to change in any manner any Series or Class thereof
and to fix such preferences, voting powers, rights, duties and privileges and
business purpose of each Series or Class thereof as the Trustees may from time
to time determine, which preferences, voting powers, rights, duties and
privileges may be senior or subordinate to (or in the case of business purpose,
different from) any existing Series or Class thereof and may be limited to
specified property or obligations of the Trust or profits and losses associated
with specified property or obligations of the Trust, (iv) to divide or combine
the Shares of any Series or Class thereof into a greater or lesser number
without thereby materially changing the proportionate beneficial interest of the
Shares of such Series or Class in the assets held with respect to that Series,
(v) to classify or reclassify any issued Shares of any Series or Class thereof
into shares of one or more Series or Classes thereof and (vi) to take such other
action with respect to the Shares as the Trustees may deem desirable.
Subject to the distinctions permitted among Classes of the same Series
as established by the Trustees consistent with the requirements of the 1940 Act,
each Share of a Series of the Trust shall represent an equal beneficial interest
in the net assets of such Series, and each holder of Shares of a Series shall be
entitled to receive such holder's pro rata share of distributions of income and
capital gains, if any, made with respect to such Series. Upon redemption of the
Shares of any Series, the applicable Shareholder shall be paid solely out of the
funds and property of such Series of the Trust.
All references to Shares in this Declaration of Trust shall be deemed
to be Shares of any or all Series or Classes thereof, as the context may
require. All provisions herein relating to the Trust shall apply equally to each
Series of the Trust and each Class thereof, except as the context otherwise
requires.
3
<PAGE> 7
All Shares issued hereunder, including, without limitation, Shares
issued in connection with a dividend in Shares or a split or reverse split of
Shares, shall be fully paid and non-assessable. Except as otherwise provided by
the Trustees, Shareholders shall have no preemptive or other right to subscribe
to any additional Shares or other securities issued by the Trust.
Section 2. Ownership of Shares. The Ownership of Shares shall be
recorded on the books of the Trust or a transfer or similar agent for the Trust,
which books shall be maintained separately for the Shares of each Series (or
Class). No certificates certifying the ownership of Shares shall be issued
except as the Trustees may otherwise determine from time to time. The Trustees
may make such rules as they consider appropriate for the issuance of Share
certificates, the transfer of Shares of each Series (or Class) and similar
matters. The record books of the Trust as kept by the Trust or any transfer or
similar agent, as the case may be, shall be conclusive as to the identity of the
Shareholders of each Series (or Class) and as to the number of Shares of each
Series (or Class) held from time to time by each Shareholder.
Section 3. Transfer of Shares. Except as otherwise provided by the
Trustees, Shares shall be transferable on the books of the Trust only by the
record holder thereof or by his duly authorized agent upon delivery to the
Trustees or the Trust's transfer agent of a duly executed instrument of
transfer, together with a Share certificate if one is outstanding, and such
evidence of the genuineness of each such execution and authorization and of such
other matters as may be required by the Trustees. Upon such delivery, and
subject to any further requirements specified by the Trustees or contained in
the By-Laws, the transfer shall be recorded on the books of the Trust. Until a
transfer is so recorded, the Shareholder of record of Shares shall be deemed to
be the holder of such Shares for all purposes hereunder and neither the Trustees
nor the Trust, nor any transfer agent or registrar or any officer, employee or
agent of the Trust, shall be affected by any notice of a proposed transfer.
Section 4. Investments in the Trust. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize.
Section 5. Status of Shares and Limitation of Personal Liability.
Shares shall be deemed to be personal property giving only the rights provided
in this instrument. Every Shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof. The
death, incapacity, dissolution, termination or bankruptcy of a Shareholder
during the existence of the Trust shall not operate to terminate the Trust, nor
entitle the representative of any such Shareholder to an accounting or to take
any action in court or elsewhere against the Trust or the Trustees, but entitles
such representative only to the rights of such Shareholder under this Trust.
Ownership of Shares shall not entitle the Shareholder to any title in or to the
whole or any part of the Trust Property or right to call for a partition or
division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders as partners. Neither the Trust nor the Trustees, nor
any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholders, nor, except as specifically provided herein,
4
<PAGE> 8
to call upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay.
Section 6. Establishment and Designation of Series. The establishment
and designation of any Series (or Class) of Shares shall be effective upon the
adoption by a majority of the then Trustees of a resolution that sets forth such
establishment and designation and the relative rights and preferences of such
Series (or Class), whether directly in such resolution or by reference to
another document including, without limitation, any registration statement of
Trust, or as otherwise provided in such resolution.
Shares of each Series (or Class) established pursuant to this Article
III, unless otherwise provided in the resolution establishing such Series, shall
have the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably be held with respect to that Series for all purposes, subject only
to the rights of creditors of such Series, and shall be so recorded upon the
books of account of the Trust. Such consideration, assets, income, earnings,
profits and proceeds thereof, from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
held with respect to" that Series. In the event that there are any assets,
income, earnings, profits and proceeds thereof, funds or payments which are not
readily identifiable as assets held with respect to any particular Series
(collectively "General Assets"), the Trustees shall allocate such General Assets
to, between or among any one or more of the Series in such manner and on such
basis as the Trustees, in their sole discretion, deem fair and equitable, and
any General Assets so allocated to a particular Series shall be held with
respect to that Series. Each such allocation by the Trustees shall be conclusive
and binding upon the Shareholders of all Series for all purposes. Separate and
distinct records shall be maintained for each Series and the assets held with
respect to each Series shall be held and accounted for separately from the
assets held with respect to all other Series and the General Assets of the Trust
not allocated to such Series.
(b) Liabilities Held with Respect to a Particular Series. The assets of
the Trust held with respect to each particular Series shall be charged against
the liabilities of the Trust held with respect to that Series and all expenses,
costs, charges and reserves attributable to that Series. Any general liabilities
of the Trust which are not readily identifiable as being held with respect to
any particular Series shall be allocated and charged by the Trustees to and
among any one or more of the Series in such manner and on such basis as the
Trustees in their sole discretion deem fair and
5
<PAGE> 9
equitable. All liabilities, expenses, costs, charges, and reserves so charged to
a Series are herein referred to as "liabilities held with respect to" that
Series. Each allocation of liabilities, expenses, costs, charges and reserves by
the Trustees shall be conclusive and binding upon the holders of all Series for
all purposes. All liabilities held with respect to a particular Series shall be
enforceable against the assets held with respect to such Series only and not
against the assets of the Trust generally or against the assets held with
respect to any other Series. Notice of this contractual limitation on the
liability of each Series shall be set forth in the Certificate of Trust or in an
amendment thereto prior to the issuance of any Shares of a Series.
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including,
without limitation, Article VI, no dividend or distribution, including, without
limitation, any distribution paid upon termination of the Trust or of any Series
(or Class) with respect to, nor any redemption or repurchase of, the Shares of
any Series (or Class) shall be effected by the Trust other than from the assets
held with respect to such Series, nor shall any Shareholder of any particular
Series otherwise have any right or claim against the assets held with respect to
any other Series except to the extent that such Shareholder has such a right or
claim hereunder as a Shareholder of such other Series. The Trustees shall have
full discretion, to the extent not inconsistent with the 1940 Act, to determine
which items shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(d) Equality. All the Shares of each particular Series shall represent
an equal proportionate interest in the assets held with respect to that Series
(subject to the liabilities held with respect to that Series and such rights and
preferences as may have been established and designated with respect to Classes
of Shares within such Series), and each Share of any particular Series shall be
equal to each other Share of that Series.
(e) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole Share of that Series,
including rights with respect to voting, receipt of dividends and distributions,
redemption of Shares and termination of the Trust.
(f) Exchange Privilege. The Trustees shall have the authority to
provide that the holders of Shares of any Series shall have the right to
exchange said Shares for Shares of one or more other Series of Shares in
accordance with such requirements and procedures as may be established by the
Trustees.
(g) Combination of Series. The Trustees "shall have the authority,
without the approval of the Shareholders of any Series unless otherwise required
by applicable law, to combine the assets and liabilities held with respect to
any two or more Series into asset" and liabilities held with respect to a single
Series.
(h) Elimination of Series. At any time that there are no Shares
outstanding of any particular Series (or Class) previously established and
designated, the Trustees may by resolution
6
<PAGE> 10
of a majority of the Trustees abolish that Series (or Class) and rescind the
establishment and designation thereof.
Section 7. Indemnification of Shareholders. If any Shareholder or
former Shareholder shall be exposed to liability by reason of a claim or demand
relating to such Person being or having been a Shareholder, and not because of
such Person's acts or omissions, the Shareholder or former Shareholder (or such
Person's heirs, executors, administrators, or other legal representatives, or in
the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of the
assets of the Trust against all loss and expense arising from such claim or
demand, but only out of the assets held with respect to the particular Series of
Shares of which such Person is or was a Shareholder and from or in relation to
which such liability arose.
ARTICLE IV
Trustees
Section 1. Number, Election and Tenure. The number of Trustees shall
initially be two, who shall be Frank W. Giordano and S. Jane Rose. Hereafter,
the number of Trustees shall at all times be at least two and no more than
fifteen as determined, from time to time, by the Trustees pursuant to Section 3
of this Article IV. Each Trustee shall serve during the continued lifetime of
the Trust until he or she dies, resigns, is declared bankrupt or incompetent by
a court of appropriate jurisdiction, or is removed, or, if sooner, until the
next meeting of Shareholders called for the purpose of electing Trustees and
until the election and qualification of his or her successor. In the event that
less than the majority of the Trustees holding office have been elected by the
Shareholder, the Trustees then in office shall call a Shareholders' meeting for
the election of Trustees. Any Trustee may resign at any time by written
instrument signed by him and delivered to any officer of the Trust or to a
meeting of the Trustees. Such resignation shall be effective upon receipt unless
specified to be effective at some other time. Except to the extent expressly
provided in a written agreement with the Trust, no Trustee resigning and no
Trustee removed shall have any right to any compensation for any period
following his or her resignation or removal, or any right to damages on account
of such removal. The Shareholders may elect Trustees at any meeting of
Shareholders called by the Trustees for that purpose. Any Trustee may be removed
at any meeting of Shareholders by a vote of two-thirds of the outstanding Shares
of the Trust.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
declination to serve, resignation, retirement, removal, or incapacity of one or
more Trustees, or all of them, shall not operate to annul the Trust or to revoke
any existing agency created pursuant to the terms of this Declaration of Trust.
Whenever there shall be fewer than the designated number of Trustees, until
additional Trustees are elected or appointed as provided herein to bring the
total number of Trustees equal to the designated number, the Trustees in office,
regardless of their number, shall
7
<PAGE> 11
have all the powers granted to the Trustees and shall discharge all the duties
imposed upon the Trustees by this Declaration of Trust. As conclusive evidence
of such vacancy, a written instrument certifying the existence of such vacancy
may be executed by an officer of the Trust or by a majority of the Trustees. In
the event of the death, declination, resignation, retirement, removal, or
incapacity of all the then Trustees within a short period of time and without
the opportunity for at least one Trustee being able to appoint additional
Trustees to replace those no longer serving, the Trust's Manager(s) are
empowered to appoint new Trustees subject to the provisions of Section 16(a) of
the 1940 Act.
Section 3. Powers. Subject to the provisions of this Declaration of
Trust, the business of the Trust shall be managed by the Trustees, and the
Trustees shall have all powers necessary or convenient to carry out that
responsibility including the power to engage in securities transactions of all
kinds on behalf of the Trust. Without limiting the foregoing, the Trustees may:
adopt By-Laws not inconsistent with this Declaration of Trust providing for the
regulation and management of the affairs of the Trust and may amend and repeal
them to the extent that such By-Laws do not reserve that right to the
Shareholders; enlarge or reduce their number; remove any Trustee with or without
cause at any time by written instrument signed by at least two-thirds of the
number of Trustees prior to such removal, specifying the date when such removal
"shall become effective, and fill vacancies caused by enlargement of their
number or by the death, resignation or removal of a Trustee; elect and remove,
with or without cause, such officers and appoint and terminate such agents as
they consider appropriate; appoint from their own number and establish and
terminate one or more committees consisting of two or more Trustees which may
exercise the powers and authority of the Board of Trustees to the extent that
the Trustees determine; employ one or more custodians of the assets of the Trust
and may authorize such custodians to employ subcustodians and to deposit all or
any part of such assets in a system or systems for the central handling of
securities or with a Federal Reserve Bank, retain a transfer agent or a
shareholder servicing agent, or both; provide for the issuance and distribution
of Shares by the Trust directly or through one or more Principal Underwriters or
otherwise; redeem, repurchase and transfer Shares pursuant to applicable law;
set record dates for the determination of Shareholders with respect to various
matters; declare and pay dividends and distributions to Shareholders of each
Series from the assets of such Series; and in general delegate such authority as
they consider desirable to any officer of the Trust, to any committee of the
Trustees and to any agent or employee of the Trust or to any such custodian,
transfer or Shareholder servicing agent, or Principal Underwriter. Any
determination as to what is in the interests of the Trust made by the Trustees
in good faith shall be conclusive. In construing the provisions of this
Declaration of Trust, the presumption shall be in favor of a grant of power to
the Trustees. Unless otherwise specified herein or in the By-Laws or required by
law, any action by the Trustees shall be deemed effective if approved or taken
by a majority of the Trustees present at a meeting of Trustees at which a quorum
of Trustees is present, within or without the State of Delaware.
Without limiting the foregoing, the Trustees shall have the power and
authority to cause the Trust (or to act on behalf of the Trust):
8
<PAGE> 12
(a) To invest and reinvest cash, to hold cash uninvested, and
to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options on,
lend or otherwise deal in or dispose of contracts for the future acquisition or
delivery of fixed income or other securities, and securities of every nature and
kind, including, without limitation, all types of bonds, debentures, stocks,
negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed, or sponsored by any and all Persons, including,
without limitation, states, territories, and possessions of the United States
and the District of Columbia and any political subdivision, agency, or
instrumentality thereof, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory, or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts for any such
securities, to change the investments of the assets of the Trust; and to
exercise any and all rights, powers, and privileges of ownership or interest in
respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options (including, options on futures contracts) with respect
to or otherwise deal in any property rights relating to any or all of the assets
of the Trust or any Series;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to execute
and deliver proxies or powers of attorney to such Person or Persons as the
Trustees shall deem proper, granting to such Person or Persons such power and
discretion with relation to securities or property as the Trustees shall deem
proper;
(d) To exercise powers and right of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable form, or in its
own name or in the name of a custodian or subcustodian or a nominee or nominees
or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee,
9
<PAGE> 13
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including, but not
limited to, claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes and in connection therewith issue notes or other
evidence of indebtedness; and to mortgage and pledge the Trust Property or any
part thereof to secure any or all of such indebtedness;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge the
Trust Property or any part thereof to secure any of or all of such obligations;
(l) To purchase and pay for entirely out of Trust Property
such insurance as the Trustees may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature arising by reason of holding Shares, holding, being
or having held any such office or position, or by reason of any action alleged
to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, investment adviser, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
Person against liability;
(m) To adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans and trusts, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits, for any or
all of the Trustees, officers, employees and agents of the Trust;
(n) To operate as and carry out the business of an investment
company, and exercise all the powers necessary or appropriate to the conduct of
such operations;
10
<PAGE> 14
(o) To enter into contracts of any kind and description;
(p) To employ one or more banks, trust companies or companies
that are members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to any
conditions set forth in this Declaration or Trust or in the By-Laws;
(q) To interpret the investment policies, practices or
limitations of any Series or Class; and
(r) Subject to the 1940 Act, to engage in any other lawful act
or activity in which a business trust organized under the Delaware Act may
engage.
The Trust shall not be limited to investing in obligations
maturing before the possible termination of the Trust or one or more of its
Series. The Trust shall not in any way be bound or limited by any present or
future law or custom in regard to investment by fiduciaries. The Trust shall not
be required to obtain any court order to deal with any assets of the Trust or
take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are
authorized to pay or cause to be paid out of the principal or income of the
Trust, or partly out of the principal and partly out of income, as they deem
fair, all expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, or in connection with the management thereof,
including, but not limited to, the Trustees compensation and such expenses and
charges for the services of the Trust's officers, employees, investment adviser
or manager, Principal Underwriter, auditors, counsel, custodian, transfer agent,
shareholder servicing agent, and such other agents or independent contractors
and such other expenses and charges as the Trustees may deem necessary or proper
to incur, which expenses, fees, charges, taxes and liabilities shall be
allocated in accordance with Article III, Section 6 hereof.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series, to pay directly, in advance or
arrears, for charges of the Trust's custodian or transfer, Shareholder servicing
or similar agent, an amount fixed from time to time by the Trustees, by setting
off such charges due from such Shareholder from declared but unpaid dividends
owed such Shareholder and/or by reducing the number of Shares in the account of
such Shareholder by that number of full and/or fractional Shares which
represents the outstanding amount of such charges due from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets
of the Trust shall at all times be considered as vested in the Trust, except
that the Trustees shall have power to cause legal title to any Trust Property to
be held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
11
<PAGE> 15
Trustees may determine. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee, he or she shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 7. Service Contracts.
(a) Subject to such requirements and restrictions as may be
set forth under federal and/or state law and in the By-Laws, including, without
limitation, the requirements of Section 15 of the 1940 Act, the Trustees may, at
any time and from time to time, contract for exclusive or nonexclusive advisory,
management and/or administrative services for the Trust or for any Series (or
Class thereof) with any corporation, trust, association or other organization;
and any such contract may contain such other terms as the Trustees may
determine, including, without limitation, authority for the Manager or
administrator to delegate certain or all of its duties under such contracts to
qualified investment advisers and administrations and to determine from time to
time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to such
party.
(b) The Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal Underwriter for
the Shares of one or more of the Series (or Classes) or other securities to be
issued by the Trust. Every such contract shall comply with such requirements and
restrictions as may be set forth under federal and/or state law and in the
By-Laws, including, without limitation, the requirements of Section 15 of the
1940 Act; and any such contract may contain such other terms as the Trustees may
determine.
(c) The Trustees are also empowered, at any time and from time
to time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
Shareholder servicing agent for the Trust or one or more of its Series. Every
such contract shall comply with such requirements and restrictions as may be set
forth under federal and/or state law and in the By-Laws or stipulated by
resolution of the Trustees.
(d) Subject to applicable law, the Trustees are further
empowered, at any time and from time to time, to contract with any entity to
provide such other services to the Trust or one or more of the Series, as the
Trustees determine to be in the best interests of the Trust and the applicable
Series.
12
<PAGE> 16
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of
the Trust is a shareholder, director, officer, partner,
trustee, employee, Manager, adviser, Principal Underwriter,
distributor, or affiliate or agent of or for any corporation,
trust, association, or other organization, or for any parent
or affiliate of any organization with which an advisory,
management or administration contract, or principal
underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may
have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a
Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other
organization with which an advisory, management or
administration contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may have been or may hereafter
be made also has an advisory, management or administration
contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service
contract with one or more other corporations, trusts,
associations, or other organizations, or has other business or
interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the 1940 Act.
Section 8. Trustees and Officers as Shareholders. Any Trustee, officer
or agent of the Trust may acquire, own and dispose of Shares to the same extent
as if he were not a Trustee, officer or agent; and the Trustees may issue and
sell and cause to be issued and sold Shares to, and redeem such Shares from, any
such Person or any firm or company in which such Person is interested, subject
only to the general limitations contained herein or in the By-Laws relating to
the sale and redemption of such Shares.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers, Meetings, Notice and Record Dates. The
Shareholders shall have power to vote only (i) for the election or removal of
Trustees as provided in Article IV, Section 1, and (ii) with respect to such
additional matters relating to the Trust as may be required by applicable law,
this Declaration of Trust, the By-laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled
13
<PAGE> 17
to vote and each fractional Share shall be entitled to a proportionate
fractional vote. Notwithstanding any other provision of this Declaration of
Trust, on any matter submitted to a vote of the Shareholders, all Shares of the
Trust then entitled to vote shall be voted in aggregate, except (i) when
required by the 1940 Act, Shares shall be voted by individual Series; (ii) when
the matter involves the termination of a Series or any other action that the
Trustees have determined will affect only the interests of one or more Series,
then only Shareholders of such Series shall be entitled to vote thereon; and
(iii) when the matter involves any action that the Trustees have determined will
affect only the interests of one or more Classes, then only the Shareholders of
such Class or Classes shall be entitled to vote thereon. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person or
by proxy. A proxy may be given in writing. The By-Laws may provide that proxies
may also, or may instead, be given by any electronic or telecommunications
device or in any other manner. Notwithstanding anything else contained herein or
in the By-Laws, in the event a proposal by anyone other than the officers or
Trustees of the Trust is submitted to a vote of the Shareholders of one or more
Series or Classes thereof or of the Trust, or in the event of any proxy contest
or proxy solicitation or proposal in opposition to any proposal by the officers
or Trustees of the Trust, Shares may be voted only in person or by written proxy
at a meeting. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required by law, this Declaration of Trust
or the By-Laws to be taken by the Shareholders. Meeting of the Shareholders
shall be called and notice thereof and record dates therefor shall be given and
set as provided in the By-Laws.
Section 2. Quorum and Required Vote. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
thirty-three and one-third percent (33-1/3%) of the Shares entitled to vote
shall constitute a quorum at a Shareholders' meeting. When any one or more
Series (or Classes) is to vote as a single Class separate from any other Shares,
thirty-three and one-third percent (33-1/3%) of the Shares of each such Series
(or Classes) entitled to vote shall constitute a quorum at a Shareholders'
meeting of that Series (or Class). Except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by applicable law, when
a quorum is present at any meeting, a majority of the Shares voted shall decide
any questions and a plurality of the Shares voted shall elect a Trustee,
provided that where any provision of law or of this Declaration of Trust
requires that the holders of any Series shall vote as a Series (or that holders
of a Class shall vote as a Class), then a majority of the Shares of that Series
(or Class) voted on the matter (or a plurality with respect to the election of a
Trustee) shall decide that matter insofar as that Series (or Class) is
concerned.
Section 3. Record Dates. For the purpose of determining the
Shareholders of any Series (or Class) who are entitled to receive payment of any
dividend or of any other distribution, the Trustees may from time to time fix a
date, which shall be before the date for the payment of such dividend or such
other payment, as the record date for determining the Shareholders of such
Series (or Class) having the right to receive such dividend or distribution.
Without fixing a record date, the Trustees may for distribution purposes close
the register or transfer books for one or more Series (or Classes) at any time
prior to the payment of a distribution. Nothing in this Section shall be
construed as precluding the Trustees from setting different record dates for
different
14
<PAGE> 18
Series (or Classes).
Section 4. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value, Distributions and Redemptions
Section 1. Determination of Net Asset Value, Net Income, and
Distributions. Subject to applicable law and Article III, Section 6 hereof, the
Trustees, in their absolute discretion, may prescribe and shall set forth in the
By-Laws or in a duly adopted vote of the Trustees such bases and time for
determining the per Share or net asset value of the Shares of any Series or net
income attributable to the Shares of any Series, or the declaration and payment
of dividends and distributions on the Shares of any Series, as they may deem
necessary or desirable.
Section 2. Redemptions and Repurchases.
(a) The Trust shall purchase such Shares as are offered by any
Shareholder for redemption, upon the presentation of a proper instrument of
transfer together with a request directed to the Trust or a Person designated by
the Trust that the Trust purchase such Shares or in accordance with such other
procedures for redemption as the Trustees may from time to time authorize; and
the Trust will pay therefor the net asset value thereof as determined by the
Trustees (or on their behalf), in accordance with any applicable provisions of
the By-Laws and applicable law. Unless extraordinary circumstances exist,
payment for said Shares shall be made by the Trust to the Shareholder within
seven (7) days after the date on which the request is made in proper form. The
obligation set forth in this Section 2 is subject to the provision that in the
event that any time the New York Stock Exchange (the "Exchange") is closed for
other than weekends or holidays, or if permitted by the rules and regulations or
an order of the Commission during periods when trading on the Exchange is
restricted or during any emergency which makes it impracticable for the Trust to
dispose of the investments of the applicable Series or to determine fairly the
value of the net assets held with respect to such Series or during any other
period permitted by order of the Commission for the protection of investors,
such obligations may be suspended or postponed by the Trustees. In the case of a
suspension of the right of redemption as provided herein, a Shareholder may
either withdraw the request for redemption or receive payment based on the net
asset value per share next determined after the termination of such suspension.
(b) The redemption price may in any case or cases be paid
wholly or partly in kind if the Trustees determine that such payment is
advisable in the interest of the remaining Shareholders of the Series for which
the Shares are being redeemed. Subject to the foregoing, the fair value,
selection and quantity of securities or other property so paid or delivered as
all or part
15
<PAGE> 19
of the redemption price may be determined by or under authority of the Trustees.
In no case shall the Trust be liable for any delay of any corporation or other
Person in transferring securities selected for delivery as all or part of any
payment in kind.
(c) If the Trustees shall, at any time and in good faith,
determine that direct or indirect ownership of Shares of any Series has or may
become concentrated in any Person to an extent that would disqualify any Series
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (or any successor statute thereto), then the Trustees shall have the
power (but not the obligation) by such means as they deem equitable (i) to call
for the redemption by any such Person of a number, or principal amount, of
Shares sufficient to maintain or bring the direct or indirect ownership of
Shares into conformity with the requirements for such qualification and (ii) to
refuse to transfer or issue Shares to any Person whose acquisition of the Shares
in question would result in such disqualification. Any such redemption shall be
effected at the redemption price and in the manner provided in this Article VI.
(d) The holders of Shares shall upon demand disclose to the
Trustees in writing such information with respect to direct and indirect
ownership of Shares as the Trustees deem necessary to comply with the provisions
of the Internal Revenue Code of 1986, as amended (or any successor statute
thereto), or to comply with the requirements of any other taxing authority.
ARTICLE VII
Compensation and Limitation of
Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. A Trustee, when
acting in such capacity, shall not be personally liable to any Person, other
than the Trust or a Shareholder to the extent provided in this Article VII, for
any act, omission or obligation of the Trust, of such Trustee or of any other
Trustee. The Trustees shall not be responsible or liable in any event for any
neglect or wrongdoing of any officer, agent, employee, Manager or Principal
Underwriter of the Trust. The Trust shall indemnify each Person who is, or has
been, a Trustee, officer, employee or agent of the Trust and any Person who is
serving or has served at the Trust's request as a director, officer, trustee,
employee or agent of another organization in which the Trust has any interest as
a shareholder, creditor or otherwise to the extent and in the manner provided in
the By-Laws.
16
<PAGE> 20
All persons extending credit to, contracting with or having any claim
against the Trust or the Trustees shall look only to the assets of the
appropriate Series, or, if the Trustees have yet to establish Series, of the
Trust for payment under such credit, contract or claim; and neither the Trustees
nor the Shareholders, nor any of the Trust's officers, employees or agents,
whether past, present or future, shall be personally liable therefor.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees by any of them in connection with the Trust shall
conclusively be deemed to have been executed or done only in or with respect to
his or their capacity as Trustee or Trustees, and such Trustee or Trustees shall
not be personally liable thereon. At the Trustees' discretion, any note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or by any officer or officers may give notice that the Certificate of Trust is
on file in the Office of the Secretary of State of the State of Delaware and
that a limitation on liability of Series exists and such note, bond, contract,
instrument, certificate or undertaking may, if the Trustees so determine, recite
that the same was executed or made on behalf of the Trust by a Trustee or
Trustees in such capacity and not individually or by an officer or officers in
such capacity and not individually and that the obligations of such instrument
are not binding upon any of them or the Shareholders individually but are
binding only on the assets and property of the Trust or a Series thereof, and
may contain such further recital as such Person or Persons may deem appropriate.
The omission of any such notice or recital shall in no way operate to bind any
Trustees, officers or Shareholders individually.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or
Surety. The exercise by the Trustees of their powers and discretions hereunder
shall be binding upon everyone interested. A Trustee shall be liable to the
Trust and to any Shareholder solely for his or her own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment
or mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust,
and shall be under no liability for any act or omission in accordance with such
advice nor for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and empowered to
the fullest extent permitted by law to purchase with Trust assets insurance for
liability and for all expenses reasonably incurred or paid or expected to be
paid by a Trustee, officer, employee or agent of the Trust in connection with
any claim, action, suit or proceeding in which he or she becomes involved by
virtue of his or her capacity or former capacity with the Trust.
17
<PAGE> 21
ARTICLE VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 2. Termination of Trust or Series.
(a) Unless terminated as provided herein, the Trust shall
continue without limitation of time. The Trust may be terminated at any time by
vote of a majority of the Shares of each Series entitled to vote, voting
separately by Series, or by the Trustees by written notice to the Shareholders.
Any Series of Shares or Class thereof may be terminated at any time by vote of a
majority of the Shares of such Series or Class entitled to vote or by the
Trustees by written notice to the Shareholders of such Series or Class.
(b) Upon the requisite Shareholder vote or action by the
Trustees to terminate the Trust or any one or more Series of Shares or any Class
thereof, after paying or otherwise providing for all charges, taxes, expenses
and liabilities, whether due or accrued or anticipated, of the Trust or of the
particular Series or any Class thereof as may be determined by the Trustees, the
Trust shall in accordance with such procedures as the Trustees consider
appropriate reduce the remaining assets of the Trust or of the affected Series
or Class to distributable form in cash or Shares (if any Series remain) or other
securities, or any combination thereof, and distribute the proceeds to the
Shareholders of the Series or Classes involved, ratably according to the number
of Shares of such Series or Class held by the several Shareholders of such
Series or Class on the date of distribution. Thereupon, the Trust or any
affected Series or Class shall terminate and the Trustees and the Trust shall be
discharged of any and all further liabilities and duties relating thereto or
arising therefrom, and the right, title and interest of all parties with respect
to the Trust or such Series or Class shall be canceled and discharged.
(c) Upon termination of the Trust, following completion of
winding up of its business, the Trustees shall cause a certificate of
cancellation of the Trust's Certificate of Trust to be filed in accordance with
the Delaware Act, which certificate of cancellation may be signed by any one
Trustee.
Section 3. Reorganization.
(a) Notwithstanding anything else herein, the Trustees may,
without Shareholder approval unless such approval is required by applicable law,
(i) cause the Trust to merge or consolidate with or into one or more trusts (or
series thereof to the extent permitted by law), partnerships, associations,
corporations or other business entities (including trusts,
18
<PAGE> 22
partnerships, associations, corporations or other business entities created by
the Trustees to accomplish such merger or consolidation) so long as the
surviving or resulting entity is an open-end management investment company under
the 1940 Act, or is a series thereof, that will succeed to or assume the Trust's
registration under the 1940 Act and that is formed, organized or existing under
the laws of the United States or of a state, commonwealth, possession or colony
of the United States, (ii) cause the Shares to be exchanged under or pursuant to
any state or federal statute to the extent permitted by law or (iii) cause the
Trust to incorporate under the laws of Delaware. Any agreement of merger or
consolidation or exchange or certificate of merger may be signed by a majority
of the Trustees and facsimile signatures conveyed by electronic or
telecommunication means shall be valid.
(b) Pursuant to and in accordance with the provisions of
Section 3815(f) of the Delaware Act, and notwithstanding anything to the
contrary contained in this Declaration of Trust, an agreement of merger or
consolidation approved by the Trustees in accordance with this Section 3 may
effect any amendment to the governing instrument of the Trust or effect the
adoption of a new trust instrument of the Trust if the Trust is the surviving or
resulting trust in the merger or consolidation.
(c) The Trustees may create one or more business trusts to
which all or any part of the assets, liabilities, profits or losses of the Trust
or any Series or Class thereof may be transferred and may provide for the
conversion of Shares in the Trust or any Series or Class thereof into beneficial
interests in any such newly created trust or trusts or any series or classes
thereof.
Section 4. Amendments. Except as specifically provided in this Section,
the Trustees may, without Shareholder vote, restate, amend or otherwise
supplement this Declaration of Trust. Shareholders shall have the right to vote
(i) on any amendment that would affect their right to vote granted in Article V,
Section 1 hereof, (ii) on any amendment to this Section 4 of Article VIII, (iii)
on any amendment that may be required by applicable law or by the Trust's
registration statement filed with the Commission and (iv) on any amendment
submitted to them by the Trustees. Any amendment required or permitted to be
submitted to the Shareholders that, as the Trustees determine, shall affect the
Shareholders of one or more Series shall be authorized by a vote of the
Shareholders of each Series affected and no vote of Shareholders of a Series not
affected shall be required. Notwithstanding anything else herein, no amendment
hereof shall limit the rights to insurance provided by Article VII, Section 4
with respect to any acts or omissions of Persons covered thereby prior to such
amendment nor shall any such amendment limit the rights to indemnification
referenced in Article VII, Section 2 hereof as provided in the ByLaws with
respect to any actions or omissions of Persons covered thereby prior to such
amendment. The Trustees may, without Shareholder vote, restate, amend, or
otherwise supplement the Certificate of Trust as they deem necessary or
desirable.
Section 5. Filing of Copies, References, Headings. The original or a
copy of this instrument and of each restatement and/or amendment hereto shall be
kept at the office of the
19
<PAGE> 23
Trust where it may be inspected by any Shareholder. Anyone dealing with the
Trust may rely on a certificate by an officer of the Trust as to whether or not
any such restatements and/or amendments have been made and as to any matters in
connection with the Trust hereunder; and, with the same effect as if it were the
original, may rely on a copy certified by an officer of the Trust to be a copy
of this instrument or of any such restatements and/or amendments. In this
instrument and in any such restatements and/or amendments, references to this
instrument, and all expressions such as "herein", "hereof" and "hereunder",
shall be deemed to refer to this instrument as amended or affected by any such
restatements and/or amendments. Headings are placed herein for convenience of
reference only and shall not be taken as a part hereof or control or affect the
meaning, construction or effect of this instrument. Whenever the singular number
is used herein, the same shall include the plural; and the neuter, masculine and
feminine genders shall include each other, as applicable. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
Section 6. Applicable Law.
(a) The Trust is created under, and this Declaration of Trust
is to be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware. The Trust shall be of the type commonly called a business
trust, and without limiting the provisions hereof, the Trust specifically
reserves the right to exercise any of the powers or privileges afforded to
business trusts or actions that may be engaged in by business trusts under the
Delaware Act, and the absence of a specific reference herein to any such power,
privilege or action shall not imply that the Trust may not exercise such power
or privilege or take such actions.
(b) Notwithstanding the first sentence of Section 6(a) of this
Article VIII, there shall not be applicable to the Trust, the Trustees or this
Declaration of Trust (x) the provisions of Section 3540 of Title 12 of the
Delaware Code or (y) any provisions of the laws (statutory or common) of the
State of Delaware (other than the Delaware Act) pertaining to trusts that relate
to or regulate: (i) the filing with any court or governmental body or agency of
trustee accounts or schedules of trustee fees and charges, (ii) affirmative
requirements to post bonds for trustees, officers, agents or employees of a
trust, (iii) the necessity for obtaining a court or other governmental approval
concerning the acquisition, holding or disposition of real or personal property,
(iv) fees or other sums applicable to trustees, officers, agents or employees of
a trust, (v) the allocation of receipts and expenditures to income or principal,
(vi) restrictions or limitations on the permissible nature, amount or
concentration of trust investments or requirements relating to the titling,
storage or other manner of holding of trust assets, or (vii) the establishment
of fiduciary or other standards or responsibilities or limitations on the acts
or powers of trustees that are inconsistent with the limitations or liabilities
or authorities and powers of the Trustees set forth or referenced in this
Declaration of Trust.
Section 7. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are severable,
and if the
20
<PAGE> 24
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code of 1986, as amended (or any successor
statute thereto), and the regulations thereunder, the Delaware Act or with other
applicable laws and regulations, the conflicting provision shall be deemed never
to have constituted a part of the Declaration of Trust; provided, however, that
such determination shall not affect any of the remaining provisions of the
Declaration of Trust or render invalid or improper any action taken or omitted
prior to such determination.
(b) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration of Trust in any jurisdiction.
Section 8. Business Trust Only. It is the intention of the Trustees to
create a business trust pursuant to the Delaware Act. It is not the intention of
the Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, or any form of legal relationship other than
a business trust pursuant to the Delaware Act. Nothing in this Declaration of
Trust shall be construed to make the Shareholders, either by themselves or with
the Trustees, partners or members of a joint stock association.
[The remainder of this page has been
left blank intentionally.]
21
<PAGE> 25
IN WITNESS WHEREOF, the Trustees named below do hereby make and enter
into this Declaration of Trust as of the 29th day of July 1992.
/s/ Frank W. Giordano
---------------------
Name: Frank W. Giordano
Address: One Seaport Plaza
New York, New York 10292
/s/ S. Jane Rose
---------------------
Name: S. Jane Rose
Address: One Seaport Plaza
New York, New York 10292
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS:
One Seaport Plaza
New York, New York 10292
22
<PAGE> 1
EXHIBIT 2
BY-LAWS
The Target Portfolio Trust
a Delaware Business Trust
<PAGE> 2
BY-LAWS
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article I Offices.........................................................................................1
1. Principal Office................................................................................1
2. Delaware Office.................................................................................1
3. Other Offices...................................................................................1
Article II Meetings of Shareholders........................................................................2
1. Place of Meetings...............................................................................2
2. Call of Meetings................................................................................2
3. Notice of Meetings of Shareholders..............................................................2
4. Manner of Giving Notice: Affidavit of Notice....................................................2
5. Adjourned Meeting: Notice.......................................................................3
6. Voting..........................................................................................3
7. Waiver of Notice by Consent of Absent Shareholders..............................................3
8. Shareholder Action by Written Consent Without a Meeting.........................................4
9. Record Date for Shareholder Notice, Voting and Giving Consents..................................4
10. Proxies.........................................................................................5
11. Inspectors of Election..........................................................................5
ARTICLE III Trustees........................................................................................6
1. Powers..........................................................................................6
2. Number of Trustees..............................................................................6
3. Vacancies.......................................................................................6
4. Place of Meetings and Meetings by Telephone.....................................................6
5. Regular Meetings................................................................................7
6. Special Meetings................................................................................7
7. Quorum..........................................................................................7
8. Waiver of Notice................................................................................7
9. Adjournment.....................................................................................7
10. Notice of Adjournment...........................................................................8
11. Action Without a Meeting........................................................................8
12. Fees and Compensation of Trustees...............................................................8
13. Delegation of Power to Other Trustees...........................................................8
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE IV Committees......................................................................................8
1. Committees of Trustees..........................................................................8
2. Meetings and Action of Committees...............................................................9
ARTICLE V Officers........................................................................................9
1. Officers........................................................................................9
2. Election of Officers...........................................................................10
3. Subordinate Officers...........................................................................10
4. Removal and Resignation of Officers............................................................10
5. Vacancies in Offices...........................................................................10
6. Chairman.......................................................................................10
7. President......................................................................................10
8. Vice Presidents................................................................................11
9. Secretary......................................................................................11
10. Treasurer......................................................................................11
ARTICLE VI Indemnification of Trustees, Officers, Employees and Other Agents..............................12
1. Agents, Proceedings, Expenses..................................................................12
2. Indemnification................................................................................12
3. Limitations, Settlements.......................................................................12
4. Insurance, Rights Not Exclusive................................................................13
5. Advance of Expenses............................................................................13
6. Fiduciaries of Employee Benefit Plan...........................................................13
ARTICLE VII Records and Reports............................................................................13
1. Maintenance and Inspection of Share Registrar..................................................13
2. Maintenance and Inspection of By-Laws..........................................................14
3. Maintenance and Inspection of Other Records....................................................14
4. Inspection by Trustees.........................................................................14
5. Financial Statements...........................................................................14
ARTICLE VIII General Matters................................................................................15
1. Checks, Drafts, Evidence of Indebtedness.......................................................15
2. Contracts and Instruments; How Executed........................................................15
3. Certificates for Shares........................................................................15
4. Lost Certificates..............................................................................15
5. Representation of Shares of Other Entities Held by Trust.......................................15
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C> <C>
6. Fiscal Year....................................................................................16
7. Seal...........................................................................................16
ARTICLE IX Amendments.....................................................................................16
1. Amendment......................................................................................16
2. Incorporation by Reference into Agreement and Declaration
of Trust by the Trust..........................................................................16
</TABLE>
iv
<PAGE> 5
BY-LAWS
OF
The Target Portfolio Trust
A Delaware Business Trust
INTRODUCTION
A. Agreement and Declaration of Trust. These By-Laws shall be subject
to the Agreement and Declaration of Trust, as from time to time in effect (the
Declaration of Trust), of The Target Portfolio Trust, a Delaware business trust
(the Trust). In the event of any inconsistency between the terms hereof and the
terms of the Declaration of Trust, the terms of the Declaration of Trust shall
control.
B. Definitions. Capitalized terms used herein and not herein defined
are used as defined in the Declaration of Trust.
Article I
Offices
Section 1. Principal Office. The Trustees shall fix and, from time to
time, may change the location of the principal executive office of the Trust at
any place within or outside the State of Delaware.
Section 2. Delaware Office. The Trustees shall establish a registered
office in the State of Delaware and shall appoint as the Trust's registered
agent for service of process in the State of Delaware an individual resident of
the State of Delaware or a Delaware corporation or a corporation authorized to
transact business in the State of Delaware; in each case the business office of
such registered agent for service of process shall be identical with the
registered Delaware office of the Trust.
Section 3. Other Offices. The Trustees may at any time establish branch
or subordinate offices at any place or places where the Trust intends to do
business.
1
<PAGE> 6
Article II
Meetings of Shareholders
Section 1. Place of Meetings. Meetings of Shareholders shall be held at
any place designated by the Trustees. In the absence of any such designation,
Shareholders' meetings shall be held at the principal executive office of the
Trust.
Section 2. Call of Meetings. Meetings of the Shareholders may be called
at any time by the Trustees or by the President for the purpose of taking action
upon any matter requiring the vote or authority of the Shareholders as herein
provided or provided in the Declaration of Trust or upon any other matter as to
which such vote or authority is deemed by the Trustees or the President to be
necessary or desirable. To the extent required by the 1940 Act, meetings of the
Shareholders for the purpose of voting on the removal of any Trustee shall be
called promptly by the Trustees upon the written request of Shareholders holding
at least ten percent (10%) of the outstanding Shares entitled to vote.
Section 3. Notice of Meetings of Shareholders. All notices of meetings
of Shareholders shall be sent or otherwise given in accordance with Section 4 of
this Article II not less than ten (10) nor more than ninety (90) days before the
date of the meeting. The notice shall specify (i) the place, date and hour of
the meeting, and (ii) the general nature of the business to be transacted. The
notice of any meeting at which Trustees are to be elected also shall include the
name of any nominee or nominees whom at the time of the notice are intended to
be presented for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a Trustee has a direct or indirect financial
interest, (ii) an amendment of the Agreement and Declaration of Trust of the
Trust, (iii) a reorganization of the Trust, or (iv) a voluntary dissolution of
the Trust, the notice shall also state the general nature of that proposal.
Section 4. Manner of Giving Notice; Affidavit of Notice. Notice of any
meeting of Shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
Shareholder at the address of that Shareholder appearing on the books of the
Trust or its transfer agent or given by the Shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is given,
notice shall be deemed to have been given if sent to that Shareholder by
first-class mail or telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication or, where
notice is given by publication, on the date of publication.
2
<PAGE> 7
If any notice addressed to a Shareholder at the address of that
Shareholder appearing on the books of the Trust is returned to the Trust by the
United States Postal Service marked to indicate that the Postal Service is
unable to deliver the notice to the Shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if these shall be available to the Shareholder on written demand of the
Shareholder at the principal executive office of the Trust for a period of one
year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
meeting of Shareholders shall be filed and maintained in the minute book of the
Trust.
Section 5. Adjourned Meeting: Notice. Any meeting of Shareholders,
whether or not a quorum is present, may be adjourned from time to time by the
vote of the majority of the Shares represented at that meeting, either in person
or by proxy.
When any meeting of Shareholders is adjourned to another time or place,
notice need not be given of the adjourned meeting at which the adjournment is
taken, unless a new record date of the adjourned meeting is fixed or unless the
adjournment is for more than sixty (60) days from the date set for the original
meeting, in which case the Trustees shall set a new record date. Notice of any
such adjourned meeting shall be given to each Shareholder of record entitled to
vote at the adjourned meeting in accordance with the provisions of Sections 3
and 4 of this Article II. At any adjourned meeting, the Trust may transact any
business which might have been transacted at the original meeting.
Section 6. Voting. The Shareholders entitled to vote at any meeting of
Shareholders shall be determined in accordance with the provisions of the
Declaration of Trust of the Trust, as in effect at such time. The Shareholders'
vote may be by voice vote or by ballot, provided, however, that any election for
Trustees must be by ballot if demanded by any Shareholder before the voting has
begun. On any matter other than elections of Trustees, any Shareholder may vote
part of the Shares in favor of the proposal and refrain from voting the
remaining Shares or vote them against the proposal, but if the Shareholder fails
to specify the number of Shares which the Shareholder is voting affirmatively,
it will be conclusively presumed that the Shareholder's approving vote is with
respect to the total Shares that the Shareholder is entitled to vote on such
proposal.
Section 7. Waiver of Notice by Consent of Absent Shareholders. The
transactions of the meeting of Shareholders, however called and noticed and
wherever held, shall be as valid as though taken at a meeting duly held after
regular call and notice if a quorum be present either in person or by proxy and
if either before or after the meeting, each person entitled to vote who was not
present in person or by proxy signs a written waiver of notice or a consent to a
holding of the meeting or an approval of the minutes. The waiver of notice or
consent need not specify either the business to be transacted or the purpose of
any meeting of Shareholders.
3
<PAGE> 8
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the beginning of the
meeting.
Section 8. Shareholder Action by Written Consent Without a Meeting.
Except as provided in the Declaration of Trust, any action that may be taken at
any meeting of Shareholders may be taken without a meeting and without prior
notice if a consent in writing setting forth the action so taken is signed by
the holders of outstanding Shares having not less than the minimum number of
votes that would be necessary to authorize or take that action at a meeting at
which all Shares entitled to vote on that action were present and voted. All
such consents shall be filed with the Secretary of the Trust and shall be
maintained in the Trust's records. Any Shareholder giving a written consent or
the Shareholder's proxy holders or a transferee of the Shares or a personal
representative of the Shareholder or their respective proxy holders may revoke
the consent by a writing received by the Secretary of the Trust before written
consents of the number of Shares required to authorize the proposed action have
been filed with the Secretary.
If the consents of all Shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
Shareholders shall not have been received, the Secretary shall give prompt
notice of the action approved by the Shareholders without a meeting. This notice
shall be given in the manner specified in Section 4 of this Article II.
Section 9. Record Date for Shareholder Notice, Voting and Giving
Consents.
(a) For purposes of determining the Shareholders entitled to vote or
act at any meeting or adjournment thereof, the Trustees may fix in advance a
record date which shall not be more than ninety (90) days nor less than ten (10)
days before the date of any such meeting. Without fixing a record date for a
meeting, the Trustees may for voting and notice purposes close the register or
transfer books for one or more Series (or Classes) for all or any part of the
period between the earliest date on which a record date for such meeting could
be set in accordance herewith and the date of such meeting.
If the Trustees do not so fix a record date or close the
register or transfer books of the affected Series (or Classes): The record date
for determining Shareholders entitled to notice of or to vote at a meeting of
Shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held.
(b) The record date for determining Shareholders entitled to give
consent to action in writing without a meeting, (a) when no prior action of the
Trustees has been taken, shall be the day on which the first written consent is
given, or (b) when prior action of the Trustees has been taken, shall be (x)
such date as determined for that purpose by the Trustees, which record date
4
<PAGE> 9
shall not precede the date upon which the resolution fixing it is adopted by the
Trustees and shall not be more than 20 days after the date of such resolution,
or (y) if no record date is fixed by the Trustees the record date shall be the
close of business on the day on which the Trustees adopt the resolution relating
to that action. Nothing in this Section shall be construed as precluding the
Trustees from setting different record dates for different Series (or Classes).
Only Shareholders of record on the record date as herein determined shall have
any right to vote or to act at any meeting or give consent to any action
relating to such record date, notwithstanding any transfer of Shares on the
books of the Trust after such record date.
Section 10. Proxies. Subject to the provisions of the Declaration of
Trust, every Person entitled to vote for Trustees or on any other matter shall
have the right to do so either in person or by proxy, provided that either (i)
an instrument authorizing such a proxy to act is executed by the Shareholder in
writing and dated not more than eleven (11) months before the meeting, unless
the instrument specifically provides for a longer period or (ii) the Trustees
adopt an electronic, telephonic, computerized or other alternative to execution
of a written instrument authorizing the proxy to act which authorization is
received not more than eleven (11) months before the meeting. A proxy shall be
deemed executed by a Shareholder if the Shareholder's name is placed on the
proxy (whether by manual signature, typewriting, telegraphic transmission or
otherwise) by the Shareholder or the Shareholder's attorney-in-fact. A valid
proxy which does not state that it is irrevocable shall continue in full force
and effect unless (i) revoked by the person executing it before the vote
pursuant to that proxy by a writing delivered to the Trust stating that the
proxy is revoked, by a subsequent proxy executed by or attendance at the meeting
and voting in person by the person executing that proxy or revoked by such
person using any electronic, telephonic, computerized or other alternative means
authorized by the Trustees for authorizing the proxy to act; or (ii) written
notice of the death or incapacity of the maker of that proxy is received by the
Trust before the vote pursuant to that proxy is counted. A proxy with respect to
Shares held in the name of two or more Persons shall be valid if executed by any
one of them unless at or prior to exercise of the proxy the Trust receives a
specific written notice to the contrary from any of them. A proxy purporting to
be executed by or on behalf of a Shareholder shall be deemed valid unless
challenged at or prior to its exercise and the burden of proving invalidity
shall rest on the challenger.
Section 11. Inspectors of Election. Before any meeting of Shareholders,
the Trustees may appoint any persons other than nominees for office to act as
inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the Chairman of the meeting may appoint inspectors of
election at the meeting. The number of inspectors shall be two (2). If any
person appointed as inspector fails to appear or fails or refuses to act, the
Chairman of the meeting may appoint a person to fill the vacancy.
These inspectors shall:
5
<PAGE> 10
(a) Determine the number of Shares outstanding and the
voting power of each, the Shares represented at the
meeting, the existence of a quorum and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in
any way arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the
election or vote with fairness to all Shareholders.
ARTICLE III
Trustees
Section 1. Powers. Subject to the applicable provisions of the 1940
Act, the Declaration of Trust and these By-Laws relating to action required to
be approved by the Shareholders, the business and affairs of the Trust shall be
managed and all powers shall be exercised by or under the direction of the
Trustees.
Section 2. Number of Trustees. The exact number of Trustees within the
limits specified in the Declaration of Trust shall be fixed from time to time by
a resolution of the Trustees.
Section 3. Vacancies. Vacancies in the authorized number of Trustees
may be filled as provided in the Declaration of Trust.
Section 4. Place of Meetings and Meetings by Telephone. All meetings of
the Trustees may be held at any place that has been designated from time to time
by resolution of the Trustees. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the Trust. Any
meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all Trustees participating in the meeting
can hear one another and all such Trustees shall be deemed to be present in
person at the meeting.
6
<PAGE> 11
Section 5. Regular Meetings. Regular meetings of the Trustees shall be
held without call at such time as shall from time to time be fixed by the
Trustees. Such regular meetings may be held without notice.
Section 6. Special Meetings. Special meetings of the Trustees for any
purpose or purposes may be called at any time by the President or any Vice
President or the Secretary or any two (2) Trustees.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each Trustee or sent by first-class mail, by
telegram or telecopy (or similar electronic means) or by nationally recognized
overnight courier), charges prepaid, addressed to each Trustee at that Trustee's
address as it is shown on the records of the Trust. In case the notice is
mailed, it shall be deposited in the United States mail at least seven (7)
calendar days before the time of the holding of the meeting. In case the notice
is delivered personally or by telephone or by telegram, telecopy (or similar
electronic means) or overnight courier, it shall be given at least forty-eight
(48) hours before the time of the holding of the meeting. Any oral notice given
personally or by telephone may be communicated either to the Trustee or to a
person at the office of the Trustee who the person giving the notice has reason
to believe will promptly communicate it to the Trustee. The notice need not
specify the purpose of the meeting or the place if the meeting is to be held at
the principal executive office of the Trust. Notice of a meeting need not be
given to any Trustee if a written waiver of notice, executed by such Trustee
before or after the meeting, is filed with the records of the meeting, or to any
Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to such Trustee.
Section 7. Quorum. A third of the authorized number of Trustees shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 9 of this Article III. Every act or decision done or made by
a majority of the Trustees present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Trustees, subject to the provisions
of the Declaration of Trust. A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of Trustees if
any action taken is approved by a least a majority of the required quorum for
that meeting.
Section 8. Waiver of Notice. Notice of any meeting need not be given to
any Trustee who either before or after the meeting signs a written waiver of
notice, a consent to holding the meeting, or an approval of the minutes. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents, and approvals shall be filed with the records of the
Trust or made a part of the minutes of the meeting. Notice of a meeting shall
also be deemed given to any Trustee who attends the meeting without protesting
before or at its commencement the lack of notice to that Trustee.
Section 9. Adjournment. A majority of the Trustees present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
7
<PAGE> 12
Section 10. Notice of Adjournment. Notice of the time and place of
holding an adjourned meeting need not be given unless the meeting is adjourned
for more than forty-eight (48) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting in the manner specified
in Section 6 of this Article III to the Trustees who were present at the time of
the adjournment.
Section 11. Action Without a Meeting. Unless the 1940 Act requires that
a particular action be taken only at a meeting at which the Trustees are present
in person, any action to be taken by the Trustees at a meeting may be taken
without such meeting by the written consent of a majority of the Trustees then
in office. Any such written consent may be executed and given by telecopy or
similar electronic means. Such written consents shall be filed with the minutes
of the proceedings of the Trustees. If any action is so taken by the Trustees by
the written consent of less than all of the Trustees, prompt notice of the
taking of such action shall be furnished to each Trustee who did not execute
such written consent, provided that the effectiveness of such action shall not
be impaired by any delay or failure to furnish such notice.
Section 12. Fees and Compensation of Trustees. Trustees and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Trustees. This Section 12 shall not be construed to preclude any Trustee from
serving the Trust in any other capacity as an officer, agent, employee, or
otherwise and receiving compensation for those services.
Section 13. Delegation of Power to Other Trustees. Any Trustee may, by
power of attorney, delegate his or her power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two (2) Trustees personally exercise the powers granted to
the Trustees, except as otherwise expressly provided herein or by resolution of
the Trustees. Except where applicable law may require a Trustee to be present in
person, a Trustee represented by another Trustee pursuant to such power of
attorney shall be deemed to be present for purposes of establishing a quorum and
satisfying the required majority vote.
ARTICLE IV
Committees
Section 1. Committees of Trustees. The Trustees may by resolution
designate one or more committees, each consisting of two (2) or more Trustees,
to serve at the pleasure of the Trustees. The Trustees may designate one or more
Trustees as alternate members of any committee who may replace any absent member
at any meeting of the committee. Any committee to the extent provided in the
resolution of the Trustee, shall have the authority of the Trustees, except with
respect to:
8
<PAGE> 13
(a) the approval of any action which under applicable law
requires approval by a majority of the entire
authorized number of Trustees or certain Trustees;
(b) the filling of vacancies of Trustees;
(c) the fixing of compensation of the Trustees; for
services generally or as a member of any committee;
(d) the amendment or termination of the Declaration of
Trust or any Series or Class or amendment of the
By-Laws or the adoption of new By-Laws;
(e) the amendment or repeal of any resolution of the
Trustees which by its express terms is not so
amendable or repealable;
(f) a distribution to the Shareholders of the Trust,
except at a rate or in a periodic amount or within a
designated range determined by the Trustees; or
(g) the appointment of any other committees of the
Trustees or the members of such new committees.
Section 2. Meetings and Action of Committees. Meetings and action of
committees shall be governed by and held and taken in accordance with the
provisions of Article III of these By-Laws, with such changes in the context
thereof as are necessary to substitute the committee and its members for the
Trustees generally, except that the time of regular meetings of committees may
be determined either by resolution of the Trustees or by resolution of the
committee. Special meetings of committees may also be called by resolution of
the Trustees. Alternate members shall be given notice of meetings of committees
and shall have the right to attend all meetings of committees. The Trustees may
adopt rules for the governance of any committee not inconsistent with the
provisions of these By-Laws.
ARTICLE V
Officers
Section 1. Officers. The officers of the Trust shall be a President, a
Secretary, and a Treasurer. The Trust may also have, at the discretion of the
Trustees, a Chairman of the Board (Chairman), one or more Vice Presidents, one
or more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any number of offices may be held by the same person. The
Chairman, if there be one, and the President shall each be a Trustee and may but
need not be a Shareholder; and any other officer may but need not be a Trustee
or Shareholder.
9
<PAGE> 14
Section 2. Election of Officers. The officers of the Trust, except such
officers as may be appointed in accordance with the provisions of Section 3 or
Section 5 of this Article V, shall be chosen by the Trustees, and each shall
serve at the pleasure of the Trustees, subject to the rights, if any, of an
officer under any contract of employment.
Section 3. Subordinate Officers. The Trustees may appoint and may
empower the President to appoint such other officers as the business of the
Trust may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-Laws or as the
Trustees may from time to time determine.
Section 4. Removal and Resignation of Officers. Subject to the rights,
if any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the Trustees at any regular or special
meeting of the Trustees or by the principal executive officer or by such other
officer upon whom such power of removal may be conferred by the Trustees.
Any officer may resign at any time by giving written notice to the
Trust. Any resignation shall take effect at the date of the receipt of that
notice or at any later time specified in that notice; and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Trust under any contract to which the officer is a party.
Section 5. Vacancies in Offices. A vacancy in any office because of
death, resignation, removal, disqualification or other cause shall be filled in
the manner prescribed in these By-Laws for regular appointment to that office.
The President may make temporary appointments to a vacant office pending action
by the Trustees.
Section 6. Chairman. The Chairman, if such an officer is elected, shall
if present preside at meetings of the Trustees, shall be the chief executive
officer of the Trust and shall, subject to the control of the Trustees, have
general supervision, direction and control of the business and the officers of
the Trust and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Trustees or prescribed by the Declaration of
Trust or these By-Laws.
Section 7. President. Subject to such supervisory powers, if any, as
may be given by the Trustees to the Chairman, if there be such an officer, the
President shall be the chief operating officer of the Trust and shall, subject
to the control of the Trustees and the Chairman, have general supervision,
direction and control of the business and the officers of the Trust. He or she
shall preside at all meetings of the Shareholders and in the absence of the
Chairman or if there be none, at all meetings of the Trustees. He or she shall
have the general powers and duties of management usually vested in the office of
President of a corporation and shall have such other powers and duties as may be
prescribed by the Trustees, the Declaration of Trust or these By-Laws.
10
<PAGE> 15
Section 8. Vice Presidents. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Trustees or if not ranked, the Executive Vice President (who shall be considered
first ranked) and such other Vice Presidents as shall be designated by the
Trustees, shall perform all the duties of the President and when so acting shall
have all powers of and be subject to all the restrictions upon the President.
The Vice Presidents shall have such other powers and perform such other duties
as from time to time may be prescribed for them respectively by the Trustees or
the President or the Chairman or by these By-Laws.
Section 9. Secretary. The Secretary shall keep or cause to be kept at
the principal executive office of the Trust or such other place as the Trustees
may direct a book of minutes of all meetings and actions of Trustees, committees
of Trustees and Shareholders with the time and place of holding, whether regular
or special, and if special, how authorized, the notice given, the names of those
present at Trustees' meetings or committee meetings, the number of Shares
present or represented at meetings of Shareholders and the proceedings.
The Secretary shall keep or cause to be kept at the principal executive
office of the Trust or at the office of the Trust's transfer agent or registrar,
a share register or a duplicate share register showing the names of all
Shareholders and their addresses, the number and classes of Shares held by each,
the number and date of certificates issued for the same and the number and date
of cancellation of every certificate surrendered for cancellation.
The Secretary shall give or cause to be given notice of all meetings of
the Shareholders and of the Trustees (or committees thereof) required to be
given by these By-Laws or by applicable law and shall have such other powers and
perform such other duties as may be prescribed by the Trustees or by these
By-Laws.
Section 10. Treasurer. The Treasurer shall be the chief financial
officer and chief accounting officer of the Trust and shall keep and maintain or
cause to be kept and maintained adequate and correct books and records of
accounts of the properties and business transactions of the Trust and each
Series, including accounts of the assets, liabilities, receipts, disbursements,
gains, losses, capital and retained earnings of all Series. The books of account
shall at all reasonable times be open to inspection by any Trustee.
The Treasurer shall deposit all monies and other valuables in the name
and to the credit of the Trust with such depositaries as may be designated by
the Board of Trustees. He or she shall disburse the funds of the Trust as may be
ordered by the Trustees, shall render to the President and Trustees, whenever
they request it, an account of all of his or her transactions as chief financial
officer and of the financial condition of the Trust and shall have other powers
and perform such other duties as may be prescribed by the Trustees or these
By-Laws.
11
<PAGE> 16
ARTICLE VI
Indemnification of Trustees, Officers,
Employees and Other Agents
Section 1. Agents, Proceedings, Expenses. For the purpose of this
Article, "agent" means any Person who is or was a Trustee, officer, employee or
other agent of the Trust or is or was serving at the request of the Trust as a
trustee, director, officer, employee or agent of another organization in which
the Trust has any interest as a shareholder, creditor or otherwise: "proceeding"
means any threatened, pending or completed claim, action, suit or proceeding,
whether civil, criminal, administrative or investigative (including appeals);
and "expenses" includes, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and all other liabilities
whatsoever.
Section 2. Indemnification. Subject to the exceptions and limitation
contained in Section 3 below, every agent shall be indemnified by the Trust to
the fullest extent permitted by law against all liabilities and against all
expenses reasonably incurred or paid by him or her in connection with any
proceeding in which he or she becomes involved as a party or otherwise by virtue
of his or her being or having been an agent.
Section 3. Limitations, Settlements. No indemnification shall be
provided hereunder to an agent:
(a) who shall have been adjudicated by the court or other body
before which the proceeding was brought to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office
(collectively, "disabling conduct"); or
(b) with respect to any proceeding disposed of (whether by
settlement, pursuant to a consent decree or otherwise) without an adjudication
by the court or other body before which the proceeding was brought that such
agent was liable to the Trust or its Shareholders by reason of disabling
conduct, unless there has been a determination that such agent did not engage in
disabling conduct;
(i) by the court or other body before which the proceeding
was brought;
(ii) by at least a majority of those Trustees who are
neither Interested Persons of the Trust nor are parties to the proceeding based
upon a review of readily available facts (as opposed to a full trial-type
inquiry); or
(iii) by written opinion of independent legal counsel based
upon a review of readily available facts (as opposed to a full trial-type
inquiry);
12
<PAGE> 17
provided, however, that indemnification shall be provided hereunder to an agent
with respect to any proceeding in the event of (1) a final decision on the
merits by the court or other body before which the proceeding was brought that
the agent was not liable by reason of disabling conduct, or (2) the dismissal of
the proceeding by the court or other body before which it was brought for
insufficiency of evidence of any disabling conduct with which such agent has
been charged.
Section 4. Insurance, Rights Not Exclusive. The rights of
indemnification herein provided may be insured against by policies maintained by
the Trust on behalf of any agent, shall be severable, shall not be exclusive of
or affect any other rights to which any agent may now or hereafter be entitled
and shall inure to the benefit of the heirs, executors and administrators of any
agent.
Section 5. Advance of Expenses. Expenses incurred by an agent in
connection with the preparation and presentation of a defense to any proceeding
may be paid by the Trust from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such agent that such amount
will be paid over by him or her to the Trust if it is ultimately determined that
he or she is not entitled to indemnification under this Article VI: provided,
however, that (a) such agent shall have provided appropriate security for such
undertaking, (b) the Trust is insured against-losses arising out of any such
advance payments or (c) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the proceeding, or independent
legal counsel in a written opinion, shall have determined, based upon a review
of readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such agent will be found
entitled to indemnification under this Article VI.
Section 6. Fiduciaries of Employee Benefit Plan. This Article does not
apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1 of
this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ARTICLE VII
Records and Reports
Section 1. Maintenance and Inspection of Share Registrar. The Trust
shall maintain at its principal executive office or at the office of its
transfer agent or registrar, if either be appointed and as determined by
resolution of the Trustees, a record of its Shareholders, giving the names and
addresses of all Shareholders and the number and Series (and, as applicable,
Class) of Shares held by each Shareholder. Subject to such reasonable standards
(including standards governing
13
<PAGE> 18
what information and documents are to be furnished and at whose expense) as may
be established by the Trustees from time to time, the [ ].
Section 2. Maintenance and Inspection of By-Laws. The Trust shall keep
at its principal executive office the original or a copy of these By-Laws as
amended to date, which shall be open to inspection by the Shareholders at all
reasonable times during office hours.
Section 3. Maintenance and Inspection of Other Records. The accounting
books and records and minutes of proceedings of the Shareholders and the
Trustees and any committee or committees of the Trustees shall be kept at such
place or places designated by the Trustees or in the absence of such
designation, at the principal executive office of the Trust. The minutes shall
be kept in written form and the accounting books and records shall be kept
either in written form or in any other form capable of being converted into
written form. Minutes and accounting books and records shall be open to
inspection upon the written demand of any Shareholder at any reasonable time
during usual business hours for a purpose reasonably related to the holder's
interests as a Shareholder. Any such inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts.
Notwithstanding the foregoing, the Trustees shall have the right to keep
confidential from Shareholders for such period of time as the Trustees deem
reasonable, any information which the Trustees reasonably believe to be in the
nature of trade secrets or other information the disclosure of which the
Trustees in good faith believe is not in the best interests of the Trust or
could damage the Trust or its business or which the Trust is required by law or
by agreement with a third party to keep confidential.
Section 4. Inspection by Trustees. Every Trustee shall have the
absolute right at any reasonable time to inspect all books, records, and
documents of every kind and the physical properties of the Trust. This
inspection by a Trustee may be made in person or by an agent or attorney and the
right of inspection includes the right to copy and make extracts of documents.
Section 5. Financial Statements. A copy of any financial statements and
any income statement of the Trust for each semi-annual period of each fiscal
year and accompanying balance sheet of the Trust as of the end of each such
period that has been prepared by the Trust shall be kept on file in the
principal executive office of the Trust for at least twelve (12) months and each
such statement shall be exhibited at all reasonable times to any Shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such Shareholder.
The semi-annual income statements and balance sheets referred to in
this section shall be accompanied by the report, if any, of any independent
accountants engaged by the Trust or the certificate of an authorized officer of
the Trust that the financial statements were prepared without audit from the
books and records of the Trust.
14
<PAGE> 19
ARTICLE VIII
General Matters
Section 1. Checks, Drafts, Evidence of Indebtedness. All checks,
drafts, or other orders for payment of money, notes or other evidences of
indebtedness issued in the name of or payable to the Trust shall be signed or
endorsed in such manner and by such person or persons as shall be designated
from time to time in accordance with the resolution of the Board of Trustees.
Section 2. Contracts and Instruments; How Executed. The Trustees,
except as otherwise provided in these By-Laws, may authorize any officer or
officers, agent or agents, to enter into any contract or execute any instrument
in the name of and on behalf of the Trust and this authority may be general or
confined to specific instances; and unless so authorized or ratified by the
Trustees or within the agency power of an officer, no officer, agent, or
employee shall have any power or authority to bind the Trust by any contract or
engagement or to pledge its credit or to render it liable for any purpose or for
any amount.
Section 3. Certificates for Shares. The Trustees may at any time
authorize the issuance of Share certificates for any one or more Series. In that
event, each Shareholder of an affected Series shall be entitled upon request to
receive a certificate evidencing such Shareholder's ownership of Shares of the
relevant Series (in such form as shall be prescribed from time to time by the
Trustees). All certificates shall be signed in the name of the Trust by the
President or Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or any Assistant Secretary, certifying the number of Shares and
the Series of Shares owned by the Shareholders. Any or all of the signatures on
the certificate may be facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed on a
certificate shall have ceased to be that officer, transfer agent, or registrar
before that certificate is issued, it may be issued by the Trust with the same
effect as if that person were an officer, transfer agent or registrar at the
date of issue. Notwithstanding the foregoing, the Trust may adopt and use a
system of issuance, recordation and transfer of its Shares by electronic or
other means.
Section 4. Lost Certificates. Except as provided in this Section 4, no
new certificates for Shares shall be issued to replace an old certificate unless
the latter is surrendered to the Trust and cancelled at the same time. The
Trustees may, in the event any share certificate or certificate for any other
security is lost, stolen, or destroyed, authorize the issuance of a replacement
certificate on such terms and conditions as the Trustees may require, including
a provision for indemnification of the Trust secured by a bond or other adequate
security sufficient to protect the Trust against any claim that may be made
against it, including any expense or liability on account of the alleged loss,
theft, or destruction of the certificate or the issuance of the replacement
certificate.
Section 5. Representation of Shares of Other Entities Held by Trust.
The President or any Vice President or any other person authorized by the
Trustees or by any of the foregoing
15
<PAGE> 20
designated officers, is authorized to vote or represent on behalf of the Trust
any and all Shares of any corporation, partnership, trusts, or other entities,
foreign or domestic, standing in the name of the Trust. The authority granted
may be exercised in person or by a proxy duly executed by such designated
person.
Section 6. Fiscal Year. The fiscal year of the Trust shall be fixed and
refixed or changed from time to time by the Trustees. The fiscal year of the
Trust shall be the taxable year of each Series of the Trust.
Section 7. Seal. The seal of the Trust shall consist of a flat-faced
dye with the words "The Target Portfolio Trust, Delaware, Trust, 1992" cut or
engraved thereon. However, unless otherwise required by the Trustees, the seal
shall not be necessary to be placed on, and its absence shall not impair the
validity of, any document, instrument or other paper executed and delivered by
or on behalf of the Trust.
ARTICLE IX
Amendments
Section 1. Amendment. Except as otherwise provided by applicable law or
by the Declaration of Trust, these By-Laws may be restated, amended,
supplemented or repealed by the Trustees, provided that no restatement,
amendment, supplement or repeal hereof shall limit the rights to indemnification
or insurance provided in Article VI hereof with respect to any acts or omissions
of agents (as defined in Article VI) of the Trust prior to such amendment.
[Section 2. Incorporation by Reference into Agreement and Declaration
of Trust by the Trust. These By-Laws and any amendments thereto shall be deemed
incorporated by reference in the Declaration of Trust.]
16
<PAGE> 1
EXHIBIT 5(a)
THE TARGET PORTFOLIO TRUST
Management Agreement
Agreement, made this 9th day of November, 1992 between The Target
Portfolio Trust, a Delaware business trust (the Trust), and Prudential Mutual
Fund Management, Inc., a Delaware corporation (the Manager).
W I T N E S S E T H
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
1940 Act); and
WHEREAS, the shares of beneficial interest of the Trust are divided
into separate series or portfolios (each a Portfolio), each of which is
established pursuant to a resolution of the Trustees of the Trust, and the
Trustees may from time to time terminate such Portfolios or establish and
terminate additional Portfolios.
WHEREAS, the Trust desires to retain the Manager to render or contract
to obtain as hereinafter provided investment advisory services to the Trust and
the Trust also desires to avail itself of the facilities available to the
Manager with respect to the administration of its day to day business affairs,
and the Manager is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Trust hereby appoints the Manager to act as manager of the Trust
and
<PAGE> 2
administrator of its business affairs for the period and on the terms set forth
in this Agreement. The Manager accepts such appointment and agrees to render the
services herein described, for the compensation herein provided. The Manager is
authorized to enter into subadvisory agreements for investment advisory services
in connection with the management of the Trust and each Portfolio thereof. Any
such agreement may be entered into by the Manager on such terms and in such
manner as may be permitted by the 1940 Act and the rules thereunder. The Manager
will continue to have responsibility for all investment advisory services
furnished pursuant to any such investment advisory agreements. The Manager will
review the performance of all subadvisers (each an Adviser), and make
recommendations to the Trustees of the Trust with respect to the retention and
renewal of contracts.
2. Subject to the supervision of the Trustees of the Trust, and,
subject to Section 1 hereof, the Manager shall be responsible for the management
of the investment operations of the Trust and each Portfolio thereof and the
composition of each portfolio of the Trust, including the purchase, retention
and disposition thereof, in accordance with the Trust's and the Portfolio's
investment objectives, policies and restrictions as stated in the Prospectus
(hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of each Portfolio's
investments and determine from time to time what investments or
securities will be purchased, retained, sold or loaned by each
Portfolio, and what portion of the assets will be invested or held
uninvested as cash.
(b) The Manager, in the performance of its duties and
obligations under this Agreement, shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus
2
<PAGE> 3
(hereinafter defined) of the Trust and with the instructions and
directions of the Trustees of the Trust and will conform to and comply
with the requirements of the 1940 Act and all other applicable federal
and state laws and regulations.
(c) The Manager shall determine the securities and futures
contracts to be purchased or sold by each Portfolio and will place
orders pursuant to its determinations with or through such persons,
brokers, dealers or futures commission merchants (including but not
limited to Prudential Securities Incorporated and brokers, dealers and
futures commissions which are "affiliated" persons of an Adviser) in
conformity with the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus (hereinafter defined)
or as the Trustees may direct from time to time. In providing the Trust
with investment supervision, it is recognized that the Manager will
give primary consideration to securing the most favorable price and
efficient execution. Consistent with this policy, the Manager may
consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager
or an Adviser may be a party. It is understood that Prudential
Securities Incorporated or a broker which is an "affiliated" person of
an Adviser may be used as principal broker for securities transactions
but that no formula has been adopted for allocation of the Trust's
investment transaction business. It is also understood that it is
desirable for the Trust that the Manager and each Adviser have access
to supplemental investment and market research and security and
economic analysis provided by brokers or futures commission merchants
and that such brokers may execute brokerage transactions at a higher
cost to the
3
<PAGE> 4
Trust than may result when allocating brokerage to other brokers or
futures commission merchants on the basis of seeking the most favorable
price and efficient execution. Therefore, the Manager and each Adviser
is authorized to pay higher brokerage commissions for the purchase and
sale of securities and futures contracts for the Trust to brokers or
futures commission merchants who provide such research and analysis,
subject to review by the Trustees of the Trust from time to time with
respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers or futures
commission merchants may be useful to the Manager or an Adviser in
connection with its services to other clients.
On occasions when the Manager or an Adviser deems the purchase
or sale of a security or a futures contract to be in the best interest
of the Trust as well as other clients of the Manager or the Adviser,
the Manager or the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate
the securities or futures contracts to be so sold or purchased in order
to obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities or
futures contracts so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager or the Adviser
in the manner it considers to be the most equitable and consistent with
its fiduciary obligations to the Portfolio, the Trust and to such other
clients.
(d) The Manager shall maintain all bocks and records with
respect to the Trust's portfolio transactions and shall render to the
Trustees of the Trust such periodic and special reports as the Board
may reasonably request.
4
<PAGE> 5
(e) The Manager shall be responsible for the financial and
accounting records to be maintained by the Trust (including those being
maintained by the Trust's Custodian).
(f) The Manager shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning
the Trust's assets.
(g) The investment management services of the Manager to the
Trust under this Agreement are not to be deemed exclusive, and the
Manager shall be free to render similar services to others.
3. The Trust has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust, as filed with the Secretary of State
of Delaware (such Declaration of Trust, as in effect on the date hereof
and as amended from time to time, are herein called the Declaration of
Trust);
(b) By-Laws of the Trust (such By-Laws, as in effect on the
date hereof and as amended from time to time, are herein called the
By-Laws);
(c) Certified resolutions of the Trustees of the Trust
authorizing the appointment of the Manager and approving the form of
this agreement;
(d) Registration Statement under the 1940 Act and the
Securities Act of 1933, as amended, on Form N-1A (the Registration
Statement), as filed with the Securities and Exchange Commission (the
Commission) relating to the Trust and shares of beneficial interest of
the Trust and all amendments thereto;
(e) Notification of Registration of the Trust under the 1940
Act on Form N-8A as filed with the Commission and all amendments
thereto; and
5
<PAGE> 6
(f) Prospectus of the Trust (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the Prospectus).
4. The Manager shall authorize and permit any of its directors,
officers and employees who may be elected as Trustees or officers of the Trust
to serve in the capacities in which they are elected. All services to be
furnished by the Manager under this Agreement may be furnished through the
medium of any such directors, officers or employees of the Manager.
5. The Manager shall keep the Trust's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Trust are the property of the Trust and it
will surrender promptly to the Trust any such records upon the Trust's request,
provided however that the Manager may retain a copy of such records. The Manager
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records as are required to be maintained by the Manager
pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Trust
and the Manager except the fees and expenses of Trustees who are not
affiliated persons of the Manager or the Trust's investment advisers,
(ii) all expenses incurred by the Manager or by the Trust in
connection with managing the ordinary course of the Trust's business
other than those assumed by the Trust herein, and
(iii) the costs and expenses payable pursuant to any
subadvisory agreements. The Trust assumes and will pay the expenses
described below:
6
<PAGE> 7
(a) the fees and expenses incurred by the Trust in connection
with the management of the investment and reinvestment of each Trust's
assets,
(b) the fees and expenses of Trustees who are not affiliated
persons of the Manager or the Trust's Advisers,
(c) the fees and expenses of the Custodian that relate to (i)
the custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Trust
and the providing of any such records to the Manager useful to the
Manager in connection with the Manager's responsibility for the
accounting records of the Trust pursuant to Section 31 of the 1940 Act
and the rules promulgated thereunder, (iii) the pricing of the shares
of the Trust, including the cost of any pricing service or services
which may be retained pursuant to the authorization of the Trustees of
the Trust, and (iv) for both mail and wire orders, the cashiering
function in connection with the issuance and redemption of the Trust's
securities,
(d) the fees and expenses of the Trust's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Trust,
(f) brokers' commissions and any issue or transfer taxes
chargeable to the Trust in connection with its securities and futures
transactions,
(g) all taxes and corporate fees payable by the Trust to
federal, state or other governmental agencies,
(h) the fees of any trade associations of which the Trust may
be a member,
7
<PAGE> 8
(i) the cost of share certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the Trust,
(j) the cost of fidelity, directors and officers and errors
and omissions insurance,
(k) the fees and expenses involved in registering and
maintaining registration of the Trust and of its shares with the
Securities and Exchange Commission, registering the Trust as a broker
or dealer and qualifying its shares under state securities laws,
including the preparation and printing of the Trust's registration
statements, prospectuses and statements of additional information for
filing under federal and state securities laws for such purposes,
(1) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and
of preparing, printing and mailing reports to shareholders in the
amount necessary for distribution to the shareholders, and
(l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the
Trust's business.
7. In the event the expenses of the Trust for any fiscal year
(including the fees payable to the Manager but excluding interest, taxes,
brokerage commissions and litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Trust's
business) exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statute or regulations of any jurisdictions in which
shares of the Trust are then qualified for offer and sale, the compensation due
the Manager will be reduced by the amount of such excess, or, if such reduction
exceeds the compensation payable to the Manager, the Manager will pay to the
Trust the amount of such reduction which exceeds the amount of such
compensation.
8. For the services provided and the expenses assumed pursuant to this
Agreement, the
8
<PAGE> 9
Trust will pay to the Manager as full compensation therefor a fee as set forth
below. This fee will be computed daily and will be paid to the Manager monthly.
Any reduction in the fee payable and any payment by the Manager to the Trust
pursuant to paragraph 7 shall be made monthly. Any such reductions or payments
are subject to readjustment during the year.
<TABLE>
<CAPTION>
Rate as a percentage of
Name of Portfolio average daily net assets
----------------- ------------------------
<S> <C>
Large Capitalization Growth .60 of 1%
Portfolio
Large Capitalization Value .60 of 1%
Portfolio
Small Capitalization Growth .60 of 1%
Portfolio
Small Capitalization Value .60 of 1%
Portfolio
International Equity Portfolio .70 of 1%
Total Return Bond Portfolio .45 of 1%
Intermediate Term Bond .45 of 1%
Portfolio
Mortgage Backed Securities .45 of 1%
Portfolio
U.S. Government Money Market .25 of 1%
Portfolio
</TABLE>
9. The Manager shall not be liable for any error of judgment or for any
loss suffered by the Trust in connection with the matters to which this
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section
36(b)(3) of the
9
<PAGE> 10
1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
10. The Trust shall indemnify the Manager and hold it harmless from and
against all damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement) incurred by the
Manager in or by reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by or in the
right of the Trust or its security holders) arising out of or otherwise based
upon any action actually or allegedly taken or omitted to be taken by the
Manager in connection with the performance of any of its duties or obligations
under this Agreement; provided, however, that nothing contained herein shall
protect or be deemed to protect the Manager against or entitle or be deemed to
entitle the Manager to indemnification in respect of any liability to the Trust
or its security holders to which the Manager would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of its duties, by reason of its reckless disregard of its duties and obligations
under this Agreement.
11. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust or any
Portfolio thereof at any time, without the payment of any penalty, by the
Trustees of the Trust or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of a Portfolio, or by the Manager at any
time, without the payment of any penalty, on not more than 60 days' nor less
than 30 days' written notice to the other party. This Agreement shall terminate
10
<PAGE> 11
automatically in the event of its assignment (as defined in the 1940 Act).
12. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a Trustee, officer
or employee of the Trust to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
13. Except as otherwise provided herein or authorized by the Trustees
of the Trust from time to time, the Manager shall for all purposes herein be
deemed to be an independent contractor and shall have no authority to act for or
represent the Trust in any way or otherwise be deemed an agent of the Trust.
14. During the term of this Agreement, the Trust agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Trust or the public, which refer in any way to the Manager,
prior to use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of termination of this
Agreement, the Trust will continue to furnish to the Manager copies of any of
the above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first class or overnight
mail, facsimile transmission equipment or hand delivery. The Trust shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Trust as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
11
<PAGE> 12
15. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
16. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Manager at One Seaport Plaza, New York, New
York 10292, Attention: Secretary; or (2) to the Trust at one Seaport Plaza, New
York, New York 10292, Attention: President.
17. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
18. The Trust is a business trust organized under the Delaware Business
Trust Act pursuant to a certificate of trust dated July 29, 1992. The Trust is a
series trust and all debts, liabilities, obligations and expenses of a
particular Portfolio shall be enforceable only against the assets of that
Portfolio and not against the assets of any other Portfolio or of the Trust as a
whole. Neither the Trustees, officers, agents or shareholders of the Trust
assume any personal liability for obligations entered into on behalf of the
Trust (or a Portfolio thereof).
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
THE TARGET PORTFOLIO TRUST
By: /s/ Lawrence C. McQuade
-----------------------------------
Lawrence C. McQuade
President
PRUDENTIAL MUTUAL FUND
MANAGEMENT, INC.
By: /s/ Robert F. Gunia
-----------------------------------
Robert F. Gunia
Executive Vice President
13
<PAGE> 1
EXHIBIT 5(a)(i)
THE TARGET PORTFOLIO TRUST
Amendment to Management Agreement
Agreement, made this th day of April, 1994 between The Target
Portfolio Trust, a Delaware business trust (the Trust), and Prudential Mutual
Fund Management, Inc., a Delaware corporation (the Manager).
W I T N E S S E T H
WHEREAS, the parties hereto have entered into a Management Agreement,
dated November 9, 1992, pursuant to which the Manager acts as manager to the
Trust; and
WHEREAS, the parties hereto wish to amend the Management Agreement to
provide for the addition of a new portfolio, the International Bond Portfolio,
for which the Manager will serve as manager.
NOW, THEREFORE, the parties hereto agree as follows:
1. Paragraph 8 of the Management Agreement is hereby amended to add to
following portfolio to those portfolios listed therein:
<TABLE>
<CAPTION>
Rate as a percentage of
Name of Portfolio average daily net assets
- ----------------- ------------------------
<S> <C>
International Bond Portfolio .50 of 1%
</TABLE>
Except as otherwise provided herein, the Management Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
THE TARGET PORTFOLIO TRUST
By________________________________
Lawrence C. McQuade
President
PRUDENTIAL MUTUAL FUND
MANAGEMENT, INC.
By________________________________
Robert F. Gunia
Executive Vice President
<PAGE> 1
EXHIBIT 5(b)(i)
THE TARGET PORTFOLIO TRUST
(Large Capitalization Value Portfolio)
SUBADVISORY AGREEMENT
Agreement made as of this 9th day of November, 1992 between Prudential
Mutual Fund Management, Inc. (PMF or the Manager), a Delaware Corporation, and
INVESCO MIM, Inc. (the Adviser), a Georgia corporation.
WHEREAS, PMF will enter into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF will
act as Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and desires to retain the Adviser to provide investment advisory services to the
Large Capitalization Value Portfolio of the Trust (the Portfolio) in connection
with the management of the Trust and the Adviser is willing to render such
investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
<PAGE> 2
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage the investment operations of the
Portfolio and the composition of its portfolio, including the purchase,
retention and disposition thereof, in accordance with the Portfolio's
investment objectives, policies and restrictions as stated in the
Prospectus (such Prospectus and Statement of Additional Information as
currently in effect and as amended or supplemented from time to time,
being herein called the "Prospectus") and subject to the following
understandings:
(i) The Adviser shall provide supervision of the
Portfolio's investments and determine from time to time what
investments and securities will be purchased, retained, sold
or loaned by the Portfolio, and what portion of the assets
will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations
under this Agreement, the Adviser shall act in conformity with
the Declaration of Trust, By-Laws and Prospectus of the Trust
and the Portfolio and with the instructions and directions of
the Manager and of the Trustees of the Trust and will conform
to and comply with the requirements of the 1940 Act, the
Internal Revenue Code of 1986 and all other applicable federal
and state laws and regulations.
(iii) The Adviser shall determine the securities and
futures contracts to be purchased or sold by the Portfolio and
will place orders with or through such persons, brokers,
dealers or futures commission merchants (including but not
limited to Prudential Securities Incorporated) to carry out
the policy with respect to brokerage as set forth in the
Trust's Registration Statement and Prospectus or as the
Trustees
2
<PAGE> 3
may direct from time to time. In providing the Portfolio with
investment supervision, it is recognized that the Adviser will
give primary consideration to securing the most favorable
price and efficient execution. Within the framework of this
policy, the Adviser may consider the financial responsibility,
research and investment information and other services
provided by brokers, dealers or futures commission merchants
who may effect or be a party to any such transaction or other
transactions to which the Adviser's other clients may be a
party. It is understood that Prudential Securities
Incorporated may be used as principal broker for securities
transactions but that no formula has been adopted for
allocation of the Portfolio's investment transaction business.
It is also understood that it is desirable for the Trust that
the Adviser have access to supplemental investment and market
research and security and economic analysis provided by
brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may
result when allocating brokerage to other brokers on the basis
of seeking the most favorable price and efficient execution.
Therefore, the Adviser is authorized to place orders for the
purchase and sale of securities and futures contracts for the
Portfolio with such brokers or futures commission merchants,
subject to review by the Trustees from time to time with
respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers or
futures commission merchants may be useful to the Adviser in
connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or
sale of a security or futures contract to be in the best
interest of the Portfolio as well as other clients of the
3
<PAGE> 4
Adviser, the Adviser, to the extent permitted by applicable
laws and regulations, may, but shall be under no obligation
to, aggregate the securities or futures contracts to be sold
or purchased in order to obtain the most favorable price or
lower brokerage commissions and efficient execution. In such
event, allocation of the securities or futures contracts so
purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Adviser in the manner the
Adviser considers to be the most equitable and consistent with
its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records
with respect to the portfolio transactions required by
subparagraphs (b) (5), (6), (7), (9), (10) and (11) and
paragraph (f) of Rule 31a-1 under the 1940 Act and shall
render to the Trustees such periodic and special reports as
the Board may reasonably request.
(v) The Adviser shall provide the Trust's Custodian
on each business day with information relating to all
transactions concerning the Portfolio's assets and shall
provide the Manager with such information upon request of the
Manager.
(vi) The investment management services provided by
the Adviser hereunder are not exclusive, and the Adviser shall
be free to render similar services to others: provided,
however, that the Adviser agrees that neither it nor any of
its affiliated persons (as defined in the 1940 Act) shall
serve or accept retention as investment adviser, investment
manager or similar service provider during the term of this
Agreement and for the period of one year after the termination
of this Agreement with or for the benefit of any investment
company registered under the
4
<PAGE> 5
1940 Act that seeks as a primary market for its shares asset
allocation programs similar in nature or market to the
Prudential Securities Target Program and which are sponsored
by other "major retail broker-dealers" as may be agreed from
time to time by the Manager and the Adviser. Notwithstanding
the foregoing, the Adviser and its affiliates are free to
deliver asset allocation products under any advisory
arrangement in existence on the date of this Agreement.
(b) Services to be furnished by the Adviser under this
Agreement may be furnished through the medium of any of its directors,
officers or employees.
(c) The Adviser shall keep the Portfolio's books and records
required to be maintained by the Adviser pursuant to paragraph l(a)(iv)
hereof and shall timely furnish to the Manager all information relating
to the Adviser's services hereunder needed by the Manager to keep the
other books and records of the Trust required by Rule 31a-1 under the
1940 Act. The Adviser agrees that all records which it maintains for
the Portfolio are the property of the Trust and the Adviser will
surrender promptly to the Trust any of such records upon the Trust's
request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are
required to be maintained by it pursuant to paragraph l(a) hereof.
(d) The Adviser agrees to maintain adequate compliance
procedures to ensure its compliance with the 1940 Act, the Investment
Advisers Act of 1940 (Advisers Act) and other applicable state and
federal laws and regulations.
(e) The Adviser shall furnish to the Manager copies of all
records prepared in connection with (i) the performance of this
Agreement and (ii) the maintenance of compliance
5
<PAGE> 6
procedures pursuant to paragraph l(d) hereof as the Manager may
reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the Portfolio. This
fee will be computed daily and paid monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's
6
<PAGE> 7
directors, officers or employees to engage in any other business or to devote
his or her time and attention in part to the management or other aspects of any
business, whether of a similar or dissimilar nature, nor limit the Adviser's
right to engage in any other business or to render services of any kind to any
other corporation, firm, individual or association, except as described in
Paragraph l(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile transmission equipment or
hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
7
<PAGE> 8
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Robert F. Gunia
------------------------------------
Robert F. Gunia
Executive Vice President
INVESCO MIM, INC.
By /s/ Edward C. Mitchell, Jr.
------------------------------------
8
<PAGE> 9
INVESCO MIM, Inc.
1315 Peachtree Street, N.E., Suite 500
Atlanta, Georgia 30309
November 9, 1992
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, New York 10292
Re: The Target Portfolio Trust
Ladies and Gentlemen:
The Subadvisory Agreement for the Large Capitalization Value
Portfolio of the Target Portfolio Trust (the Agreement) between Prudential
Mutual Fund Management, Inc. (the Manager) and INVESCO MIM, Inc. (the Adviser)
provides that, during the term of the Agreement and for the period of one year
after the termination of the Agreement, neither the Adviser nor any of its
affiliated persons (as defined in the 1940 Act) shall serve or accept retention
as investment adviser, investment manager or similar service provider with or
for the benefit of any investment company registered under the 1940 Act that
seeks as a primary market for its shares asset allocation programs which are
similar in nature or market to the Prudential Securities Target Program and
which are sponsored by other "major retail broker-dealers" as may be agreed from
time to time by the Manager and the Adviser. It is understood and agreed that
the following brokerage firms, including any successor firms, constitute "major
retail broker-dealers" within the meaning of the Agreement:
Merrill Lynch & Co., Inc.
Shearson Lehman Brothers Inc.
Paine Webber Group Inc.
The Bear Stearns Companies Inc.
Dean Witter Reynolds Inc.
Smith Barney, Harris Upham & Co., Incorporated
Kidder Peabody & Co., Incorporated
A. G. Edwards, Inc.
Charles Schwab & Co., Inc.
Very truly yours,
INVESCO MIM, Inc.
By
/s/ Edward C. Mitchell, Jr.
-----------------------------
Agreed to this 9th day of November, 1992
Prudential Mutual Fund Management, Inc.
By
/s/ Robert F. Gunia
-----------------------------------------
Robert F. Gunia, Executive Vice President
<PAGE> 1
EXHIBIT 5(b)(ii)
THE TARGET PORTFOLIO TRUST
(Small Capitalization Growth Portfolio)
SUBADVISORY AGREEMENT
Agreement made as of this 9th day of November, 1992, between Prudential
Mutual Fund Management, Inc. (PMF or the Manager), a Delaware Corporation, and
Nicholas-Applegate Capital Management (the Adviser), a California limited
partnership.
WHEREAS, PMF will enter into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF will
act as Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and desires to retain the Adviser to provide investment advisory services to the
Small Capitalization Growth Portfolio of the Trust (the Portfolio) in connection
with the management of the Trust and the Adviser is willing to render such
investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage the investment operations of the
Portfolio and the composition of its portfolio, including the purchase,
retention and disposition thereof, in accordance with the Portfolio's
investment objectives, policies and restrictions as stated in the
Prospectus (such
<PAGE> 2
Prospectus and Statement of Additional Information as currently in
effect and as amended or supplemented from time to time, being herein
called the "Prospectus") and subject to the following understandings:
(i) The Adviser shall provide supervision of the Portfolio's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the
Portfolio, and what portion of the assets will be invested or held
uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus of the Trust and the
Portfolio and with the instructions and directions of the Manager and
of the Trustees of the Trust and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986 and all
other applicable federal and state laws and regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by the Portfolio and will place
orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential
Securities Incorporated) to carry out the policy with respect to
brokerage as set forth in the Trust's Registration Statement and
Prospectus or as the Trustees may direct from time to time. In
providing the Portfolio with investment supervision, it is recognized
that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this
policy, the Adviser may consider the financial responsibility, research
and investment information and other services provided by brokers,
dealers or futures commission merchants who may effect or be a party to
any such transaction or other transactions to which the Adviser's other
clients may be a party.
2
<PAGE> 3
It is understood that Prudential Securities Incorporated may be used as
principal broker for securities transactions but that no formula has
been adopted for allocation of the Portfolio's investment transaction
business. It is also understood that it is desirable for the Trust that
the Adviser have access to supplemental investment and market research
and security and economic analysis provided by brokers or futures
commission merchants who may execute brokerage transactions at a higher
cost to the Trust than may result when allocating brokerage to other
brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the Adviser is authorized to place orders for the
purchase and sale of securities and futures contracts for the Portfolio
with such brokers or futures commission merchants, subject to review by
the Trustees from time to time with respect to the extent and
continuation of this practice. It is understood that the services
provided by such brokers or futures commission merchants may be useful
to the Adviser in connection with the Adviser's services to other
clients.
On occasions when the Adviser deems the purchase or sale of a
security or futures contract to be in the best interest of the
Portfolio as well as other clients of the Adviser, the Adviser, to the
extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities or futures contracts
to be sold or purchased in order to obtain the most favorable price or
lower brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or sold,
as well as the expenses incurred in the transaction, will be made by
the Adviser in the manner the Adviser considers to be the most
equitable and consistent with its fiduciary obligations to the Trust
and to such other clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5),
(6), (7), (9), (10) and (11) and
3
<PAGE> 4
paragraph (f) of Rule 31a-1 under the 1940 Act and shall render to the
Trustees such periodic and special reports as the Board may reasonably
request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning
the Portfolio's assets and shall provide the Manager with such
information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to
render similar services to others; provided, however, that the Adviser
agrees that, during the term of this Agreement and for a period of six
months after the termination of this Agreement, without the prior
written approval of the Manager, neither the Adviser nor any of its
affiliated persons (as defined in the 1940 Act) shall serve or accept
retention as investment adviser, investment manager or similar service
provider with or for the benefit of any investment company registered
under the 1940 Act which (A) is sponsored by any other "major retail
broker-dealer" (as may be agreed from time to time by the Manager and
the Adviser in writing), (B) has investment objectives and policies
substantially similar to those of the Portfolio (including without
limitation the objective of maximizing capital appreciation by
investing in the common stock of "emerging growth" companies with total
market capitalizations of less than $1.5 billion), (C) is managed by
the Adviser based primarily on computerized analysis of fundamental
stock characteristics and (D) serves as a vehicle for an asset
allocation program or programs which are similar in nature or market to
the Prudential Securities Target Program. Notwithstanding the
foregoing, the Adviser and its affiliates are free to serve or accept
retention as investment adviser, investment manager or similar service
provider (x) under any advisory arrangement in existence on the date of
this Agreement, (y) to registered investment companies which are part
of a variable annuity or
4
<PAGE> 5
insurance program, and (z) in connection with any investment or
programs which are marketing primarily to non-United States investors.
In addition, notwithstanding the foregoing, the provisions of this
Section l(a)(vi) shall be of no further force or effect thirty (30)
days after the written notice by the Adviser that the Manager is in
default of its obligations to the Adviser pursuant to Section 7 hereof.
For purposes of item (B) above, an investment company which has the
objective of maximizing capital appreciation by investing in the common
stock of "emerging growth companies" with total market capitalizations
of less than $1 billion, or of up to $2 billion or more, shall not be
deemed to have investment objectives and policies substantially similar
to those of the Portfolio.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its partners, officers or
employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph l(a)(iv) hereof
and shall timely furnish to the Manager all information relating to the
Adviser's services hereunder needed by the Manager to keep the other
books and records of the Trust required by Rule 31a-1 under the 1940
Act. The Adviser agrees that all records which it maintains for the
Portfolio are the property of the Trust and the Adviser will surrender
promptly to the Trust any of such records upon the Trust's request. The
Adviser further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act any such records as are required to be
maintained by it pursuant to paragraph l(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of
1940 (Advisers Act) and other applicable state and federal laws and
regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in
5
<PAGE> 6
connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph l(d) hereof
as the Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the Portfolio. This
fee will be computed daily and paid monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's
6
<PAGE> 7
partners, officers or employees to engage in any other business or to devote his
or her time and attention in part to the management or other aspects of any
business, whether of a similar or dissimilar nature, nor limit the Adviser's
right to engage in any other business or to render services of any kind to any
other corporation, firm, individual or association, except as described in
Paragraph l(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way;
provided, however, that any such item which describes or characterizes the
Adviser's investment process with respect to the Portfolio, the names of any of
its clients (other than the Trust or advisory clients of Prudential Securities
Incorporated or Prudential Mutual Fund Management, Inc.) or any of its
performance results shall be furnished to the Adviser by first class or
overnight mail, facsimile transmission equipment or hand delivery prior to use
thereof, and such item shall not be used if the Adviser reasonably objects to
such use in writing within twenty-four (24) hours (or such other time as may be
mutually agreed) after receipt thereof (provided, however, that if such item is
not received by the Adviser during normal business hours on a business day, such
period shall end twenty-four (24) hours after the start of normal business hours
on the next succeeding business day).
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
7
<PAGE> 8
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Robert F. Gunia
---------------------------------------
Robert F. Gunia
Executive Vice President
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT,
a California limited partnership
By: Nicholas-Applegate Capital Management, Inc.
General Partner
By /s/ Antonio A. Cabral, Jr.
---------------------------------------
Antonio A. Cabral, Jr.
Vice President
8
<PAGE> 9
Nicholas-Applegate Capital Management
501 West Broadway, Suite 2000
San Diego, California 92101
November 9, 1992
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, New York 10292
Re: The Target Portfolio Trust
Ladies and Gentlemen:
The Subadvisory Agreement for the Small Capitalization Growth Portfolio
of the Target Portfolio Trust (the Agreement) between Prudential Mutual Fund
Management, Inc. (the Manager) and Nicholas-Applegate Capital Management (the
Adviser) provides that, during the term of the Agreement and, if the Agreement
is terminated by the Adviser, for the period of six months after the termination
of the Agreement, neither the Adviser nor any of its affiliated persons (as
defined in the 1940 Act) shall serve or accept retention as investment adviser,
investment manager or similar service provider with or for the benefit of any
investment company registered under the 1940 Act that serves as a vehicle for an
asset allocation program or programs which are similar in nature or market to
the Prudential Securities Target Program and which are sponsored by other "major
retail broker-dealers" as may be agreed from time to time by the Manager and the
Adviser. It is understood and agreed that the following brokerage firms,
including any successor firms, constitute "major retail broker-dealers" within
the meaning of the Agreement:
Merrill Lynch & Co., Inc.
Shearson Lehman Brothers Inc.
Paine Webber Group Inc.
The Bear Stearns Companies Inc.
Dean Witter Reynolds Inc.
Smith Barney, Harris Upham & Co., Incorporated
Kidder Peabody & Co., Incorporated
A. G. Edwards, Inc.
Charles Schwab & Co., Inc.
Very truly yours,
Nicholas-Applegate Capital Management
By /s/ Antonio A. Cabral, Jr.
-------------------------------
Agreed to this 9th day of November; 1992
Prudential Mutual Fund Management, Inc.
By /s/ Robert F. Gunia
----------------------------------
Robert F. Gunia, Executive Vice President
9
<PAGE> 1
EXHIBIT 5(b)(iii)
THE TARGET PORTFOLIO TRUST
(International Equity Portfolio)
SUBADVISORY AGREEMENT
Agreement made as of this 9th day of November, 1992, between Prudential
Mutual Fund Management, Inc. (PMF or the Manager), a Delaware Corporation, and
Lazard Freres Asset Management, a division of Lazard Freres & Co. (the Adviser),
a New York limited partnership.
WHEREAS, PMF will enter into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF will
act as manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and desires to retain the Adviser to provide investment advisory services to the
International Equity Portfolio of the Trust (the Portfolio) in connection with
the management of the Trust and the Adviser is willing to render such investment
advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage the investment operations of the
Portfolio and the composition of its
<PAGE> 2
portfolio, including the purchase, retention and disposition thereof,
in accordance with the Portfolio's investment objectives, policies and
restrictions as stated in the Prospectus (such Prospectus and Statement
of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus")
and subject to the following understandings:
(i) The Adviser shall provide supervision of the Portfolio's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the
Portfolio, and what portion of the assets will be invested or held
uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus of the Trust and the
Portfolio and with the instructions and directions of the Manager and
of the Trustees of the Trust and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986 and all
other applicable federal and state laws and regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by the Portfolio and will place
orders pursuant to its determination with or through such persons,
brokers, dealers or futures commission merchants (including but not
limited to Prudential Securities Incorporated and Lazard Freres & Co.)
in conformity with the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees
may direct from time to time. In providing the Portfolio with
investment supervision, it is recognized that the Adviser will give
primary
<PAGE> 3
consideration to securing the most favorable price and efficient
execution. Within the framework of this policy, the Adviser may
consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such
transaction or other transactions to which the Adviser's other clients
may be a party. It is understood that Prudential Securities
Incorporated and Lazard Freres & Co. may each be used as broker for
securities transactions but that no formula has been adopted for
allocation of the Portfolio's investment transaction business. It is
also understood that it is desirable for the Trust that the Adviser
have access to supplemental investment and market research and security
and economic analysis provided by brokers or futures commission
merchants who may execute brokerage transactions at a higher cost to
the Trust than may result when allocating brokerage to other brokers on
the basis of seeking the most favorable price and efficient execution.
Therefore, the Adviser is authorized to place orders for the purchase
and sale of securities and futures contracts for the Portfolio with
such brokers or futures commission merchants, subject to review by the
Trustees from time to time with respect to the extent and continuation
of this practice. It is understood that the services provided by such
brokers or futures commission merchants may be useful to the Adviser in
connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security or futures contract to be in the best interest of the
Portfolio as well as other clients of the Adviser, the Adviser, to the
extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities or futures contracts
to be sold or
<PAGE> 4
purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or sold,
as well as the expenses incurred in the transaction, will be made by
the Adviser in the manner the Adviser considers to be the most
equitable and consistent with its fiduciary obligations to the Trust
and to such other clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5),
(6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the
1940 Act and shall render to the Trustees such periodic and special
reports as the Board may reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning
the Portfolio's assets and shall provide the Manager with such
information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to
render similar services to others; provided, however, that the Adviser
agrees that neither it, nor any person controlled by it, shall serve or
accept retention as investment adviser, investment manager or similar
service provider during the term of this Agreement and for the period
of one year after the termination of this Agreement with or for the
benefit of any investment company registered under the 1940 Act (A)
that has an investment objective of capital appreciation which it seeks
to achieve by investing in equity securities of companies domiciled
outside the United States, (B) the shares of which are sold primarily
through an asset allocation program which is similar to the Prudential
Securities Target Program, as described in the registration
<PAGE> 5
statement of the Trust filed with the Securities and Exchange
Commission, and (C) which is sponsored by a "major retail
broker-dealer" as may be agreed from time to time in writing by the
Manager and the Adviser.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its partners, officers or
employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph l(a)(iv) hereof
and shall timely furnish to the Manager all information relating to the
Adviser's services hereunder needed by the Manager to keep the other
books and records of the Trust required by Rule 31a-1 under the 1940
Act. The Adviser agrees that all records which it maintains for the
Portfolio are the property of the Trust and the Adviser will surrender
promptly to the Trust any of such records upon the Trust's request. The
Adviser further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act any such records as are required to be
maintained by it pursuant to paragraph l(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of
1940 (Advisers Act) and other applicable state and federal laws and
regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and
(ii) the maintenance of compliance procedures pursuant to paragraph
l(d) hereof as the Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services to
be provided to
<PAGE> 6
the Portfolio pursuant to the Management Agreement and shall oversee and review
the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .40 of 1% of the average daily net assets of the Portfolio. This
fee will be computed daily and paid monthly in arrears.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act:
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's partners, officers or employees to engage in any other business
or to devote his or her time and
<PAGE> 7
attention in part to the management or other aspects of any business, whether of
a similar or dissimilar nature, nor limit the Adviser's right to engage in any
other business or to render services of any kind to any other corporation, firm,
individual or association, except as described in Paragraph l(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. In the event of the termination of this Agreement, the
Manager will continue to furnish the Adviser copies of such materials which
refer to the Adviser. Sales literature may be furnished to the Adviser hereunder
by first class or overnight mail, facsimile transmission equipment or hand
delivery.
8. The Manager has delivered to the Adviser copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust, as filed with the Secretary of State of
Delaware (such Declaration of Trust, as in effect on the date hereof
and as amended from time to time, are herein called the Declaration of
Trust);
(b) By-Laws of the Trust (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the
By-Laws);
(c) Certified resolutions of the Trustees of the Trust authorizing
the appointment of the Manager and the Adviser and approving the form
of this Agreement;
<PAGE> 8
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-1A (the Registration Statement), as
filed with the Securities and Exchange Commission (the Commission)
relating to the Portfolios and shares of beneficial interest of each
Portfolio and all amendments thereto;
(e) Notification of Registration of the Trust under the 1940 Act on
Form N-8A as filed with the commission and all amendments thereto; and
(f) Prospectus of the Portfolios (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the Prospectus).
9. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By: /s/ Robert F. Gunia
--------------------------------
Robert F. Gunia
Executive Vice President
LAZARD FRERES ASSET MANAGEMENT
By: /s/ Robert P. Morgenthau
--------------------------------
Robert P. Morgenthau
General Partner
<PAGE> 9
Lazard Freres & Co.
Lazard Freres Asset Management
1 Rockefeller Plaza
New York, New York 10020
November 9, 1992
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, New York 10292
Re: The Target Portfolio Trust
Ladies and Gentlemen:
The Subadvisory Agreement for the International Equity Portfolio of the
Target Portfolio Trust (the Agreement) between Prudential Mutual Fund
Management, Inc. (the Manager) and Lazard Freres Asset Management (the Adviser)
provides that, during the term of the Agreement and for the period of one year
after the termination of the Agreement, neither the Adviser nor any person
controlled by the Adviser shall serve or accept retention as investment adviser,
investment manager or similar service provider with or for the benefit of any
investment company registered under the 1940 Act (A) that has an investment
objective of capital appreciation which it seeks to achieve by investing in
equity securities of companies domiciled outside the United States, (B) the
shares of which are sold primarily through an asset allocation program which is
similar to the Prudential Securities Target Program, as described in the
registration statement of the Trust filed with the Securities and Exchange
Commission, and (C) which is sponsored by a "major retail broker-dealer" as may
be agreed from time to time in writing by the Manager and the Adviser. It is
understood and agreed that each of the following brokerage firms, including any
successor firms, constitutes a "major retail broker-dealer" within the meaning
of the Agreement:
Merrill Lynch & Co., Inc.
Shearson Lehman Brothers Inc.
Paine Webber Group Inc.
Dean Witter Reynolds Inc.
Smith Barney, Harris Upham & Co., Incorporated
A. G. Edwards, Inc.
Charles Schwab & Co., Inc.
Very truly yours,
LAZARD FRERES ASSET MANAGEMENT
By
/s/ Robert Morgenthau
----------------------------------
Robert Morgenthau, General Partner
<PAGE> 10
Agreed to this 9th day of November, 1992
Prudential Mutual Fund Management, Inc.
By
/s/ Robert F. Gunia
---------------------------------
Robert F. Gunia, Executive Vice President
<PAGE> 1
EXHIBIT 5(b)(iv)
THE TARGET PORTFOLIO TRUST
(Mortgage Backed Securities Portfolio)
(U.S. Government Money Market Portfolio)
SUBADVISORY AGREEMENT
Agreement made as of this 9th day of November, 1992, between Prudential
Mutual Fund Management, Inc. (PMF or the Manager), a Delaware Corporation, and
Wellington Management Company (the Adviser), a Massachusetts general
partnership.
WHEREAS, PMF has entered into a management agreement (the Management
Agreement), dated November 9, 1992, with The Target Portfolio Trust (the Trust),
a Delaware business trust and a diversified open-end management investment
company registered under the Investment Company Act of 1940 (the 1940 Act),
pursuant to which PMF will act as Manager of the Trust;
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios;
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and desires to retain the Adviser to provide investment advisory services to the
U.S. Government Money Market Portfolio and the Mortgage Backed Securities
Portfolio of the Trust (each a Portfolio) in connection with the management of
the Trust and the Adviser is willing to render such investment advisory
services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the
<PAGE> 2
Adviser shall manage the investment operations of, and the composition
of, each Portfolio, including the purchase, retention and disposition
thereof, in accordance with each Portfolio's investment objectives,
policies and restrictions as stated in the Prospectus (such Prospectus
and Statement of Additional Information as currently in effect and as
amended or supplemented from time to time, being herein called the
"Prospectus") and subject to the following understandings:
(i) The Adviser shall provide supervision of each
Portfolio's investments and determine from time to time what
investments and securities will be purchased, retained, sold or loaned
by a Portfolio, and what portion of the assets will be invested or held
uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus of the Trust and the
Portfolios and with the instructions and directions of the Manager and
of the Trustees of the Trust and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986 and all
other applicable federal and state laws and regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by the Portfolios and will place
orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential
Securities Incorporated to the extent permitted by the Trustees and
applicable law) to carry out the policy with respect to brokerage as
set forth in the Trust's Registration Statement and Prospectus or as
the Trustees may direct from time to time. In providing the Portfolios
with
2
<PAGE> 3
investment supervision, it is recognized that the Adviser will give
primary consideration to securing the most favorable price and
efficient execution. Within the framework of this policy, the Adviser
may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such
transaction or other transactions to which the Adviser's other clients
may be a party. It is understood that Prudential Securities
Incorporated may be used as a broker for securities transactions but
that no formula has been adopted for allocation of the Portfolios'
investment transaction business. It is also understood that it is
desirable for the Trust that the Adviser have access to supplemental
investment and market research and security and economic analysis
provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may result
when allocating brokerage to other brokers on the basis of seeking the
most favorable price and efficient execution. Therefore, the Adviser is
authorized to place orders for the purchase and sale of securities and
futures contracts for the Portfolios with such brokers or futures
commission merchants, subject to review by the Trustees from time to
time with respect to the extent and continuation of this practice. It
is understood that the services provided by such brokers or futures
commission merchants may be useful to the Adviser in connection with
the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security or futures contract to be in the best interest of a Portfolio
as well as other clients of the Adviser, the Adviser, to the extent
permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities or futures contracts to be
sold or purchased in order
3
<PAGE> 4
to obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities or
futures contracts so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Adviser in the manner
the Adviser considers to be the most equitable and consistent with its
fiduciary obligations to the Trust and to such other clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5),
(6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the
1940 Act and shall render to the Trustees such periodic and special
reports as the Board may reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning
the Portfolios' assets and shall provide the Manager with such
information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to
render similar services to others.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its partners, officers or
employees.
(c) The Adviser shall keep the Portfolios' books and records required
to be maintained by the Adviser pursuant to paragraph l (a)(iv) hereof
and shall timely furnish to the Manager all information relating to the
Adviser's services hereunder needed by the Manager to keep the other
books and records of the Trust required by Rule 3la-1 under the 1940
Act. The Adviser agrees that all records which it maintains for the
Portfolios are the property of the Trust and the Adviser will surrender
promptly to the Trust any of such records upon the
4
<PAGE> 5
Trust's request; provided, however, that the Adviser may retain a copy
of such records. The Adviser further agrees to preserve for the periods
prescribed by Rule 3la-2 under the 1940 Act any such records as are
required to be maintained by it pursuant to paragraph l(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of
1940 (Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and
(ii) the maintenance of compliance procedures pursuant to paragraph
l(d) hereof as the Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolios pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager has delivered to the Adviser copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust, as filed with the Secretary of State of
Delaware (such Declaration of Trust, as in effect on the date hereof
and as amended from time to time, are herein called the Declaration of
Trust);
(b) By-Laws of the Trust (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the
By-Laws);
(c) Certified resolutions of the Trustees of the Trust authorizing
the appointment of the Manager and the Adviser and approving the form
of this Agreement;
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as
5
<PAGE> 6
amended, on Form N-1A (the Registration Statement), as filed with the
Securities and Exchange Commission (the Commission) relating to the
Portfolios and shares of beneficial interest of each Portfolio and all
amendments thereto;
(e) Notification of Registration of the Trust under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Portfolios (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the Prospectus).
4. The Manager shall pay the Adviser as full compensation for the
services provided and the expenses assumed pursuant to this Subadvisory
Agreement a fee at an annual rate of .25 of 1% of the average daily net assets
of the Mortgage Backed Securities Portfolio and .125 of 1% of the average daily
net assets of the U.S. Government Money Market Portfolio. This fee will be
computed daily and paid to the Adviser monthly.
5. The Adviser shall not be liable for any error of judgment or for any
loss suffered by a Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
6. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority
6
<PAGE> 7
of the outstanding voting securities (as defined in the 1940 Act) of a
Portfolio, or by the Manager or the Adviser at any time, without the payment of
any penalty, on not more than 60 days' nor less than 30 days' written notice to
the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
7. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's partners, officers, or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association.
8. During the term of this Agreement, the Manager agrees to furnish
the Adviser at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing within five business days (or such other time as may be mutually
agreed) after receipt thereof. The Manager agrees to use its best efforts to
ensure that materials prepared by employees or agents of the Manager and its
affiliates which refer to the Adviser in any way are consistent with those
materials previously approved by the Adviser as referenced in the preceding
sentence. Sales literature may be furnished to the Adviser hereunder by first
class or overnight mail, facsimile transmission equipment or hand delivery.
9. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by the laws of the State of New
York.
7
<PAGE> 8
11. Should any part of this Agreement be held invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
12. Where the effect of a requirement of the 1940 Act reflected in any
provision of this Agreement or altered by a rule, regulation or order of the
Commission, whether of special or regular application, such provision shall be
deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Robert F. Gunia
------------------------------
Robert F. Gunia
Executive Vice President
WELLINGTON MANAGEMENT COMPANY
By: /s/
------------------------------
8
<PAGE> 9
- --------------------------------------------------------------------------------
Wellington Management Company 75 State Street Telephone:
Boston, Massachusetts 02109 (617) 951-5000
- --------------------------------------------------------------------------------
Telex: Telefax:
81943 Tadpole Bsn (617) 951-5250
- --------------------------------------------------------------------------------
December 30, 1992
Stephen P. Fisher
Senior Vice President
Prudential Mutual Fund Management
One Seaport Plaza
New York, New York
Dear Steve:
Wellington Management Company, as you know, serves as investment adviser to a
wide range of investment company portfolios for a number of different sponsors.
These portfolios encompass a variety of investment styles, including
mortgage-backed securities and money market instruments, and are sold through a
number of different distribution channels both as regular mutual funds and as
vehicles which underlie variable annuities. As you also know, we are not in a
position to control the marketing strategies or packaging decisions of our
clients.
Nonetheless, we are always mindful of the distribution considerations of our
clients and the extent to which the distribution of similar products advised by
Wellington Management in the same markets may create difficult issues. Indeed,
prior to accepting our TARGET assignment, we reviewed and discussed whether the
assignment would raise similar issues for other existing clients. While you
understand that we are not able to grant an "exclusive" to any client, we can
assure you we have no current expectation of accepting a future assignment as an
investment adviser for a mutual fund portfolio with the same investment
objectives and policies as that for which we serve as adviser in the TARGET
Program and which also intends its primary market to be an asset allocation
program distributed in the same market and manner as that of the TARGET Program.
We have always been able to work closely with you and others at PMFM on issues
of mutual interest and we are confident that we will continue to do so in the
future.
Sincerely,
/s/ Mary Ann Tynan
Mary Ann Tynan
Senior Vice President and Partner
<PAGE> 1
EXHIBIT 5(b)(v)
THE TARGET PORTFOLIO TRUST
(International Bond Portfolio)
SUBADVISORY AGREEMENT
Agreement made as of this th day of April 1994, between Prudential
Mutual Fund Management, Inc. (PMF or the Manager), a Delaware Corporation, and
Fiduciary International Inc. (the Adviser), a New York corporation.
WHEREAS, PMF has entered into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and desires to retain the Adviser to provide investment advisory services to the
International Bond Portfolio of the Trust (the Portfolio) in connection with the
management of the Trust and the Adviser is willing to render such investment
advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage the investment operations of the
Portfolio and the composition of its portfolio, including the purchase,
retention and disposition thereof, in accordance with the Portfolio's
investment objectives, policies and restrictions as stated in the
Prospectus (such
<PAGE> 2
Prospectus and Statement of Additional Information as currently in
effect and as amended or supplemented from time to time, being herein
called the "Prospectus") and subject to the following understandings:
(i) The Adviser shall provide supervision of the Portfolio's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the
Portfolio, and what portion of the assets will be invested or held
uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus of the Trust and the
Portfolio and with the instructions and directions of the Manager and
of the Trustees of the Trust and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986 and all
other applicable federal and state laws and regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by the Portfolio and will place
orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential
Securities Incorporated) to carry out the policy with respect to
brokerage as set forth in the Trust's Registration Statement and
Prospectus or as the Trustees may direct from time to time. In
providing the Portfolio with investment supervision, it is recognized
that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this
policy, the Adviser may consider the financial responsibility, research
and investment information and other services provided by brokers,
dealers or futures commission merchants who may effect or be a party to
any such transaction or other transactions to which the Adviser's other
clients may be a party. It is understood that Prudential Securities
Incorporated may be used as principal broker for securities
transactions
<PAGE> 3
but that no formula has been adopted for allocation of the Portfolio's
investment transaction business. It is also understood that it is
desirable for the Trust that the Adviser have access to supplemental
investment and market research and security and economic analysis
provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may result
when allocating brokerage to other brokers on the basis of seeking the
most favorable price and efficient execution. Therefore, the Adviser is
authorized to place orders for the purchase and sale of securities and
futures contracts for the Portfolio with such brokers or futures
commission merchants, subject to review by the Trustees from time to
time with respect to the extent and continuation of this practice. It
is understood that the services provided by such brokers or futures
commission merchants may be useful to the Adviser in connection with
the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security or futures contract to be in the best interest of the
Portfolio as well as other clients of the Adviser, the Adviser, to the
extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities or futures contracts
to be sold or purchased in order to obtain the most favorable price or
lower brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or sold,
as well as the expenses incurred in the transaction, will be made by
the Adviser in the manner the Adviser considers to be the most
equitable and consistent with its fiduciary obligations to the Trust
and to such other clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5),
(6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the
1940 Act and shall render to the Trustees such periodic and special
reports as the Board may reasonably request.
<PAGE> 4
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning
the Portfolio's assets and shall provide the Manager with such
information upon request of the Manager.
(vi) the investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to
render similar services to others; provided, however, that the Adviser
agrees that neither it nor any of its affiliated persons (as defined in
the 1940 Act) shall serve or accept retention as an investment adviser,
investment manager or similar service provider, of an international
fixed income fund, during the term of this Agreement and for the period
of one year after the termination of this Agreement, with or for the
benefit of any investment company registered under the 1940 Act that
seeks as a primary market for its shares asset allocation programs
similar in nature and market to the Prudential Securities Target
Program. For purposes of this Agreement, an asset allocation program
shall be deemed to be similar in nature and market to the Prudential
Securities Target Program if (A) it is sponsored by a retail
broker-dealer, (B) provides for the provision of investment advice to
investors wherein one or more investment companies sponsored by the
retail broker-dealer serve as potential investment vehicles into which
investment may be recommended, and (C) is marketed primarily to
investors domiciled within the United States. In addition,
notwithstanding the foregoing, the provisions of this Section l(a)(vi)
shall be of no further force and effect 90 days after written notice to
the Adviser by the Trust or the Manager of the termination of the
Adviser's services hereunder, and provided further, that nothing herein
shall be deemed to prohibit the Adviser from continuing to serve in its
existing capacity as investment adviser or investment manager for its
existing clients.
(b) Services to be furnished by the Adviser under this Agreement may
be furnished through the medium of any of its directors, officers or
employees.
<PAGE> 5
(c) The Adviser shall keep the Portfolio's books and records
required to be maintained by the Adviser pursuant to paragraph l(a)(iv)
hereof and shall timely furnish to the Manager all information relating
to the Adviser's services hereunder needed by the Manager to keep the
other books and records of the Trust required by Rule 31a-1 under the
1940 Act. The Adviser agrees that all records which it maintains for
the Portfolio are the property of the Trust and the Adviser will
surrender promptly to the Trust any of such records upon the Trust's
request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are
required to be maintained by it pursuant to paragraph l(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of
1940 (Advisers Act) and other applicable state and federal laws and
regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and
(ii) the maintenance of compliance procedures pursuant to paragraph
l(d) hereof as the Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the Portfolio. This
fee will be computed daily and paid monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's
<PAGE> 6
part in the performance of its duties or from its reckless disregard of its
obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or dissimilar nature, nor
limit the Adviser's right to engage in any other business or to render services
of any kind to any other corporation, firm, individual or association, except as
described in Paragraph l(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile transmission equipment or
hand delivery.
<PAGE> 7
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By: /s/ ROBERT F. GUNIA
---------------------------------
FIDUCIARY INTERNATIONAL INC.
By: /s/
---------------------------------
<PAGE> 1
EXHIBIT 5(b)(vi)
THE TARGET PORTFOLIO TRUST
SUBADVISORY AGREEMENT
Agreement made as of this second day of January, 1995, between
Prudential Mutual Fund Management, Inc. (PMF or the Manager), a Delaware
corporation, and Columbus Circle Investors (the Adviser), a Delaware
partnership.
WHEREAS, PMF has entered into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Large Capitalization Growth Portfolio of the
Trust (the Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services.
1
<PAGE> 2
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such portfolio, including the purchase, retention and disposition thereof, in
accordance with each Portfolio's investment objectives, policies and
restrictions as stated in the Prospectus (such Prospectus and Statement of
Additional Information as currently in effect and as amended or supplemented
from time to time, being herein called the "Prospectus") and subject to the
following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and shall determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by a Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolio
2
<PAGE> 3
with investment supervision, it is recognized that the Adviser will give primary
consideration to securing the most favorable price and efficient execution.
Within the framework of this policy, the Adviser may consider the financial
responsibility, research and investment information and other services provided
by brokers, dealers or futures commission merchants who may effect or be a party
to any such transaction or other transactions to which the Adviser's other
clients may be a party. It is understood that Prudential Securities Incorporated
may be used as principal broker for securities transactions but that no formula
has been adopted for allocation of the Portfolio's investment transaction
business. It is also understood that it is desirable for the Trust that the
Adviser have access to supplemental investment and market research and security
and economic analysis provided by brokers or futures commission merchants who
may execute brokerage transactions at a higher cost to the Trust than may result
when allocating brokerage to other brokers on the basis of seeking the most
favorable price and efficient execution. Therefore, the Adviser is authorized to
place orders for the purchase and sale of securities and futures contracts for
the Portfolio with such brokers or futures commission merchants, subject to
review by the Trustees from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided by
such brokers or futures commission merchants may be useful to the Adviser in
connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Portfolio as well
as other clients of the Adviser, the Adviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be sold or purchased in order
to obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities or futures contracts so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the Adviser in the manner the Adviser considers to be the most equitable
and consistent with its fiduciary obligations to the Trust and to such other
clients.
3
<PAGE> 4
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others; provided, however, that the Adviser agrees that
neither it, nor any person controlled by it, nor any successor shall serve or
accept retention as investment adviser, investment manager or similar service
provider during the term of this Agreement and for the period of one year after
the termination of this Agreement with or for the benefit of any investment
company registered under the 1940 Act that seeks as a primary market for its
shares asset allocation programs sponsored by U.S. broker-dealers similar in
nature or market to the Prudential Securities Target Program and as may be
agreed from time to time in writing by the Manager and the Adviser.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph l(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that
4
<PAGE> 5
all records which it maintains for the Portfolio are the property of the Trust
and the Adviser will surrender promptly to the Trust any of such records upon
the Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph l(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph l(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the portion of the
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under
5
<PAGE> 6
this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers, or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph l(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile transmission equipment or
hand delivery.
6
<PAGE> 7
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
Prudential Mutual Fund Management, Inc.
By /s/ Robert F. Gunia
------------------------------
Robert F. Gunia
Executive Vice President
Columbus Circle Investors
By /s/ Louis Celantano
------------------------------
Louis Celantano
7
<PAGE> 8
Columbus Circle Investors
One Station Place
Metro Center
Stamford, Connecticut 06902
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, New York 10292
January 2, 1995
Re: The Target Portfolio Trust
Ladies and Gentlemen:
The Subadvisory Agreement for the Large Capitalization Growth Portfolio
of the Target Portfolio Trust (the Agreement) between Prudential Mutual Fund
Management, Inc. (the Manager) and Columbus Circle Investors (the Adviser)
provides that, during the term of the Agreement and for the period of one year
after the termination of the Agreement, neither the Adviser nor any person
controlled by the Adviser, nor any successor shall serve or accept retention as
investment adviser, investment manager or similar service provider with or for
the benefit of any investment company registered under the 1940 Act that seeks
as a primary market for its shares asset allocation programs sponsored by U.S.
broker-dealers similar in nature to the Prudential Securities Target Program
and may be agreed from time to time in writing by the Manager and the Adviser.
It is understood and agreed that each of the following brokerage firms
including any successor firms, constitutes a "U.S. broker-dealer" within the
meaning of the Agreement
Merrill Lynch & Co., Inc.
Paine Webber Group Inc.
Dean Witter Reynolds Inc.
Smith Barney, Shearson
A.G. Edwards, Inc.
Charles Schwab & Co., Inc.
Very truly yours,
Columbus Circle Investors
By: /s/ Louis Celantano
--------------------------
Agreed to this 2nd day of January, 1995
Prudential Mutual Fund Management, Inc.
/s/ Robert F. Gunia
By: -----------------------------------------
Robert F. Gunia, Executive Vice President
<PAGE> 1
Exhibit 5(b)(vii)
THE TARGET PORTFOLIO TRUST
SUBADVISORY AGREEMENT
Agreement made as this 14th day of November, 1994, between Prudential
Mutual Fund Management, Inc. (PMF or the Manager), a Delaware corporation, and
Pacific Investment Management Company (the Adviser), a Deleware general
partnership.
WHEREAS, PMF has entered into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF acts
as Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Intermediate-Term Bond Portfolio and Total
Return Bond Portfolio of the Trust (the Portfolios) in connection with the
management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolios and to manage such portion of
the Portfolios as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees
of the Trust, the Adviser shall manage such portion the investment operations
of the Portfolios as the Manager shall direct and shall manage the composition
of such Portfolios, including the purchase, retention and disposition thereof,
in accordance with each Portfolios' investment objectives, policies and
restrictions as stated in the Prospectus (such Prospectus and Statement of
Additional Information as currently in effect and as amended or supplemented
from time to time, being herein called the "Prospectus") and subject to the
following understandings:
(i) The Adviser shall provide supervision of such portion
of the Portfolios' investments as the Manager shall direct and determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by a Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
<PAGE> 2
(ii) In the performance of its duties and obligations
under this Agreement, the Adviser shall act in conformity with the Declaration
of Trust, By-Laws and Prospectus of the Trust and the Portfolios and with the
instructions and directions of the Manager and to the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and
futures contracts to be purchased or sold by such portion of a Portfolio and
will place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolios with investment supervision, it
is recognized that the Adviser will give primary consideration to securing the
most favorable price and efficient execution. Within the framework of this
policy, the Adviser may consider the financial responsibility, research and
investment information and other services provided by brokers, dealers or
futures commission merchants who may effect or be a party to any such
transaction or other transactions to which the Adviser's other clients may be a
party. It is understood that Prudential Securities Incorporated may be used as
principal broker for securities transactions but that no formula has been
adopted for allocation of the Portfolios' investment transaction business. It
is also understood that it is desirable for the Trust that the Adviser have
access to supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Trust than may result when
allocating brokerage to other brokers on the basis of seeking the most
favorable price and efficient execution. Therefore, the Adviser is authorized
to place orders for the purchase and sale of securities and futures contracts
for the Portfolios with such brokers or futures commission merchants, subject
to review by the Trustees from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided by
such brokers or futures commission merchants may be useful to the Adviser in
connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security or futures contract to be in the best interest of a Portfolio as well
as other clients of the Adviser, the Adviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be sold or purchased in order
to obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities or futures
contracts so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Adviser in the manner the Adviser considers to
be the most equitable and consistent with its fiduciary obligations to the
Trust and to such other clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
2
<PAGE> 3
(v) The Adviser shall provide the Trust's Custodian on
each business day with information relating to all transactions concerning the
portion of the Portfolios' assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others; provided, however, that the Adviser agrees that
neither it, nor any person controlled by it, nor any successor shall serve or
accept retention as investment adviser, investment manager or similar service
provider during the term of this Agreement and for the period of one year after
the termination of this Agreement with or for the benefit of any investment
company registered under the 1940 Act that seeks as a primary market for its
shares asset allocation programs sponsored by U.S. broker-dealers similar in
nature or market to the Prudential Securities Target Program.
(b) Services to be furnished by the Adviser under this Agreement
may be furnished through the medium of any of its directors, officers or
employees.
(c) The Adviser shall keep the Portfolios' books and records
required to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof
and shall timely furnish to the Manager all information relating to the
Adviser's services hereunder needed by the Manager to keep the other books and
records of the Trust required by Rule 31a-1 under the 1940 Act. The Adviser
agrees that all records which it maintains for the Portfolios are the property
of the Trust and the Adviser will surrender promptly to the Trust any of such
records upon the Trust's request. The Adviser further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act any such records as are
required to be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures
to ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all
services to be provided to the Portfolios pursuant to the Management Agreement
and shall oversee and review the Adviser's performance of its duties under this
Agreement.
3. The Manager shall compensate the Adviser for the services
provided and the expenses assumed pursuant to this Subadvisory Agreement, a fee
at an annual rate of .25 of 1% of the average daily net assets of the portion
of the Portfolios managed by the Adviser. This fee will be computed daily and
paid monthly.
3
<PAGE> 4
4. The Adviser shall not be liable for any error of judgment or
for any loss suffered by a Portfolio, the Trust or the Manager in connection
with the matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the Adviser's part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. To the extent indemnification is provided to the Manager by
the Trust under the Management Agreement, the Manager shall indemnify the
Adviser and hold it harmless from and against all damages, liabilities, costs
and expenses (including reasonable attorneys' fees and amounts reasonably paid
in settlement) incurred by the Adviser in or by reason of any pending,
threatened or completed action, suit, investigation or other proceeding
(including an action or suit by or in the right of the Trust or its security
holders) arising out of or otherwise based upon any action actually or
allegedly taken or omitted to be taken by the Manager, the Trust or the Adviser
in connection with this Agreement; provided, however, that nothing contained
herein shall protect or be deemed to protect the Adviser against or entitle or
be deemed to entitle the Adviser to indemnification in respect of any liability
to the Trust or its security holders to which the Adviser would otherwise be
subject by reason of this willful misfeasance, bad faith or gross negligence in
the performance of its duties, by reason of its reckless disregard of its
duties and obligations under this Agreement.
6. This Agreement shall continue in effect for a period of more
than two years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the requirements of
the 1940 Act; provided, however, that this Agreement may be terminated by the
Trust at any time, without the payment of any penalty, by the Trustees or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of a Portfolio, or by the Manager or the Adviser at any time, without the
payment of any penalty, on not more than 60 days' nor less than 30 days'
written notice to the other party. This Agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act) or
upon the termination of the Management Agreement.
7. Nothing in this Agreement shall limit or restrict the right of
any of the Adviser's directors, officers, or employees to engage in any other
business or to devote his or her time and attention in part to the management
or other aspects of any business, whether of a similar or a dissimilar nature,
nor limit or restrict the adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph 1(a)(vi) above.
8. During the term of this Agreement, the Manager agrees to
furnish the Adviser at its principal office all prospectuses, proxy statements,
reports to shareholders, sales literature or other material prepared for
distribution to shareholders of the Trust or the public, which refer to the
Adviser in any way, prior to use thereof and not to use material if the Adviser
reasonably objects in writing five business days (or such other time as may be
mutually agreed) after receipt thereof. Sales literature may be furnished to
the Adviser hereunder by first class or overnight mail, facsimile transmission
equipment or hand delivery.
4
<PAGE> 5
9. It is understood that the name "Pacific Investment Management
Company" or "PIMCO" or any derivative thereof or logo associated with that name
is the valuable property of the Adviser and that the Manager or the Trust has
the right to use such name (or derivative or logo) in offering materials of the
Trust and/or Portfolios with the approval of the Adviser and for so long as the
Adviser is a subadviser to the Trust and/or the Portfolios. Upon termination
of this Agreement between the Adviser and the Manager, the Trust and the
Manager shall forthwith cease to use such name (or derivative or logo), except
as may be required by applicable law or regulation.
10. This Agreement may be amended by mutual consent, but the
consent of the Trust must be obtained in conformity with the requirements of
the 1940 Act.
11. This Agreement shall be governed by the laws of the State of
New York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
Prudential Mutual Fund Management, Inc.
By /s/ Robert F. Gunia
-------------------------------------
Robert F. Gunia
Executive Vice President
Pacific Investment Management Company
By /s/ Brent R. Harris
-------------------------------------
Brent R. Harris
Managing Director
5
<PAGE> 1
EXHIBIT 5(b)(viii)
THE TARGET PORTFOLIO TRUST
SUBADVISORY AGREEMENT
Agreement made as of this 12th day of November, 1996, between
Prudential Mutual Fund Management, Inc. (PMF or the Manager), a Delaware
corporation, and Hotchkis and Wiley (the Adviser), a division of the Capital
Management Group of Merrill Lynch Asset Management, L.P. (the "Adviser").
WHEREAS, PMF has entered into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Large Capitalization Value Portfolio of the
Trust (the Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory
<PAGE> 2
services to the Portfolio and to manage such portion of the Portfolio as the
Manager shall from time to time direct and the Adviser is willing to render such
investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such portfolio, including the purchase, retention and disposition thereof, in
accordance with each Portfolio's investment objectives, policies and
restrictions as stated in the Prospectus (such Prospectus and Statement of
Additional Information as currently in effect and as amended or supplemented
from time to time, being herein called the "Prospectus") and subject to the
following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and shall determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by a Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of
2
<PAGE> 3
1986 and all other applicable federal and state laws and regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolio with investment supervision, it is
recognized that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this policy,
the Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction or
other transactions to which the Adviser's other clients may be a party. It is
understood that Prudential Securities Incorporated may be used as principal
broker for securities transactions but that no formula has been adopted for
allocation of the Portfolio's investment transaction business. It is also
understood that it is desirable for the Trust that the Adviser have access to
supplemental investment and market research and security and economic analysis
provided by brokers or futures commission merchants who may execute brokerage
transactions at a higher cost to the Trust than may result when allocating
brokerage to other brokers on the basis of seeking the most favorable price and
efficient execution. Therefore, the Adviser is authorized to place orders for
the purchase and sale of securities and futures contacts for the Portfolio with
such brokers or futures commission merchants, subject to review by the Trustees
from time to time with respect to the extent and continuation of this practice.
It is understood that the services provided by such
3
<PAGE> 4
brokers or futures commission merchants may be useful to the Adviser in
connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Portfolio as well
as other clients of the Adviser, the Adviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be sold or purchased in order
to obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities or futures contracts so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the Adviser in the manner the Adviser considers to be the most equitable
and consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the Adviser
hereunder are not
4
<PAGE> 5
exclusive, and the Adviser shall be free to render similar services to others;
provided, however, that the Adviser agrees that neither it, nor any person
controlled by it, nor any successor shall serve or accept retention as
investment adviser, investment manager or similar service provider during the
term of this Agreement and for the period of one year after the termination of
this Agreement with or for the benefit of any investment company registered
under the 1940 Act that seeks as a primary market for its shares asset
allocation programs sponsored by U.S. broker-dealers similar in nature or market
to the Prudential Securities Target Program.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph l(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph l(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state
5
<PAGE> 6
and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph l(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the portion of the
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from the
willful misfeasance, bad faith or gross negligence of the Adviser's in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the
6
<PAGE> 7
date hereof only so long as such continuance is specifically approved at least
annually in conformity with the requirements of the 1940 Act; provided, however,
that this Agreement may be terminated by the Trust at any time, without the
payment of any penalty, by the Trustees or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Portfolio, or
by the Manager or the Adviser at any time, without the payment of any penalty,
on not more than 60 days' nor less than 30 days' written notice to the other
party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers, or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph l(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. Sales literature may be furnished to the Adviser
hereunder by first class or overnight mail, facsimile
7
<PAGE> 8
transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
Prudential Mutual Fund Management, Inc.
By: /s/ Robert F. Gunia
------------------------------------------
Robert F. Gunia
Executive Vice President
Hotchkis and Wiley
By: /s/ Nancy Celick
-------------------------------------------
Nancy Celick
Chief Financial Officer
8
<PAGE> 1
EXHIBIT 5(b)(ix)
THE TARGET PORTFOLIO TRUST
SUBADVISORY AGREEMENT
Agreement made as of this second day of January, 1995, between
Prudential Mutual Fund Management, Inc. (PMF or the Manager), a Delaware
corporation, and Investment Advisers, Inc. (the Adviser), a Minnesota
corporation.
WHEREAS, PMF has entered into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Small Capitalization Growth Portfolio of the
Trust (the Portfolio) in connection with the management of the Trust.
<PAGE> 2
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such portfolio, including the purchase, retention and disposition thereof, in
accordance with each Portfolio's investment objectives, policies and
restrictions as stated in the Prospectus (such Prospectus and Statement of
Additional Information as currently in effect and as amended or supplemented
from time to time, being herein called the "Prospectus") and subject to the
following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and shall determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by a Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the
2
<PAGE> 3
Trust and will conform to and comply with the requirements of the 1940 Act, the
Internal Revenue Code of 1986 and all other applicable federal and state laws
and regulations.
(iii) The Adviser shall determine the securities-and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to brokerage as set forth in
the Trust's Registration Statement and Prospectus or as the Trustees may direct
from time to time. In providing the Portfolio with investment supervision, it is
recognized that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Within the framework of this policy,
the Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction or
other transactions to which the Adviser's other clients may be a party. It is
understood that Prudential Securities Incorporated may be used as principal
broker for agency securities transactions but that no formula has been adopted
for allocation of the Portfolio's investment transaction business. It is also
understood that it is desirable for the Trust that the Adviser have access to
supplemental investment and market research and security and economic analysis
provided by brokers or futures commission merchants who may execute brokerage
transactions at a higher cost to the Trust than may result when allocating
brokerage to other brokers on the basis of seeking the most favorable price and
efficient execution. Therefore, the Adviser is authorized to place orders for
the purchase and sale of securities and futures contracts for the Portfolio with
such brokers or futures commission merchants, subject to review by the Trustees
from time to time with respect
3
<PAGE> 4
to the extent and continuation of this practice. It is understood that the
services provided by such brokers or futures commission merchants may be useful
to the Adviser in connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Portfolio as well
as other clients of the Adviser, the Adviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be sold or purchased in order
to obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities or futures contracts so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the Adviser in the manner the Adviser considers to be the most equitable
and consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
4
<PAGE> 5
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others; provided, however, that the Adviser agrees that
neither it, nor any person controlled by it, nor any successor shall serve or
accept retention as investment adviser, investment manager or similar service
provider during the term of this Agreement and for the period of one year after
the termination of this Agreement with or for the benefit of any investment
company registered under the 1940 Act that seeks as a primary market for its
shares asset allocation programs sponsored by U.S. broker-dealers similar in
nature or market to the Prudential Securities Target Program.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph l(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph l(a) hereof.
5
<PAGE> 6
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph l(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Management Agreement and shall
oversee and review the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the portion of the
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from the
willful misfeasance, bad faith or gross negligence of the Adviser in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
6
<PAGE> 7
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers, or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph l(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. Sales
7
<PAGE> 8
literature may be furnished to the Adviser hereunder by first class or overnight
mail, facsimile transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
PRUDENTIAL MUTUAL FUND
MANAGEMENT, INC.
By /s/ Robert F. Gunia
--------------------------------------
Robert F. Gunia
Executive Vice President
INVESTMENT ADVISERS, INC.
By /s/ I.P. Knelman
--------------------------------------
I.P. Knelman
Executive Vice President
By /s/ Christopher J. Smith
--------------------------------------
Christopher J. Smith
Senior Vice President and
General Counsel
8
<PAGE> 1
EXHIBIT 5(b)(x)
THE TARGET PORTFOLIO TRUST
SUBADVISORY AGREEMENT
Agreement made as of this second day of January, 1995, between
Prudential Mutual Fund Management, Inc. (PMF or the Manager), a Delaware
corporation, and Lazard Freres Asset Management, a division of Lazard Freres &
Co., (the Adviser), a New York limited partnership.
WHEREAS, PMF has entered into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PMF acts as
Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PMF has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Small Capitalization Value Portfolio of the
Trust (the Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services.
<PAGE> 2
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Adviser shall manage such portion of the investment operations of
the Portfolio as the Manager shall direct and shall manage the composition of
such portfolio, including the purchase, retention and disposition thereof, in
accordance with each Portfolio's investment objectives, policies and
restrictions as stated in the Prospectus (such Prospectus and Statement of
Additional Information as currently in effect and as amended or supplemented
from time to time, being herein called the "Prospectus") and subject to the
following understandings:
(i) The Adviser shall provide supervision of such portion of the
Portfolio's investments as the Manager shall direct and shall determine from
time to time what investments and securities will be purchased, retained, sold
or loaned by a Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Adviser shall act in conformity with the Declaration of Trust,
By-Laws and Prospectus of the Trust and the Portfolio and with the instructions
and directions of the Manager and of the Trustees of the Trust and will conform
to and comply with the requirements of the 1940 Act, the Internal Revenue Code
of 1986 and all other applicable federal and state laws and regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
2
<PAGE> 3
Incorporated and Lazard Freres & Co.) to carry out the policy with respect to
brokerage as set forth in the Trust's Registration Statement and Prospectus or
as the Trustees may direct from time to time. In providing the Portfolio with
investment supervision, it is recognized that the Adviser will give primary
consideration to securing the most favorable price and efficient execution.
Within the framework of this policy, the Adviser may consider the financial
responsibility, research and investment information and other services provided
by brokers, dealers or futures commission merchants who may effect or be a party
to any such transaction or other transactions to which the Adviser's other
clients may be a party. It is understood that Prudential Securities Incorporated
and Lazard Freres & Co. may each be used as principal broker for securities
transactions but that no formula has been adopted for allocation of the
Portfolio's investment transaction business. It is also understood that it is
desirable for the Trust that the Adviser have access to supplemental investment
and market research and security and economic analysis provided by brokers or
futures commission merchants who may execute brokerage transactions at a higher
cost to the Trust than may result when allocating brokerage to other brokers on
the basis of seeking the most favorable price and efficient execution.
Therefore, the Adviser is authorized to place orders for the purchase and sale
of securities and futures contracts for the Portfolio with such brokers or
futures commission merchants, subject to review by the Trustees from time to
time with respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers or futures commission
merchants may be useful to the Adviser in connection with the Adviser's services
to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as other
clients of the Adviser, the Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to obtain the
most
3
<PAGE> 4
favorable price or lower brokerage commissions and efficient execution. In such
event, allocation of the securities or futures contracts so purchased or sold,
as well as the expenses incurred in the transaction, will be made by the Adviser
in the manner the Adviser considers to be the most equitable and consistent with
its fiduciary obligations to the Trust and to such other clients.
(iv) The Adviser shall maintain all books and records with respect
to the portfolio transactions required by subparagraphs (b)(5), (6), (7), (9),
(10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and shall
render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each business
day with information relating to all transactions concerning the portion of the
Portfolio's assets it manages and shall provide the Manager with such
information upon request of the Manager.
(vi) The investment management services provided by the Adviser
hereunder are not exclusive, and the Adviser shall be free to render similar
services to others; provided, however, that the Adviser agrees that neither it,
nor any person controlled by it, nor any successor shall serve or accept
retention as investment adviser, investment manager or similar service provider
during the term of this Agreement and for a period of one year after the
termination of this Agreement with or for the benefit of any investment company
registered under the 1940 Act (a) that has as its primary investment objective
capital appreciation by investing in equity securities of companies domiciled
within the United States with total market capitalization of less than $1
billion, (b) the shares of which are sold primarily through an asset allocation
program which is substantially the same as the Prudential Securities Target
Program, as described in the registration statement filed with the
4
<PAGE> 5
Securities and Exchange Commission, and (c) which is sponsored by a "major
retail broker/dealer" as may be agreed from time to time in writing by the
Manager and the Adviser.
(b) Services to be furnished by the Adviser under this Agreement may be
furnished through the medium of any of its directors, officers or employees.
(c) The Adviser shall keep the Portfolio's books and records required
to be maintained by the Adviser pursuant to paragraph l(a)(iv) hereof and shall
timely furnish to the Manager all information relating to the Adviser's services
hereunder needed by the Manager to keep the other books and records of the Trust
required by Rule 31a-1 under the 1940 Act. The Adviser agrees that all records
which it maintains for the Portfolio are the property of the Trust and the
Adviser will surrender promptly to the Trust any of such records upon the
Trust's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records as are required to
be maintained by it pursuant to paragraph l(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph l(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all services
to be provided to
5
<PAGE> 6
the Portfolio pursuant to the Management Agreement and shall oversee and review
the Adviser's performance of its duties under this Agreement.
3. The Manager shall compensate the Adviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .30 of 1% of the average daily net assets of the portion of the
Portfolio managed by the Adviser. This fee will be computed daily and paid
monthly.
4. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Portfolio, the Trust or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from the
willful misfeasance, bad faith or gross negligence of the Adviser in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6
<PAGE> 7
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers, or employees to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar nature, nor
limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph 1(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish the
Adviser at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Trust or the public, which refer to the Adviser in any way,
prior to use thereof and not to use material if the Adviser reasonably objects
in writing five business days (or such other time as may be mutually agreed)
after receipt thereof. In the event of the termination of this Agreement, the
manager will continue to furnish the Adviser copies of such materials which
refer to the Adviser. Sales literature may be furnished to the Adviser hereunder
by first class or overnight mail, facsimile transmission equipment or hand
delivery.
8. The Manager has delivered to the Adviser copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust, as filed with the Secretary of State of
Delaware (such Declaration of Trust, as in effect on the date hereof and as
amended from time to time, are herein called the Declaration of Trust);
(b) By-Laws of the Trust (such By-Laws, as in effect on the date hereof
and as amended
7
<PAGE> 8
from time to time, are herein called the By-Laws);
(c) Certified resolutions of the Trustees of the Trust authorizing the
appointment of the Manager and the Adviser and approving the form of this
Agreement;
(d) Registration Statement under the 1940 Act and the Securities Act of
1933, as amended, on Form N-1A (the Registration Statement), as filed with the
Securities and Exchange Commission (the Commission) relating to the Portfolios
and shares of beneficial interest of each Portfolio and all amendments thereto;
(e) Notification of Registration of the Trust under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Portfolios (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or supplemented
from time to time, being herein called the Prospectus).
9. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by the laws of the State of New
York.
11. The Adviser agrees to notify the Manager of any change in the
membership of the Adviser within a reasonable time following such change. The
Manager agrees that the Adviser may
8
<PAGE> 9
refrain from providing any advice or services concerning securities of companies
of which any officers, directors, partners or employees of the Adviser or any of
the Adviser's affiliates are officers or directors, or of companies for which
the Adviser or any of the Adviser's affiliates act as financial adviser,
investment manager or in any capacity that the adviser deems confidential,
unless the Adviser determines in its sole discretion that it may appropriately
do so. The Manager appreciates that, for good commercial and legal reasons,
material nonpublic information which becomes available to affiliates of the
Adviser through these relationships cannot be passed on to the Manager.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
Prudential Mutual Fund Management, Inc.
By : /s/ Robert F. Gunia
-------------------------
Robert F. Gunia
Executive Vice President
Lazard Freres & Co.
By : /s/ Robert P. Morganthau
-------------------------
9
<PAGE> 10
[LAZARD FRERES ASSET MANAGEMENT LETTERHEAD]
February 3, 1995
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Re: The Target Portfolio Trust
Ladies and Gentlemen:
The Subadvisory Agreement for the Small Capitalization Value Portfolio of the
Target Portfolio Trust (the "Agreement") between Prudential Mutual Fund
Management, Inc. (the "Manager") and Lazard Freres Asset Management (the
"Adviser") provides that during the term of the Agreement, neither the Adviser
nor any person controlled by the Adviser shall serve or accept retention as an
investment adviser, investment manager or similar service provider with or for
the benefit of any investment company registered under the 1940 Act (A) that
has its primary investment objective, capital appreciation by investing in
equity securities of companies domiciled within the United States with total
market capitalization of less than $1 billion, (B) the shares of which are sold
primarily through an asset allocation program which is substantially the same
as the Prudential Securities Target Program, as described in the registration
statement of the Trust filed with the Securities and Exchange Commission, and
(C) which is sponsored by a "major retail broker-dealer" as may be agreed from
time to time in writing by the Manager and the Adviser. It is understood and
agreed that each of the following brokerage firms, including any successor
firms, constitutes a "major retail broker-dealer" within the meaning of the
Agreement:
Merrill Lynch & Co., Inc.
Paine Webber Group Inc.
Dean Witter Reynolds Inc.
Smith Barney, Inc.
A.G. Edwards, Inc.
Charles Schwab & Co., Inc.
Very Truly Yours,
LAZARD FRERES ASSET MANAGEMENT
By /s/ ROBERT MORGENTHAU
------------------------------------
Robert Morgenthau, General Partner
Agreed to this 8th day of February, 1994
---
Prudential Mutual Fund Management, Inc.
By: /s/ Robert F. Gunia
----------------------
<PAGE> 1
EXHIBIT 6
THE TARGET PORTFOLIO TRUST
Distribution Agreement
Agreement made as of November 9, 1992, between The Target Portfolio
Trust, a Delaware business trust (the Trust) and Prudential Securities
Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Trust to offer
its shares for sale continuously;
WHEREAS, the shares of beneficial interest of the Trust are divided
into separate series or portfolios (each a Portfolio), each of which is
established by resolution of the Trustees of the Trust, and the Trustees may
from time to time terminate such Portfolios or establish and terminate
additional Portfolios;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers; and
WHEREAS, the Trust and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the shares of the
Trust and each Portfolio thereof from and after the date hereof in order to
promote the growth or the Trust and facilitate the distribution of its shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Trust hereby appoints the Distributor as the principal underwriter
and distributor of the shares of the Trust to sell shares of each Portfolio to
the public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Trust hereby agrees during the term of this Agreement to sell
shares of the Trust to the Distributor on the terms and conditions set forth
below.
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the Trust to
act as principal underwriter and distributor of the Trust's shares, except that:
<PAGE> 2
2.1 The exclusive rights granted to the Distributor to purchase
shares from the Trust shall not apply to shares of the Trust issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Trust or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Trust.
2.2 Such exclusive rights shall not apply to shares issued by the
Trust pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to shares issued by the
Trust pursuant to any reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Trust's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Trust. The term "Prospectus"
shall mean the Prospectus and Statement of Additional Information included as
part of the Trust's Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement filed by the
Trust with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (Securities Act), and the Investment Company
Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Trust
3.1 The Distributor shall have the right to buy from the Trust the
shares needed, but not more than the shares needed (except for clerical errors
in transmission) to fill unconditional orders for shares placed with the
Distributor by investors or registered and qualified securities dealers and
other financial institutions (selected dealers). The price which the Distributor
shall pay for the shares so purchased from the Trust shall be the net asset
value, determined as set forth in the Prospectus.
3.2 The shares are to be resold by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.
3.3 The Trust shall have the right to suspend the sale of its
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Trust shall also have the right to suspend the sale of its shares if a
banking moratorium shall have been declared by federal or New York authorities.
3.4 The Trust, or any agent of the Trust designated in writing by
the Trust, shall be promptly advised of all purchase orders for shares received
by the Distributor. Any order may be rejected by the Trust; provided, however,
that the Trust will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of shares. The Trust (or its agent) will
2
<PAGE> 3
confirm orders upon their receipt, will make appropriate book entries and upon
receipt by the Trust (or its agent) of payment therefor, will deliver deposit
receipts for such shares pursuant to the instructions of the Distributor.
Payment shall be made to the Trust in New York Clearing House funds or federal
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Trust (or its agent).
Section 4. Repurchase or Redemption of Shares by the Trust
4.1 Any of the outstanding shares may be tendered for redemption at any
time, and the Trust agrees to repurchase or redeem the shares so tendered in
accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Trust hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Trust shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of the
Distributor on or before the seventh calendar day subsequent to its having
received the notice of redemption in proper form. The proceeds of any redemption
of shares shall be paid by the Trust to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of shares or payment may be suspended at times when
the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Trust
5.1 Subject to the possible suspension of the sale of shares as
provided herein, the Trust agrees to sell its shares so long as it has shares
available.
5.2 The Trust shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Trust by independent public accountants.
The Trust shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Trust shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action to
fix the number of authorized shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there
3
<PAGE> 4
will be available for sale such number of shares as the Distributor reasonably
may expect to sell. The Trust agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Trust shall use its best efforts to qualify and maintain
the qualification of any appropriate number of its shares for sale under the
securities laws of such states as the Distributor and the Trust may approve;
provided that the Trust shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its shares in any state from the
terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its shares. Any such
qualification may be withheld, terminated or withdrawn by the Trust at any time
in its discretion. As provided in Section 7 hereof, the expense of qualification
and maintenance of qualification shall be borne by the Trust. The Distributor
shall furnish such information and other material relating to its affairs and
activities as may be required by the Trust in connection with such
qualifications.
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to
effect sales of shares of the Trust, but shall not be obligated to sell any
specific number of shares. Sales of the shares shall be on the terms described
in the Prospectus. The Distributor may enter into like arrangements with other
investment companies.
6.2 In selling the shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Trust to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Trust.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of shares, provided that the
Trust shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell shares only to such selected dealers as are
members in
4
<PAGE> 5
good standing of the NASD. Shares sold to selected dealers shall be for resale
by such dealers only at the offering price determined as set forth in the
Prospectus.
Section 7. The Trust shall bear all costs and expenses of the continuous
offering of its shares, including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Trust shall also bear the cost of
expenses of qualification of the shares for sale, and, if necessary or advisable
in connection therewith, of qualifying the Trust as a broker or dealer, in such
states of the United States or other jurisdictions as shall be selected by the
Trust and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Trust decides to discontinue such qualification pursuant to Section 5.4
hereof.
Section 8. Indemnification
8.1 The Trust agrees to indemnify, defend and hold the
Distributor, its officers and directors and any person who controls the
Distributor within the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers, directors or any such controlling person may incur
under the Securities Act, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registration
Statement or Prospectus or arising out of or based upon any alleged omission to
state a material fact required to be stated in either thereof or necessary to
make the statements in either thereof not misleading, except insofar as such
claims, demands, liabilities or expenses arise out of or are based upon any such
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information furnished in writing by the
Distributor to the Trust for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement shall not inure to the benefit
of any such officer, director, trustee or controlling person unless a court of
competent jurisdiction shall determine in a final decision on the merits, that
the person to be indemnified was not liable by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations under this Agreement (disabling
conduct), or, in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnified person was not liable by
reason of disabling conduct, by (a) a vote of a majority of a quorum of
directors or trustees who are neither "interested persons" of the Trust as
defined in Section 2(a)(19) of the Investment Company Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion. The
Trust's agreement to indemnify the Distributor, its officers and directors and
any such controlling person as aforesaid is expressly conditioned upon the
Trust's being promptly notified of any action brought against the Distributor,
its officers or directors, any such controlling
5
<PAGE> 6
person, such notification to be given by letter or telegram addressed to the
Trust at its principal business office. The Trust agrees promptly to notify the
Distributor of the commencement of any litigation or proceedings against it or
any of its officers or directors in connection with the issue and sale of any
shares.
8.2 The Distributor agrees to indemnify, defend and hold the Trust, its
officers and Trustees and any person who controls the Trust, if any, within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Trust, its officers and
Trustees or any such controlling person may incur under the Securities Act or
under common law or otherwise, but only to the extent that such liability or
expense incurred by the Trust, its Trustees or officers or such controlling
person resulting from such claims or demands shall arise out of or be based upon
any alleged untrue statement of a material fact contained in information
furnished in writing by the Distributor to the Trust for use in the Registration
Statement or Prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to make
such information not misleading. The Distributor's agreement to indemnify the
Trust, its officers and Trustees and any such controlling person as aforesaid,
is expressly conditioned upon the Distributor's being promptly notified of any
action brought against the Trust, its officers and Trustees or any such
controlling person, such notification being given to the Distributor at its
principal business office.
Section 9. Duration and Termination of this Agreement
9.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Trust, or by the vote of a majority of
the outstanding voting securities of the Trust or a Portfolio thereof, and (b)
by the vote of a majority of those Trustees who are not parties to this
Agreement or interested persons of any such parties (Independent Trustees), cast
in person at a meeting called for the purpose of voting upon such approval.
9.2 This Agreement may be terminated at any time, without the payment
of any penalty, by a majority of the Independent Trustees or by vote of a
majority of the outstanding voting securities of the Trust, or by the
Distributor, on sixty (60) days' written notice to the other party. This
Agreement shall automatically terminate in the event of its assignment.
9.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
6
<PAGE> 7
Section 10. Amendments to this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Trust, or by the vote of a
majority of the outstanding voting securities of the Trust, and (b) by the vote
of a majority of the Independent Trustees cast in person at a meeting called for
the purpose of voting on such amendment.
Section 11. Governing Law
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
Section 12. Liabilities of the Trust
The Trust is a business trust organized under the Delaware Business
Trust Act pursuant to a certificate of trust dated July 29, 1992. The Trust is a
series trust and all debts, liabilities, obligations and expenses of a
particular Portfolio shall be enforceable only against the assets of that
Portfolio and not against the assets of any other Portfolio or of the Trust as a
whole. Neither the Trustees, officers, agents or shareholders of the Trust
assume any personal liability for obligations entered into on behalf of the
Trust (or a Portfolio thereof).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: /s/ Stephen Fisher
-------------------------
Stephen Fisher
Senior Vice President
The Target Portfolio Trust
By: /s/ Lawrence C. McQuade
-------------------------
Lawrence C. McQuade
President
7
<PAGE> 1
EXHIBIT 8
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<C> <C>
1. Employment of Custodian and Property to be Held by It....................................................1
2. Duties of the Custodian with Respect to Property of the Fund Held by the Custodian
in the United States.....................................................................................2
2.1 Holding Securities..............................................................................2
2.2 Delivery of Securities..........................................................................2
2.3 Registration of Securities......................................................................6
2.4 Bank Accounts...................................................................................6
2.5 Availability of Federal Funds...................................................................7
2.6 Collection of Income............................................................................7
2.7 Payment of Fund Monies..........................................................................8
2.8 Liability for Payment in Advance of Receipt of Securities Purchased............................10
2.9 Appointment of Agents..........................................................................10
2.10 Deposit of Securities in Securities Systems....................................................11
2.10A Fund Assets Held in the Custodian's Direct Paper System........................................13
2.11 Segregated Account.............................................................................14
2.12 Ownership Certificates for Tax Purposes........................................................15
2.13 Proxies........................................................................................15
2.14 Communications Relating to Fund Portfolio Securities...........................................16
2.15 Reports to Fund by Independent Public Accountants..............................................16
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States....................................................................................17
3.1 Appointment of Foreign Sub-Custodians..........................................................17
3.2 Assets to be Held..............................................................................17
3.3 Foreign Securities Depositories................................................................17
3.4 Segregation of Securities......................................................................18
3.5 Agreements with Foreign Banking Institutions...................................................18
3.6 Access of Independent Accountants of the Fund..................................................19
3.7 Reports by Custodian...........................................................................19
3.8 Transactions in Foreign Custody Account........................................................19
3.9 Liability of Foreign Sub-Custodians............................................................20
3.10 Liability of Custodian.........................................................................20
3.11 Reimbursement for Advances.....................................................................21
3.12 Monitoring Responsibilities....................................................................22
3.13 Branches of U.S. Banks.........................................................................22
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund.................................23
5. Proper Instructions. ..................................................................................24
6. Actions Permitted without Express Authority.............................................................25
7. Evidence of Authority...................................................................................25
8. Duties of Custodian with Respect to the Books of Account and Calculation
of Net Asset Value and Net Income.......................................................................26
9. Records.................................................................................................26
10. Opinion of Fund's Independent Accountant................................................................27
11. Compensation of Custodian...............................................................................27
12. Responsibility of Custodian.............................................................................27
13. Effective Period, Termination and Amendment.............................................................29
14. Successor Custodian.....................................................................................30
15. Interpretive and Additional Provisions..................................................................32
16. Massachusetts Law to Apply..............................................................................32
17. Prior Contracts.........................................................................................32
18. The Parties.............................................................................................32
19. Limitation of Liability.................................................................................33
</TABLE>
<PAGE> 4
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110, hereinafter called the
"Custodian", and each Fund listed on Appendix A which evidences its agreement to
be bound hereby by executing a copy of this Contract (each such Fund
individually hereinafter referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/Declaration of Trust. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the Board of Directors/Trustees of the Fund, and provided that the Custodian
shall have the same responsibility or liability to the Fund on account
<PAGE> 5
of any actions or omissions of any sub-custodian so employed as any such
sub-custodian has to the Custodian, provided that the Custodian agreement with
any such domestic sub-custodian shall impose on such sub-custodian
responsibilities and liabilities similar in nature and scope to those imposed by
this Agreement with respect to the functions to be performed by such
sub-custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held by
the Custodian in the United States.
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property, to be held by it in
the United States, including all domestic securities owned by the Fund,
other than (a) securities which are maintained pursuant to Section 2.10
in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to therein as "Securities System" and (b)
commercial paper of an issuer for which State Street Bank and Trust
Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's Direct
Paper book-entry system account ("Direct Paper System") only upon
receipt of Proper Instructions, which may be continuing instructions
when deemed appropriate by the parties, and only in the following
cases:
2
<PAGE> 6
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities
3
<PAGE> 7
prior to receiving payment for such securities except as may
arise from the Custodian's own negligence or willful
misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities: provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund,
4
<PAGE> 8
the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc.
("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon the receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
15) For any other proper business purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors/Trustees or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
specifying the securities to
5
<PAGE> 9
be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper
business purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee name
of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Fund under the
terms of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain
securities in "street name," the Custodian shall utilize its best
efforts to timely collect income due the Fund on such securities and to
notify the Fund on a best efforts basis of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by the Fund in a
bank account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940. Funds
6
<PAGE> 10
held by the Custodian for the Fund may be deposited by it to its credit
as Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or
trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust company
and the funds to be deposited with each such bank or trust company
shall be approved by vote of a majority of the Board of
Directors/Trustees of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in
the amount of checks received in payment for Shares of the Fund which
are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other
payments with respect to registered securities held hereunder to which
the Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer securities if, on the date of
payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to the Fund's
custodian account. Without limiting the generality of the foregoing,
the Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they become due
and shall collect interest when due on
7
<PAGE> 11
securities held hereunder. Income due the Fund on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to
which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only;
1) Upon the purchase of securities held domestically, options,
futures contracts or options in futures contracts for the
account of the Fund but only (a) against the delivery of such
securities, or evidence of title to such options, futures
contracts or options on futures contracts, to the custodian
(or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Fund or
in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the
case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.10A; (d) in the case of repurchase agreements
entered into between the Fund and the Custodian, or another
bank, or a broker-dealer which is a member of NASD, (i)
against delivery
8
<PAGE> 12
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal Reserve
Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Fund of securities owned by
the Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund or
(e) for transfer to a time deposit account of the Fund in any
bank, whether domestic or foreign; such transfer may be
effected prior to receipt of a confirmation from a broker
and/or the applicable bank pursuant to Proper Instructions
from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper
9
<PAGE> 13
Instructions a certified copy of a resolution of the Board of
Directors/Trustees or of the Executive Committee of the Fund
signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which such payment
is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be
made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of securities for the account of
the Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions
from the Fund to so pay in advance, the Custodian shall be absolutely
liable to the fund for such securities to the same extent as if the
securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the
U.S.
10
<PAGE> 14
Department of the Treasury and certain federal agencies, collectively
referred to herein as "Securities System" in accordance with applicable
Federal Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities
belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer domestic
securities sold for the account of the Fund upon (i) receipt
of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect
such transfer and payment of the account of the Fund. Copies
of all advices from the Securities System of transfers of
domestic
11
<PAGE> 15
securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund in the form of a written
advice or notice and shall furnish promptly to the Fund copies
of daily transaction sheets reflecting each day's transactions
in the Securities System for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees of from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the Securities System or any
other person which the Custodian may have as a consequence of
any such
12
<PAGE> 16
loss or damage if and to the extent that the Fund has not been
made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or
13
<PAGE> 17
from the account of the Fund, in the form of a written advice
or notice, of Direct Paper on the next business day following
such transfer and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transaction in the
Direct Paper System for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of
The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection
with transactions by the Fund, (ii) for purposes of segregating cash,
government securities or liquid, high-grade debt obligations in
connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the
Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act
14
<PAGE> 18
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions, a certified copy
of a resolution of the Board of Directors/Trustees or of the Executive
Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income and other
payments with respect to domestic securities of the Fund held by it and
in connection with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency
of calls and maturities of securities held domestically and all
expirations of rights in connection therewith and notices of exercise
of
15
<PAGE> 19
call and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the Custodian from
issuers of the securities being held for the Fund. With respect to
tender or exchange offers, the Custodian shall transmit promptly to the
Fund all written information received by the Custodian from issuers of
the securities whose tender or exchange is sought and from the party
(or his agents) making the tender or exchange offer. If the Fund
desires to take action with respect to any tender offer, exchange offer
or any other similar transaction, the Fund shall notify the Custodian
at least three business days prior to the date on which the Custodian
is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian
shall provide the Fund, at such times as the Fund may reasonably
require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a
Securities System, relating to the services provided by the Custodian
under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed
by such examination, and, if there are no such inadequacies, the
reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained
outside the United States the foreign
16
<PAGE> 20
banking institutions and foreign securities depositories designated on
Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 5 of this Contract, together with
a certified resolution of the Fund's Board of Directors/Trustees, the
Custodian and the Fund may agree to amend Schedule A hereto from time
to time to designate additional foreign banking institutions and
foreign securities depositories to act as sub-custodian. Upon receipt
of Proper Instructions, the Fund may instruct the Custodian to cease
the employment of any one or more such sub-custodians for maintaining
custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company at of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably necessary to effect the Fund's foreign securities
transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms thereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books as
belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian. Each agreement pursuant to which the
17
<PAGE> 21
Custodian employs a foreign banking institution shall require that such
institution establish a custody account for the Custodian on behalf of
the Fund and physically segregate in that account, securities and other
assets of the Fund, and, in the event that such institution deposits
the Fund's securities in a foreign securities depository, that it shall
identify on its books as belonging to the Custodian, as agent for the
Fund, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set
forth in Exhibit 1 hereto and shall provide that: (a) the Fund's assets
will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim or payment for their safe custody of
administration; (b) beneficial ownership of the Fund's assets will be
freely transferable without the payment of money or value other than
for custody or administration; (c) adequate records will maintained
identifying the assets as belonging to the Fund; (d) officers of or
auditors employed by, or other representatives of the Custodian,
including to the extent permitted under applicable law the independent
public accountants for the Fund, will be given access to the books and
records of the foreign banking institution relating to its actions
under its agreement with the Custodian; and (e) assets of the Fund held
by the foreign sub-custodian will be subject only to the instructions
of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
18
<PAGE> 22
performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign sub-custodians,
including but not limited to an identification of entities having
possession of the Fund's securities and other assets and advices or
notifications of any transfers of securities to or from each custodial
account maintained by a foreign banking institution for the Custodian
on behalf of the Fund indicating, as to securities acquired for the
Fund, the identity of the entity having physical possession of such
securities.
3.8 Transactions in Foreign Custody Account
1) Except as otherwise provided in paragraph (b) of this Section 3.8,
the provision of Sections 2.2 and 2.7 of this Contract shall apply, in
their entirety to the foreign securities of the Fund held outside the
United States by foreign sub-custodians.
2) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund
may be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or
to a dealer therefor (or an agent for such purchaser or dealer) against
a receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may
be maintained in
19
<PAGE> 23
the name of such entity's nominee to the same extent as set forth in
Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Custodian and each Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by paragraph 3.13 hereof the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism or any loss where the sub-custodian has
otherwise exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian
20
<PAGE> 24
shall not be relieved of any responsibility to the Fund for any loss
due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses
(excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or other
losses under circumstances where the Custodian and State Street London
Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or
sale of foreign exchange or of contracts for foreign exchange, or in
the event that the Custodian or its nominee shall incur or be assessed
any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may
arise from its or its nominee's own negligent action, negligent failure
to act or willful misconduct, any property at any time held for the
account of the Fund shall be security therefor and should the Fund fail
to repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of the Fund assets to the extent
necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the
21
<PAGE> 25
Fund in the event that the Custodian will promptly inform the Fund in
the event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss of
the assets of the Fund or in the case of any foreign sub-custodian not
the subject of an exemptive order from the Securities and Exchange
Commission is notified by such foreign sub-custodian that there appears
to be a substantial likelihood that its shareholders' equity will
decline below $200 million (U.S. dollars or the equivalent thereof) or
that its shareholders' equity has declined below $200 million (in each
case computed in accordance with generally accepted U.S. accounting
principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions of Article 3 shall not apply where the custody
of the Fund assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract. (b)
Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and
any applicable votes of the Board of Directors/Trustees of the Fund
pursuant thereto, the Custodian shall, upon receipt of instructions
22
<PAGE> 26
from the Transfer Agent, make funds available for payment to holders of
Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian is
authorized upon receipt of instructions from the Transfer Agent to wire
funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares
of the Fund, the Custodian shall honor checks drawn on the Custodian by
the holder of Shares, which checks have been furnished by the Fund to
the holder of Shares, when presented to the Custodian in accordance
with such procedures and controls as are mutually agreed upon from time
to time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's
Shares or from the Transfer Agent of the Fund and deposit into the
Fund's account such payments as are received for Shares of the Fund
issued or sold from time to time by the Fund. The Custodian will
provide timely notification to the Fund and the Transfer Agent of any
receipt by it of payments for Shares of the Fund.
5. Proper Instructions.
Proper Instructions as used herein means a writing signed or
initialled by one or more person or persons as the officers of the Fund
shall have from time to time authorized. Each such writing shall set
forth the specific transaction or type of transaction involved,
including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if
the Custodian reasonably believes them to have been given by a person
authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. It is understood and agreed that the Board
23
<PAGE> 27
of Directors/Directors/Trustees has authorized (i) Prudential Mutual
Fund Management, Inc., as Manager of the Fund, and (ii) The Prudential
Investment Corporation (or Prudential-Bache Securities Inc.), as
Subadviser to the Fund, to deliver proper instructions with respect to
all matters for which proper instructions are required by this Article
5. The Custodian may rely upon the certificate of an officer of the
Manager or Subadviser, as the case may be, with respect to the person
or persons authorized on behalf of the Manager and Subadviser,
respectively, to sign, initial or give proper instructions for the
purpose of this Article 5. Proper Instructions may include
communications effected directly between electro-mechanical or
electronic devices provided that the Fund and the Custodian are
satisfied that such procedures afford adequate safeguards for the
Fund's assets. For purposes of this Section, Proper Instructions shall
include instructions received by the Custodian pursuant to any
three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of
24
<PAGE> 28
the Fund except as otherwise directed by the Board of
Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors/Trustees pursuant to the Articles of
Incorporation/Declaration of Trust as described in such vote, and such vote may
be considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors/Trustees of the Fund
to keep the books of account of the Fund and/or compute the net asset value per
share of their outstanding shares of the Fund or, if directed in writing to do
so by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time
25
<PAGE> 29
to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a- 1 and 31a-2
thereunder. All such records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Fund and employees and
agents of the Securities and Exchange Commission. The Custodian shall, at the
Fund's request, supply the Fund with a tabulation of securities owned by the
Fund and held by the Custodian and shall, when requested to do so by the Fund
and for such compensation as shall be agreed upon between the Fund and the
Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case
of a closed end Fund) and Form N-SAR or other periodic reports to the Securities
and Exchange Commission and with respect to any other requirements of such
Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.
26
<PAGE> 30
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. Notwithstanding the
foregoing, the responsibility of the Custodian with respect to redemptions
effected by check shall be in accordance with a separate Agreement entered into
between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for any loss, damage, cost, liability or claim resulting
from, or caused by, the direction of or authorization by the Fund to maintain
custody or any securities or cash of the Fund in a foreign country including,
but not limited to, losses resulting from nationalization, expropriation,
currency
27
<PAGE> 31
restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for
any purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of the Fund assets hereunder, the Custodian shall give the
Fund notice of its intention to dispose of assets identifying such assets and
the Fund shall have one business day from receipt of such notice to notify the
Custodian if the Fund wishes the Custodian to dispose of Fund assets of equal
value other than those identified in such notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered
28
<PAGE> 32
or mailed, postage prepaid to the other party, such termination to take effect
not sooner than sixty (60) days after the date of such delivery or mailing;
provided, however that the Custodian shall not act under Section 2.10 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees of the Fund has
approved the initial use of a particular Securities System and the receipt of an
annual certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not act under Section 2.10A hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the use by the Fund of the Direct Paper System; provided further,
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Articles of Incorporation/Declaration of Trust, and further provided,
that the Fund may at any time by action of its Board of Directors/Trustees (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its
29
<PAGE> 33
costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver at the office of the Custodian and
transfer such securities, funds and other properties in accordance with such
vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, or not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
30
<PAGE> 34
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian remains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/Declaration of Trust of the Fund. No interpretive
or additional provisions made as provided in the preceding sentence shall be
deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereto, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
31
<PAGE> 35
18. The Parties
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a Massachusetts Business Trust, references to Board of Directors
and Articles of Incorporation shall be deemed a reference to Board of
Directors/Trustees and Articles of Incorporation/Declaration of Trust
respectively and reference to shares of capital stock shall be deemed a
reference to shares of beneficial interest.
19. Limitation of Liability
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
ATTEST STATE STREET BANK AND TRUST COMPANY
By /s/ AL O NEAL
- --------------------------- ------------------------------
Assistant Secretary Vice President
32
<PAGE> 36
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S JANE ROSE By /s/ ROBERT F GUNIA
- ---------------------------- -------------------------------
Secretary Vice President
33
<PAGE> 37
AMENDMENT TO CUSTODIAN CONTRACT
BETWEEN THE TARGET PORTFOLIO TRUST
AND STATE STREET BANK AND TRUST COMPANY
Reference is made to the CUSTODIAN CONTRACT between The Target
Portfolio Trust and State Street Bank and Trust Company dated November 9, 1992
with respect to The Target Portfolio Trust. Paragraph 5 of said Agreement shall
be restated in its entirety and shall provide as follows:
Proper instructions as used herein means a writing signed or
initialed by one or more person or persons as the officers of the Trust
shall have from time to time authorized. Each such writing shall set
forth the specific transaction or type of transaction involved,
including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if
the Custodian reasonably believes them to have been given by a person
authorized to give such instructions with respect to the transaction
involved. The Trust shall cause all oral instructions to be confirmed
in writing. It is understood and agreed that the Trustees have
authorized (i) Prudential Mutual Fund Management, Inc., as Manager of
the Trust, and (ii) each of the subadvisers listed below (individually,
a "Subadviser" and collectively, the "Subadvisers"), to deliver proper
instructions with respect to all matters for which proper instructions
are required by this Article 5, provided, however, that each Subadviser
is authorized to give proper instructions only with respect to matters
relating to the portfolios set forth next to its name below. The
Custodian may rely upon the certificate of an officer of the Manager or
a Subadviser, as the case may be, with respect to the person or persons
authorized on behalf of the Manager and Subadvisers, respectively, to
sign, initial or give proper instructions for the purpose of this
Article 5. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that
the Trust and the Custodian are satisfied that such procedures afford
adequate safeguards for the Trust's assets. Proper Instructions shall
include instructions received by the Custodian pursuant to any
three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
For purposes of this Section the following Subadvisers have been
authorized by the Trustees to give Proper Instructions with respect to the
following portfolios:
Subadvisers Portfolio
- ----------- ---------
<PAGE> 38
Roger Engemann Management Co., Inc. Large Capitalization Growth Portfolio
Invesco MIM, Inc. Large Capitalization Value Portfolio
Nicholas-Applegate Capital Management Small Capitalization Growth Portfolio
Oak Hall Capital Advisors, Inc. Small Capitalization Value Portfolio
Lazard Freres Asset Management International Equity Portfolio
Pacific Investment Management Company Intermediate Term Bond Portfolio; Total
Return Bond Portfolio
Wellington Management Company Mortgage-Backed Securities Portfolio;
U.S. Government Money Market Portfolio
The second sentence of paragraph 18 of said Agreement shall be restated
in its entirety and shall provide as follows:
With respect to any Fund listed in Appendix A which is
organized as a Delaware business trust, references to Board of
Directors and Articles of Incorporation shall be deemed a reference to
Board of Directors/Trustees and Articles of Incorporation/Declaration
of Trust, respectively, and reference to shares of capital stock shall
be deemed a reference to shares of beneficial interest.
Paragraph 19 of said Agreement shall be restated in its entirety and
shall provide as follows:
19. The Trust is a business trust organized under the Delaware
Business Trust Act pursuant to a certificate of trust dated July 29,
1992. The Trust is a series trust and all debts, liabilities,
obligations and expenses of a particular Portfolio shall be enforceable
only against the assets of that Portfolio and not against the assets of
any other Portfolio or of the Trust as a whole. Neither the Trustees,
officers, agents or shareholders of the Trust assume any personal
liability for obligations entered into on behalf of the Trust (or a
Portfolio thereof).
IN WITNESS WHEREOF, each of the parties has caused this
instrument to be executed in its name and behalf by its duly authorized
representative.
ATTEST STATE STREET BANK & TRUST COMPANY
/s/ CLAIRE E RODOWICZ By /s/ RUSSELL E LYONS
- ----------------------------- ------------------------
<PAGE> 39
Executive Vice President
ATTEST THE TARGET PORTFOLIO TRUST
/s/ DOMINICK PUGLIESE By /s/ LAWRENCE C. MCQUADE
- ----------------------------- ------------------------
President
<PAGE> 40
Appendix A
<TABLE>
<CAPTION>
Date of
Execution Declaration of Trust
Fund Name Date (if applicable)
- --------- ---- ------------------
<S> <C> <C>
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Money Fund July 1, 1990 June 5, 1991
The Blackstone Government Income Trust August 30, 1991 June 13, 1991
The Global Yield Fund, Inc. September 5, 1990
Prudential Adjustable Rate Securities Fund, Inc. June 1, 1992
Prudential California Municipal Fund August 1, 1990 May 18, 1984
Prudential Equity Fund August 1, 1990
Prudential Global Fund, Inc. June 7, 1990
Prudential GNMA Fund August 1, 1990
Prudential Government Plus Fund July 31, 1990
Prudential Government Securities Trust July 26, 1990 September 22, 1981
Prudential Growth Opportunity Fund July 26, 1990
Prudential High Yield Fund July 26, 1990
Prudential IncomeVertible Fund, Inc. June 6, 1990
Prudential Moneymart Assets July 25, 1990
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990 May 18, 1984
Prudential National Municipals Fund July 26, 1990
Prudential Pacific Growth Fund, Inc. July 16, 1992
Prudential Growth Fund, Inc. July 25, 1990
formerly Prudential Research Fund
Prudential Short-Term Global Income Fund, Inc. October 25, 1990
Prudential Special Money Market Fund January 12, 1990
Prudential Structured Maturity Fund July 25, 1989
Prudential Tax-Free Money Fund July 26, 1990
Prudential U.S. Government Fund June 7, 1990 September 22, 1986
Prudential Utility Fund June 6, 1990
The Target Portfolio Trust November 9, 1992 July 29, 1992
The Target Portfolio Trust
</TABLE>
<PAGE> 41
Schedule A
The following foreign banking institutions and foreign
securities depositories have been approved by the Board of Trustees of
the Target Portfolio Trust for use as sub-custodians for the Trust's
securities and other assets:
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
------- ---- ---------------
<S> <C> <C>
Australia Australia and New Zealand Austraclear Limited
Banking Group Limited
Austria Girozentrale and Bank der Osterreichische Kontrollbank AG
osterreichischen Sparkassen AG
Belgium Banque Bruxelles Lambert Caisse Interprofessionnelle de
Depots et de Vire de Titres S.A.
Canada The Canada Trust Company The Canadian Deposito Securities
Limited
Denmark Den Danske Bank Vaerdipapircentralen
The Danish Securities Center
Finland Kansallis-Osake-Pankki None
France Credit Commercial de France Societe Interprofessionnelle la
Compensation des Valeurs
Mobilieres (SICOVAM)
Germany Berliner Handels - und The Deutscher Kassen AG
Frankfurter Bank
Hong Kong Standard Chartered Bank None
Indonesia Standard Chartered Bank None
Ireland Bank of Ireland The Gilts Settlement Office
Italy Credito Italiano Monte Titoli, S.p.A.
Japan Sumitomo Trust & Banking Co., None
Ltd.
Korea Bank of Seoul None
Luxembourg Cedel
</TABLE>
<PAGE> 42
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
------- ---- ---------------
<S> <C> <C>
Malaysia Standard Chartered Bank None
Mexico Citibank, N.A. Instituto para el Depos de Valores
(INDEVAL)
Netherlands Bank Mees & Hope N.V. Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V.
(NECIGEF)
New Zealand Westpac Banking Corporation None
Norway Christiania Bank og Kreditkasse Verdipapirsentralen, The
Norwegian Registry of Securities
Philippines Standard Chartered Bank None
Portugal Banco Comercial Portuges Central de Valores Mobiliarios
Singapore The Development Bank of The Central Depository (Pte)
Singapore Ltd. Limited
Spain Banco Central None
Hispanoamericano, S.A.
Sweden Skandinaviska Vardepapperscentralen
Enskilda Banken
Switzerland Union Bank of Switzerland Schweizerische Effekt Giro AG
(SEGA)
Thailand Standard Chartered Bank None
United Kingdom State Street Bank and Trust The Central Gilts Off
Company, London branch, and
State Street London Limited, a
subsidiary of State Street Bank
and Trust Company
Transnational The Euroclear System Cedel
</TABLE>
Certified:
/s/ S. JANE ROSE
- ---------------------------
Fund's Authorized Officer
<PAGE> 43
Date: October 14, 1992
<PAGE> 1
EXHIBIT 9
TRANSFER AGENCY AND SERVICE AGREEMENT
between
THE TARGET PORTFOLIO TRUST
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Article 1 Terms of Appointment; Duties of the Agent........................1
Article 2 Fees and Expenses................................................4
Article 3 Representations and Warranties of the Agent......................5
Article 4 Representations and Warranties of the Fund.......................5
Article 5 Duty of Care and Indemnification.................................6
Article 6 Documents and Covenants of the Fund and the Agent................8
Article 7 Termination of Agreement........................................10
Article 8 Assignment......................................................10
Article 9 Affiliations....................................................11
Article 10 Amendment.......................................................12
Article 11 Applicable Law..................................................12
Article 12 Miscellaneous...................................................12
Article 13 Merger of Agreement.............................................13
</TABLE>
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 9th day of November, 1992 by and
between THE TARGET PORTFOLIO TRUST, a Delaware business trust, having its
principal office and place of business at One Seaport Plaza, New York, New York
10292 (the Trust), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey
corporation, having its principal office and place of business at Raritan Plaza
One, Edison, New Jersey 08837 (the Agent or PMFS).
WHEREAS, the Trust desires to appoint PMFS as its transfer
agent, dividend disbursing agent and shareholder servicing agent in connection
with certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in
this Agreement, the Trust hereby employs and appoints PMFS to act as, and PMFS
agrees to act as, the transfer agent for the authorized and issued shares of
beneficial interest of each series or portfolio of the Trust, $.001 par value
(Shares), dividend disbursing agent and shareholder servicing agent in
connection with any accumulation, open-account or similar plans provided to the
shareholders of the Trust or any series or portfolio thereof (Shareholders) and
set out in the currently effective prospectus and statement of additional
information (prospectus) of the Trust, including without limitation any periodic
investment plan or periodic withdrawal program.
1
<PAGE> 4
1.02 PMFS agrees that it will perform the following
services:
(a) In accordance with procedures established from time to time by
agreement between the Trust and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the Custodian
of the Trust authorized pursuant to the Declaration of Trust of the Trust (the
Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it
by the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Trust;
(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Trust as such charges may be reflected in
the prospectus;
(viii) Maintain records of account for and advise the Trust and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Trust and maintain pursuant
to Rule 17Ad-l0(e) under the Securities Exchange Act of 1934 (1934 Act) a record
of the total number of Shares of the
2
<PAGE> 5
Trust which are authorized, based upon data provided to it by the Trust, and
issued and outstanding. PMFS shall also provide to the Trust on a regular basis
the total number of Shares which are authorized, issued and outstanding and
shall notify the Trust in case any proposed issue of Shares by the Trust would
result in an overissue. In case any issue of Shares would result in an
overissue, PMFS shall refuse to issue such Shares and shall not countersign and
issue any certificates requested for such Shares. When recording the issuance of
Shares, PMFS shall have no obligation to take cognizance of any Blue Sky laws
relating to the issue or sale of such Shares, which functions shall be the sole
responsibility of the Trust.
(b) In addition to and not in lieu of the services set forth in the
above paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders and
providing Shareholder account information and (ii) provide a system which will
enable the Trust to monitor the total number of Shares sold in each State or
other jurisdiction.
3
<PAGE> 6
(c) In addition, the Trust shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of PMFS for the Trust's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is solely limited
to the initial establishment of transactions subject to Blue Sky compliance by
the Trust and the reporting of such transactions to the Trust as provided above
and as agreed from time to time by the Trust and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Trust and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Trust and PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement, the
Trust agrees to pay PMFS an annual maintenance fee for each Shareholder account
and certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Trust and PMFS.
2.02 In addition to the fees paid under Section 2.01 above,
the Trust agrees to reimburse PMFS for out-of-pocket expenses or advances
incurred by PMFS for the items set out in Schedule A attached hereto. In
addition, any other expenses incurred by PMFS at the request or with the consent
of the Trust will be reimbursed by the Trust.
4
<PAGE> 7
2.03 The Trust agrees to pay all fees and reimbursable
expenses within a reasonable period of time following the mailing of the
respective billing notice. Postage for mailing of dividends, proxies, Trust
reports and other mailings to all Shareholder accounts shall be advanced to PMFS
by the Trust upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Trust that:
3.01 It is a corporation duly organized and existing and in
good standing under the laws of New Jersey and it is duly qualified to carry on
its business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities
and Exchange Commission (SEC) as a Transfer Agent pursuant to the requirements
of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter
and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings, have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Trust
The Trust represents and warrants to PMFS that:
4.01 It is a business trust duly organized and existing and in
good standing under the laws of Delaware.
4.02 It is empowered under applicable Laws and by its
Declaration of Trust and By-Laws to enter into and perform this Agreement.
5
<PAGE> 8
4.03 All proceedings required by said Declaration of Trust and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is an investment company registered with the SEC under
the Investment Company Act of 1940, as amended (the 1940 Act).
4.05 A registration statement under the Securities Act of 1933
(the 1933 Act) is currently effective and will remain effective, and appropriate
state securities law filings have been made and will continue to be made, with
respect to all Shares of the Trust being offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Trust shall
indemnify and hold PMFS harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.
(b) The Trust's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Trust's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Trust hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Trust, and (ii)
have been prepared and/or maintained by the Trust or any other person or firm on
behalf of the Trust.
6
<PAGE> 9
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Trust.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities or Blue Sky laws of
any State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Trust harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by PMFS as a result of PMFS' lack of good faith, negligence or
willful misconduct.
5.03 At any time PMFS may apply to any officer of the Trust for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Trust for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Trust, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to PMFS or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Trust, and shall not be held to have
notice of any change of authority of any person, until receipt of written notice
thereof from the Trust. PMFS, its agents and subcontractors shall also be
7
<PAGE> 10
protected and indemnified in recognizing share certificates which are reasonably
believed to bear the proper manual or facsimile signature of the officers of the
Trust, and the proper countersignature of any former transfer agent or
registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any act
or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6 Documents and Covenants of the Trust and PMFS
6.01 The Trust shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Trustees of the Trust
authorizing the appointment of PMFS and the execution and delivery of this
Agreement;
8
<PAGE> 11
(b) A certified copy of the Declaration of Trust and By-Laws of the
Trust and all amendments thereto;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Trust (if any) in
the form approved by the Trustees, with a certificate of the Secretary of the
Trust as to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Trust; and
(f) Such other certificates, documents or opinions as the Agent deems
to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Trust for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Trust and will be preserved, maintained and made available in accordance
with such Section 31 of the 1940 Act, and the Rules and Regulations thereunder,
and will be surrendered promptly to the Trust on and in accordance with its
request.
9
<PAGE> 12
6.04 PMFS and the Trust agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the
Trust.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Trust, PMFS will endeavor to notify the Trust and to
secure instructions from an authorized officer of the Trust as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02 Should the Trust exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Trust. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
10
<PAGE> 13
8.03 PMFS may, in its sole discretion and without further
consent by the Trust, subcontract, in whole or in part, for the performance of
its obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential Securities Incorporated (Prudential Securities), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
(Prudential), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential Securities or Prudential subsidiary or affiliate duly
registered as a broker-dealer and/or a transfer agent pursuant to the 1934 Act
or (vi) any other Prudential Securities or Prudential affiliate or subsidiary;
provided, however, that PMFS shall be as fully responsible to the Trust for the
acts and omissions of any agent or subcontractor as it is for its own acts and
omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of or
notice to the Trust, function as Transfer Agent and/or Shareholder Servicing
Agent for any other investment company registered with the SEC under the 1940
Act, including without limitation any investment company whose adviser,
administrator, sponsor or principal underwriter is or may become affiliated with
Prudential Securities and/or Prudential or any of its or their direct or
indirect subsidiaries or affiliates.
9.02 It is understood and agreed that the Trustees, officers,
employees, agents and Shareholders of the Trust, and the directors, officers,
employees, agents and shareholders of the Trust's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Trust as
Trustees, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
11
<PAGE> 14
Article 10 Amendment
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Trustees of the Trust.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the State of New
Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction of any
Share certificate, no new certificate shall be issued in lieu thereof, unless
there shall first be furnished to PMFS an affidavit of loss or non-receipt by
the holder of Shares with respect to which a certificate has been lost or
destroyed, supported by an appropriate bond satisfactory to PMFS and the Trust
issued by a surety company satisfactory to PMFS, except that PMFS may accept an
affidavit of loss and indemnity agreement executed by the registered holder (or
legal representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Trust for the issuance of a replacement certificate,
in cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for payment
of money on the account of any Shareholder or new investor is returned unpaid
for any reason, PMFS will (a) give prompt notification to the Trust's
distributor (Distributor) of such non-payment; and (b) take such other action,
including imposition of a reasonable processing or handling fee, as PMFS may, in
its sole discretion, deem appropriate or as the Trust and the Distributor may
instruct PMFS.
12.03 Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Trust or to PMFS shall be
sufficiently given if addressed to that party and
12
<PAGE> 15
received by it at its office set forth below or at such other place as it may
from time to time designate in writing.
To the Trust:
The Target Portfolio Trust
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
THE TARGET PORTFOLIO TRUST
BY: /s/ Lawrence C. McQuade
------------------------------
Lawrence C. McQuade
President
ATTEST:
/s/ S. Jane Rose
- ------------------
13
<PAGE> 16
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Vincent Marra
--------------------------------
Vincent Marra
Senior Vice President
ATTEST:
/s/ FRED FIANDACA
- --------------------------
14
<PAGE> 17
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
THE TARGET PORTFOLIO TRUST
General - Fees are based on an annual charge for account maintenance plus
out-of-pocket expenses. The effective period of this fee schedule is January 1,
1993 to December 31, 1993 and shall continue thereafter from year to year,
unless otherwise amended.
Annual Fee $35 per Target Program participant
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Trust.
Payment - An invoice will be presented on a monthly basis.
THE TARGET PORTFOLIO PRUDENTIAL MUTUAL FUND
TRUST SERVICES, INC.
BY: /s/ Lawrence C. McQuade BY: /s/ Vincent Marra
-------------------------- ----------------------------
Lawrence C. McQuade Vincent Marra
President Senior Vice President
Dated: November 9, 1992
15
<PAGE> 1
EXHIBIT 10
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN
919 THIRD AVENUE
NEW YORK, NEW YORK 10022-9998
(212) 758-9500
November 4, 1992
The Target Portfolio Trust
One Seaport Plaza
New York, New York 10292
Dear Sirs:
The Target Portfolio Trust (the "Trust") proposes to issue and
sell an indefinite number of shares of beneficial interest, par value $.001 per
share (the "Shares"), in the manner and on the terms set forth in its
Registration Statement on Form N-1A filed with the Securities and Exchange
Commission (File No. 33-50476).
We have, as counsel, participated in various corporate and
other proceedings relating to the Trust and to the Shares. We have examined
copies, either certified or otherwise proved to our satisfaction to be genuine,
of its Declaration of Trust and By-Laws, as currently in effect, a certificate
of good standing issued by the Department of State of the State of Delaware and
other documents relating to its organization and operation. We have also
reviewed the above-mentioned Registration Statement and all amendments filed as
of the date of this opinion and the documents filed as exhibits thereto. We are
generally familiar with the business affairs of the Trust.
Based upon the foregoing, it is our opinion that:
1. The Trust has been duly organized and is validly existing
under the laws of the State of Delaware.
2. The Fund is authorized to issue an unlimited number of its
Shares.
3. Subject to the effectiveness of the above-mentioned
Registration Statement and compliance with applicable state securities laws,
upon the issuance of the Shares for a consideration not less than the par value
thereof, and not less than the net asset value thereof as required by the
Investment Company Act of 1940 and in accordance with the terms of the
<PAGE> 2
The Target Portfolio Trust
November 4, 1992
Page 2
Registration Statement, such Shares will be legally issued and outstanding and
fully paid and non-assessable.
We hereby consent to the filing of this opinion with the
Securities and Exchange Commission as a part of the above-mentioned Registration
Statement and with any state securities commission where such filing is
required. We also consent to the reference of our firm as counsel in the
prospectus filed as a part thereof. In giving this consent we do not admit that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended.
We are members of the Bar of the State of New York and do not
hold ourselves out as being conversant with the laws of any jurisdiction other
than those of the United States of America and the State of New York. We note
that we are not licensed to practice law in the State of Delaware, and to the
extent that any opinion expressed herein involves the law of Delaware, such
opinion should be understood to be based solely upon our review of the good
standing certificate referred to above, the published statutes of that State
and, where applicable, published cases, rules or regulations of regulatory
bodies of that State.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman
SHEREFF, FRIEDMAN HOFFMAN & GOODMAN
SFH&G:GKT:MKN:HBS:plm
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 7 to Registration
Statement No. 33-50476 of The Target Portfolio Trust of our report dated
February 21, 1997, appearing in the Statement of Additional Information, which
is a part of such Registration Statement, and to the references to us under
the headings "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement, and "Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants" in the Statement of Additional Information.
Deloitte & Touche LLP
New York, New York
March 10, 1997
<PAGE> 1
EXHIBIT 16
TARGET PORTFOLIO TRUST
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
n
P (1+T) = ERV
Where: P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years
ERV = ending redeemable value.
<TABLE>
<CAPTION>
ONE YEAR ENDED SINCE INCEPTION TO
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------
NON-SUBSIDY NON-SUBSIDY SUBSIDY
PORTFOLIO ADJUSTED ADJUSTED ADJUSTED
--------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
All Portfolios except International P = $1,000 $1,000 $1,000
Bond Portfolio (see below) n = 1.0 4.0 4.0
Large Capitalization Growth ERV = $1,193 $1,423 $1,423
T = 19.29% 9.16% 9.16%
Large Capitalization Value ERV = $1,174 $1,555 $1,555
T = 17.39% 11.61% 11.61%
Small Capitalization Growth ERV = $1,171 $1,626 $1,623
T = 17.11% 12.86% 12.84%
Small Capitalization Value ERV = $1,200 $1,611 $1,609
T = 20.03% 12.60% 12.58%
International Equity ERV = $1,135 $1,667 $1,667
T = 13.53% 13.58% 13.58%
Total Return Bond ERV = $1,040 $1,266 $1,231
T = 3.97% 6.45% 6.27%
Intermediate-Term Bond ERV = $1,042 $1,266 $1,260
T = 4.17% 6.03% 6.00%
Mortgage Backed Securities ERV = $1,045 $1,279 $1,259
T = 4.50% 6.31% 6.21%
-----------------------------------------------------------------------------------------------
International Bond P = $1,000 $1,000 $1,000
n = 1.0 2.6 2.6
ERV = $1,034 $1,123 $1,102
T = 3.41% 6.33% 6.21%
</TABLE>
<PAGE> 2
TARGET PORTFOLIO TRUST
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = ------------
P
Where: P = hypothetical initial payment of $1,000.
ERV = ending redeemable value.
T = Aggregate total return.
<TABLE>
<CAPTION>
One Year Ended Since Inception to
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------
NON-SUBSIDY NON-SUBSIDY SUBSIDY
PORTFOLIO ADJUSTED ADJUSTED ADJUSTED
--------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
All Portfolios P = $1,000 $1,000 $1,000
Large Capitalization Growth ERV = $1,211 $1,506 $1,506
T = 21.09% 50.55% 50.55%
Large Capitalization Value ERV = $1,192 $1,645 $1,645
T = 19.17% 64.51% 64.51%
Small Capitalization Growth ERV = $1,189 $1,720 $1,718
T = 18.88% 71.96% 71.84%
Small Capitalization Value ERV = $1,218 $1,704 $1,703
T = 21.75% 70.40% 70.29%
International Equity ERV = $1,153 $1,764 $1,764
T = 15.25% 76.35% 76.35%
International Bond ERV = $1,045 $1,206 $1,203
T = 4.45% 20.62% 20.27%
Total Return Bond ERV = $1,050 $1,335 $1,326
T = 5.02% 33.53% 32.62%
Intermediate-Term Bond ERV = $1,052 $1,315 $1,313
T = 5.22% 31.45% 31.32%
Mortgage Backed Securities ERV = $1,056 $1,328 $1,323
T = 5.56% 32.81% 32.29%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 001
<NAME> LARGE CAPITIALIZATION GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 173,127,566
<INVESTMENTS-AT-VALUE> 220,372,335
<RECEIVABLES> 902,139
<ASSETS-OTHER> 12,881
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 504,926
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 169,699,995
<SHARES-COMMON-STOCK> 17,023,217
<SHARES-COMMON-PRIOR> 14,842,911
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 58,870
<ACCUMULATED-NET-GAINS> 3,778,795
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 47,244,769
<NET-ASSETS> (31,866,128)
<DIVIDEND-INCOME> 1,566,689
<INTEREST-INCOME> 497,522
<OTHER-INCOME> (5,259)
<EXPENSES-NET> 1,668,836
<NET-INVESTMENT-INCOME> 390,116
<REALIZED-GAINS-CURRENT> 11,243,006
<APPREC-INCREASE-CURRENT> 27,653,840
<NET-CHANGE-FROM-OPS> 39,286,962
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (23,349,943)
<DISTRIBUTIONS-OTHER> (329,698)
<NUMBER-OF-SHARES-SOLD> 63,352,161
<NUMBER-OF-SHARES-REDEEMED> (61,584,086)
<SHARES-REINVESTED> 23,329,793
<NET-CHANGE-IN-ASSETS> 40,705,189
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 15,885,732
<OVERDISTRIB-NII-PRIOR> 453,260
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,216,415
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,668,836
<AVERAGE-NET-ASSETS> 202,736,000
<PER-SHARE-NAV-BEGIN> 12.13
<PER-SHARE-NII> 2.35
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.51)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.97
<EXPENSE-RATIO> 0.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 002
<NAME> LARGE CAPITIALIZATION VALUE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 172,900,483
<INVESTMENTS-AT-VALUE> 226,733,003
<RECEIVABLES> 1,317,745
<ASSETS-OTHER> 76,900
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 421,799
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 170,293,764
<SHARES-COMMON-STOCK> 16,298,861
<SHARES-COMMON-PRIOR> 14,923,940
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,579,564
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 53,832,521
<NET-ASSETS> (31,222,801)
<DIVIDEND-INCOME> 6,072,665
<INTEREST-INCOME> 391,604
<OTHER-INCOME> (52,283)
<EXPENSES-NET> 1,582,190
<NET-INVESTMENT-INCOME> 4,829,796
<REALIZED-GAINS-CURRENT> 11,707,935
<APPREC-INCREASE-CURRENT> 20,366,798
<NET-CHANGE-FROM-OPS> 36,904,529
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (9,766,690)
<DISTRIBUTIONS-OTHER> (5,265,023)
<NUMBER-OF-SHARES-SOLD> 67,051,579
<NUMBER-OF-SHARES-REDEEMED> (63,523,667)
<SHARES-REINVESTED> 14,708,918
<NET-CHANGE-IN-ASSETS> 40,109,646
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,740,955
<OVERDISTRIB-NII-PRIOR> 2,023,032
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,253,390
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,582,190
<AVERAGE-NET-ASSETS> 208,898,000
<PER-SHARE-NAV-BEGIN> 12.57
<PER-SHARE-NII> 2.24
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.84)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.97
<EXPENSE-RATIO> 0.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 003
<NAME> SMALL CAPITIALIZATION GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 116,646,989
<INVESTMENTS-AT-VALUE> 144,538,831
<RECEIVABLES> 1,817,619
<ASSETS-OTHER> 1,505,443
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 392,618
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 117,205,440
<SHARES-COMMON-STOCK> 9,879,416
<SHARES-COMMON-PRIOR> 8,586,273
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1,302)
<ACCUMULATED-NET-GAINS> 2,373,295
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,891,842
<NET-ASSETS> (18,465,689)
<DIVIDEND-INCOME> 448,654
<INTEREST-INCOME> 368,489
<OTHER-INCOME> (4,156)
<EXPENSES-NET> 1,258,743
<NET-INVESTMENT-INCOME> (445,756)
<REALIZED-GAINS-CURRENT> 16,882,644
<APPREC-INCREASE-CURRENT> 6,803,397
<NET-CHANGE-FROM-OPS> 23,240,285
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (16,337,409)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 52,292,568
<NUMBER-OF-SHARES-REDEEMED> (49,348,968)
<SHARES-REINVESTED> 16,090,077
<NET-CHANGE-IN-ASSETS> 25,936,553
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,821,234
<OVERDISTRIB-NII-PRIOR> 103,545
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 848,974
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,258,743
<AVERAGE-NET-ASSETS> 141,496,000
<PER-SHARE-NAV-BEGIN> 14.15
<PER-SHARE-NII> 2.61
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.83)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.93
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 004
<NAME> SMALL CAPITIALIZATION VALUE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 104,449,585
<INVESTMENTS-AT-VALUE> 125,405,856
<RECEIVABLES> 1,527,375
<ASSETS-OTHER> 246,971
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 173,431
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 334,868
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 103,379,582
<SHARES-COMMON-STOCK> 8,322,158
<SHARES-COMMON-PRIOR> 7,469,911
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 8,398
<ACCUMULATED-NET-GAINS> 2,327,652
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,956,271
<NET-ASSETS> (15,792,069)
<DIVIDEND-INCOME> 1,667,319
<INTEREST-INCOME> 194,619
<OTHER-INCOME> (1,045)
<EXPENSES-NET> 1,013,321
<NET-INVESTMENT-INCOME> 847,572
<REALIZED-GAINS-CURRENT> 10,384,665
<APPREC-INCREASE-CURRENT> 11,237,645
<NET-CHANGE-FROM-OPS> 22,469,882
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (4,467,642)
<DISTRIBUTIONS-OTHER> (837,683)
<NUMBER-OF-SHARES-SOLD> 44,712,582
<NUMBER-OF-SHARES-REDEEMED> (38,007,600)
<SHARES-REINVESTED> 5,207,885
<NET-CHANGE-IN-ASSETS> 29,077,424
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,589,371)
<OVERDISTRIB-NII-PRIOR> 23,851
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 663,383
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,013,321
<AVERAGE-NET-ASSETS> 110,564,000
<PER-SHARE-NAV-BEGIN> 13.07
<PER-SHARE-NII> 2.82
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.67)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.22
<EXPENSE-RATIO> 0.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 005
<NAME> INTERNATIONAL EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 206,081,228
<INVESTMENTS-AT-VALUE> 242,636,690
<RECEIVABLES> 1,935,768
<ASSETS-OTHER> 11,780
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 331,620
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,689,692
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 200,300,337
<SHARES-COMMON-STOCK> 16,236,488
<SHARES-COMMON-PRIOR> 14,049,880
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 405,470
<ACCUMULATED-NET-GAINS> 3,304,592
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 36,552,527
<NET-ASSETS> (30,286,368)
<DIVIDEND-INCOME> 6,372,612
<INTEREST-INCOME> 656,640
<OTHER-INCOME> (918,206)
<EXPENSES-NET> 2,197,549
<NET-INVESTMENT-INCOME> 3,913,497
<REALIZED-GAINS-CURRENT> 11,814,979
<APPREC-INCREASE-CURRENT> 16,975,091
<NET-CHANGE-FROM-OPS> 32,703,567
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (9,899,724)
<DISTRIBUTIONS-OTHER> (3,405,100)
<NUMBER-OF-SHARES-SOLD> 354,553,935
<NUMBER-OF-SHARES-REDEEMED> (338,076,828)
<SHARES-REINVESTED> 13,089,510
<NET-CHANGE-IN-ASSETS> 48,965,360
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,389,337
<OVERDISTRIB-NII-PRIOR> 991,203
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,551,382
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,197,549
<AVERAGE-NET-ASSETS> 221,626,000
<PER-SHARE-NAV-BEGIN> 13.64
<PER-SHARE-NII> 2.04
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.86)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.82
<EXPENSE-RATIO> 0.99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 006
<NAME> TOTAL RETURN BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 54,078,662
<INVESTMENTS-AT-VALUE> 54,487,535
<RECEIVABLES> 4,309,558
<ASSETS-OTHER> 410,632
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 9,449,647
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 540,283
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 49,209,602
<SHARES-COMMON-STOCK> 4,786,311
<SHARES-COMMON-PRIOR> 4,249,004
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 330,940
<ACCUMULATED-NET-GAINS> (670,180)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 347,433
<NET-ASSETS> (9,035,315)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,125,856
<OTHER-INCOME> 0
<EXPENSES-NET> 445,592
<NET-INVESTMENT-INCOME> 2,680,264
<REALIZED-GAINS-CURRENT> (27,284)
<APPREC-INCREASE-CURRENT> (293,217)
<NET-CHANGE-FROM-OPS> 2,359,763
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (1,230,625)
<DISTRIBUTIONS-OTHER> (2,614,993)
<NUMBER-OF-SHARES-SOLD> 20,202,045
<NUMBER-OF-SHARES-REDEEMED> (18,219,385)
<SHARES-REINVESTED> 3,603,260
<NET-CHANGE-IN-ASSETS> 4,100,065
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 587,729
<OVERDISTRIB-NII-PRIOR> 265,669
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 212,605
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 445,592
<AVERAGE-NET-ASSETS> 47,246,000
<PER-SHARE-NAV-BEGIN> 10.62
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.82)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.28
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 007
<NAME> INTERMEDIATE-TERM BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 115,332,914
<INVESTMENTS-AT-VALUE> 115,646,813
<RECEIVABLES> 1,264,197
<ASSETS-OTHER> 415,093
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 16,122,021
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 812,065
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 100,231,457
<SHARES-COMMON-STOCK> 9,746,047
<SHARES-COMMON-PRIOR> 7,339,006
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 223,486
<ACCUMULATED-NET-GAINS> (293,958)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 231,032
<NET-ASSETS> (17,085,053)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,247,889
<OTHER-INCOME> 0
<EXPENSES-NET> 596,101
<NET-INVESTMENT-INCOME> 4,651,788
<REALIZED-GAINS-CURRENT> 53,044
<APPREC-INCREASE-CURRENT> (394,193)
<NET-CHANGE-FROM-OPS> 4,310,639
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (1,051,696)
<DISTRIBUTIONS-OTHER> (4,698,998)
<NUMBER-OF-SHARES-SOLD> 44,780,207
<NUMBER-OF-SHARES-REDEEMED> (25,580,092)
<SHARES-REINVESTED> 5,507,246
<NET-CHANGE-IN-ASSETS> 23,267,306
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 704,694
<OVERDISTRIB-NII-PRIOR> 270,696
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 367,755
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 596,101
<AVERAGE-NET-ASSETS> 81,723,000
<PER-SHARE-NAV-BEGIN> 10.51
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.73)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.30
<EXPENSE-RATIO> 0.73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 008
<NAME> MORTGAGE BACKED SECURITIES PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 72,416,518
<INVESTMENTS-AT-VALUE> 73,381,974
<RECEIVABLES> 705,412
<ASSETS-OTHER> 8,769
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 229,079
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 74,144,473
<SHARES-COMMON-STOCK> 7,236,318
<SHARES-COMMON-PRIOR> 6,767,472
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 23,140
<ACCUMULATED-NET-GAINS> (1,281,112)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 980,575
<NET-ASSETS> (14,003,790)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,310,118
<OTHER-INCOME> 0
<EXPENSES-NET> 658,949
<NET-INVESTMENT-INCOME> 4,651,169
<REALIZED-GAINS-CURRENT> 327,178
<APPREC-INCREASE-CURRENT> (1,105,092)
<NET-CHANGE-FROM-OPS> 3,873,255
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (4,503,951)
<NUMBER-OF-SHARES-SOLD> 21,388,848
<NUMBER-OF-SHARES-REDEEMED> (20,491,299)
<SHARES-REINVESTED> 3,841,153
<NET-CHANGE-IN-ASSETS> 4,108,006
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,608,290)
<OVERDISTRIB-NII-PRIOR> (124,078)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 324,962
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 658,949
<AVERAGE-NET-ASSETS> 72,214,000
<PER-SHARE-NAV-BEGIN> 10.31
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.63)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.21
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 009
<NAME> U.S. GOVERNMENT MONEY MARKET PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 22,568,098
<INVESTMENTS-AT-VALUE> 22,568,098
<RECEIVABLES> 5,624,054
<ASSETS-OTHER> 6,350
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 801,146
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,397,356
<SHARES-COMMON-STOCK> 27,397,356
<SHARES-COMMON-PRIOR> 18,854,556
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> (46,251,912)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,030,474
<OTHER-INCOME> 0
<EXPENSES-NET> 170,513
<NET-INVESTMENT-INCOME> 859,961
<REALIZED-GAINS-CURRENT> 2,578
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 862,539
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (862,539)
<NUMBER-OF-SHARES-SOLD> 339,835,083
<NUMBER-OF-SHARES-REDEEMED> (332,068,470)
<SHARES-REINVESTED> 776,187
<NET-CHANGE-IN-ASSETS> 8,542,800
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 47,830
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 170,513
<AVERAGE-NET-ASSETS> 19,132,000
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.05)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890339
<NAME> THE TARGET PORTFOLIO TRUST:
<SERIES>
<NUMBER> 010
<NAME> INTERNATIONAL BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 39,961,657
<INVESTMENTS-AT-VALUE> 40,779,210
<RECEIVABLES> 1,279,036
<ASSETS-OTHER> 382,188
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 660,734
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41,280,703
<SHARES-COMMON-STOCK> 4,109,948
<SHARES-COMMON-PRIOR> 3,401,401
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (862,643)
<ACCUMULATED-NET-GAINS> 922,057
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 439,583
<NET-ASSETS> (7,511,349)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,465,375
<OTHER-INCOME> 0
<EXPENSES-NET> 518,778
<NET-INVESTMENT-INCOME> 1,946,597
<REALIZED-GAINS-CURRENT> (128,465)
<APPREC-INCREASE-CURRENT> (34,527)
<NET-CHANGE-FROM-OPS> 1,783,605
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (1,734,080)
<NUMBER-OF-SHARES-SOLD> 18,342,835
<NUMBER-OF-SHARES-REDEEMED> (12,977,726)
<SHARES-REINVESTED> 1,705,126
<NET-CHANGE-IN-ASSETS> 7,119,760
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 79,160
<OVERDISTRIB-NII-PRIOR> (103,798)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 193,939
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 518,778
<AVERAGE-NET-ASSETS> 38,788,000
<PER-SHARE-NAV-BEGIN> 10.19
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.45)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.17
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
