<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 1999
SECURITIES ACT REGISTRATION NOS. 33-50476
INVESTMENT COMPANY ACT REGISTRATION NO. 811-7064
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 9 [X]
AND/OR REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 10 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
THE TARGET PORTFOLIO TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530
DAVID F. CONNOR, ESQ.
100 MULBERRY STREET
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
PAUL H. DYKSTRA, ESQ.
GARDNER, CARTON & DOUGLAS
321 N. CLARK STREET
CHICAGO, ILLINOIS 60610-4795
------------------------
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.
<TABLE>
<S> <C>
Title of Securities Being Registered.......... Shares of Beneficial Interest, $.001 par value
per share
</TABLE>
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<PAGE> 2
PROSPECTUS: MAY 1, 1999
As with all mutual funds, filing this prospectus with the Securities and
Exchange Commission does not mean that the SEC has judged this Fund a good
investment, nor has the SEC determined that this prospectus is complete or
accurate. It is a criminal offense to state otherwise.
<PAGE> 3
Table of Contents
1 Risk/Return Summary
1 Investment Objectives and Principal Strategies
4 Principal Risks
7 Evaluating Performance
17 Fees and Expenses
22 How the Portfolios Invest
22 Investment Objectives and Policies
28 Other Investments
31 Derivative Strategies
32 Additional Strategies
33 Investment Risks
38 How the Trust is Managed
38 Manager
39 Advisers and Portfolio Managers
45 Distributor
45 Year 2000 Readiness Disclosure
46 Portfolio Distributions and Tax Issues
46 Distributions
47 Tax Issues
48 If You Sell or Exchange Your Shares
50 How to Buy, Sell and Exchange Shares of the Trust
50 Introduction
53 How to Buy Shares
55 How to Sell Your Shares
56 How to Exchange Your Shares
57 Financial Highlights
68 The Prudential Mutual Fund Family
Appendix I Description of Security Ratings
Appendix II Exemptions
For More Information (Back Cover)
<PAGE> 4
Risk/Return Summary
This section highlights key information about the investment portfolios (the
Portfolios) of THE TARGET PORTFOLIO TRUST (THE TRUST). Additional information
follows this summary.
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
The following summarizes the investment objectives and principal strategies for
each of the Portfolios. While we make every effort to achieve the investment
objective for each Portfolio, we can't guarantee success.
EQUITY PORTFOLIOS
LARGE CAPITALIZATION GROWTH PORTFOLIO
The Portfolio's investment objective is LONG-TERM CAPITAL APPRECIATION. This
means that we seek investments that will increase in value. To achieve our
investment objective, we purchase STOCKS OF LARGE COMPANIES we believe will
experience earnings growth at a rate faster than that of the market average.
LARGE CAPITALIZATION VALUE PORTFOLIO
The Portfolio's investment objective is TOTAL RETURN CONSISTING OF CAPITAL
APPRECIATION AND DIVIDEND INCOME. This means that we seek investments that will
increase in value as well as pay the Portfolio dividends and other income. To
achieve our objective, we invest in LARGE COMPANY STOCKS that we believe are
undervalued, given the company's sales, earnings, book value and cash flow.
SMALL CAPITALIZATION GROWTH PORTFOLIO
The Portfolio's investment objective is MAXIMUM CAPITAL APPRECIATION. This means
that we seek investments that will increase in value. To achieve our objective,
we invest in the STOCKS OF SMALLER COMPANIES that we believe will experience
earnings growth at a rate faster than that of the market average.
1
<PAGE> 5
Risk/Return Summary
SMALL CAPITALIZATION VALUE PORTFOLIO
The Portfolio's investment objective is ABOVE-AVERAGE CAPITAL APPRECIATION. This
means that we seek investments that will increase in value. To achieve our
objective, we invest in STOCKS OF SMALLER COMPANIES that we believe are
undervalued, given the company's sales, earnings, book value and cash flow.
INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's investment objective is CAPITAL APPRECIATION. This means that we
seek investments that will increase in value. To achieve this objective, we
purchase STOCKS OF FOREIGN COMPANIES. These companies may be based in developed
as well as developing countries.
INCOME PORTFOLIOS
INTERNATIONAL BOND PORTFOLIO
The Portfolio's investment objective is HIGH TOTAL RETURN. This means that we
seek investments that will increase in value as well as pay income. To achieve
this objective, we invest in HIGH QUALITY FOREIGN DEBT OBLIGATIONS issued by
foreign governments, companies and financial institutions and by supranational
organizations. These obligations may include mortgage-related securities. We
normally invest at least 75% of the Portfolio's assets in debt obligations rated
A or better by Standard & Poor's Ratings Group (S&P) or Moody's Investors
Service, Inc. (Moody's) or by another major rating service and unrated debt
obligations that we believe are comparable in quality. However, we may invest up
to 25% of the Portfolio's assets in HIGH YIELD DEBT OBLIGATIONS -- also known as
"JUNK BONDS" -- which are rated at least B by S&P or Moody's or another major
rating service and unrated debt obligations we believe are comparable in
quality. The Portfolio is a NON-DIVERSIFIED MUTUAL FUND that generally may
invest a higher percentage of its assets in the securities of fewer issuers than
a diversified fund.
2
<PAGE> 6
Risk/Return Summary
TOTAL RETURN BOND PORTFOLIO
The Portfolio's investment objective is TOTAL RETURN CONSISTING OF CURRENT
INCOME AND CAPITAL APPRECIATION. This means that we seek investments that will
increase in value as well as pay income. To achieve this objective, we invest in
DEBT OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, as well as DEBT
OBLIGATIONS ISSUED BY U.S. COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS.
The Portfolio may invest up to 20% of its assets in FOREIGN DEBT OBLIGATIONS and
up to 25% of its assets in PRIVATELY-ISSUED MORTGAGE-RELATED SECURITIES (not
issued or guaranteed by the U.S. Government). We normally invest at least 90% of
the Portfolio's assets in "investment grade" debt obligations -- rated at least
BBB by S&P, Baa by Moody's, or the equivalent by another major rating service --
and unrated debt obligations that we believe are comparable in quality. However,
we may invest up to 10% of the Portfolio's assets in HIGH YIELD DEBT OBLIGATIONS
("JUNK BONDS") that are rated below investment grade, but rated at least B by
S&P or Moody's or another major rating service, and unrated debt obligations
that we believe are comparable in quality.
INTERMEDIATE-TERM BOND PORTFOLIO
The Portfolio's investment objective is CURRENT INCOME AND REASONABLE STABILITY
OF PRINCIPAL. To achieve this objective, we invest in DEBT OBLIGATIONS ISSUED OR
GUARANTEED BY THE U.S. GOVERNMENT, as well as DEBT OBLIGATIONS ISSUED BY U.S.
COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS. The Portfolio may invest
up to 20% of its assets in FOREIGN DEBT OBLIGATIONS and up to 25% of its assets
in PRIVATELY-ISSUED MORTGAGE-RELATED SECURITIES (not issued or guaranteed by the
U.S. Government). We normally invest at least 90% of the Portfolio's assets in
"investment grade" debt obligations -- rated at least BBB by S&P, Baa by
Moody's, or the equivalent by another major rating service -- and unrated debt
obligations that we believe are comparable in quality. However, we may invest up
to 10% of the Portfolio's assets in HIGH YIELD DEBT OBLIGATIONS ("JUNK BONDS")
that are rated below investment grade, but rated at least B by S&P or Moody's or
another major rating service, and unrated debt obligations that we believe are
comparable in quality. The dollar-weighted average maturity of the bonds in
which the Portfolio will invest will be between three and ten years.
3
<PAGE> 7
Risk/Return Summary
MORTGAGE BACKED SECURITIES PORTFOLIO
The Portfolio's investment objective is HIGH CURRENT INCOME and its secondary
investment objective is CAPITAL APPRECIATION, each to the extent consistent with
the protection of capital. This means we seek investments that will pay income
and which will also increase in value. To achieve these objectives, we normally
invest at least 65% of the Portfolio's total assets in MORTGAGE-RELATED DEBT
SECURITIES. These securities will usually be mortgage-related securities issued
or guaranteed by U.S. governmental agencies, including securities issued by the
Federal National Mortgage Association (FNMA or "Fannie Mae") or the Federal Home
Loan Mortgage Corporation (FHLMC or "Freddie Mac") or guaranteed by the
Government National Mortgage Association (GNMA or "Ginnie Mae"). However, we
will invest up to 25% of the Portfolio's total assets in privately-issued
mortgage-related securities. We normally purchase debt obligations that are
rated at least A by Moody's or S&P, or the equivalent by another major rating
service and unrated bonds we believe are comparable in quality.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The Portfolio's investment objective is MAXIMUM CURRENT INCOME consistent with
the maintenance of LIQUIDITY AND THE PRESERVATION OF CAPITAL. To achieve this
objective, we invest primarily in SECURITIES ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT that mature in 13 months or less. While we make every effort to
achieve our investment objective and maintain a net asset value of $1 per share,
we can't guarantee that we will be successful. So far, the Portfolio's net asset
value per share has never deviated from $1 per share.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The following
summarizes the principal risks of investing in the Portfolios.
EQUITY PORTFOLIOS
Since these Portfolios invest primarily in common stocks, there is the risk that
the price of a particular stock owned by a Portfolio could go down. Generally,
the stock price of large companies is more stable than the stock price of
smaller companies, but this is not always the case. In addition to an
4
<PAGE> 8
Risk/Return Summary
individual stock losing value, the value of the equity markets as a whole could
go down.
The SMALL CAPITALIZATION GROWTH and SMALL CAPITALIZATION VALUE PORTFOLIOS
invest primarily in stocks of smaller companies with a market capitalization of
under $1.5 billion. These companies usually offer a smaller range of products
and services than larger companies. They may also have limited financial
resources and may lack management depth. As a result, stocks issued by smaller
companies tend to fluctuate in value more than the stocks of larger, more
established companies.
The INTERNATIONAL EQUITY PORTFOLIO invests primarily in stocks of foreign
companies. Investing in foreign securities presents additional risks, since
foreign political, economic and legal systems may be less stable than in the
U.S. and foreign stock markets could decline. The changing value of foreign
currencies could also affect the value of the assets the Portfolio holds. These
risks are generally higher with respect to the Portfolio's investments in stocks
of companies located in developing countries.
INCOME PORTFOLIOS
The debt obligations in which these Portfolios invest are generally subject to
the risk that the issuer may be unable to make principal and interest payments
when they are due. There is also the risk that the securities could lose value
because of interest rate changes or a loss of confidence in the ability of
corporations to pay back debt.
The INTERNATIONAL BOND, TOTAL RETURN BOND, INTERMEDIATE-TERM BOND AND
MORTGAGE BACKED SECURITIES PORTFOLIOS may invest in mortgage-related securities
and asset-backed securities, which are subject to prepayment risk. If these
securities are pre-paid, a Portfolio may have to replace them with
lower-yielding securities.
The INTERNATIONAL BOND, TOTAL RETURN BOND AND INTERMEDIATE-TERM BOND
PORTFOLIOS may invest in non-investment grade securities -- also known as "junk
bonds" -- which have a higher risk of default and tend to be less liquid than
higher rated securities. These Portfolios may also invest in debt obligations of
foreign issuers. Foreign securities have more risks than investments in
obligations of the U.S. government and U.S. corporations. The amount of income
available for distribution may be affected by our foreign
5
<PAGE> 9
Risk/Return Summary
currency gains or losses and certain hedging activities. Foreign markets
especially those in developing countries, tend to be more volatile than U.S.
markets and changes in currency exchange rates can reduce or increase market
performance. In addition, political developments and changes in currency
exchange rates may adversely affect the value of a Portfolio's foreign
securities.
The INTERNATIONAL BOND PORTFOLIO is a non-diversified fund, meaning that we
can invest a higher percentage of its assets in the securities of fewer issuers
than a diversified fund. Investing in a non-diversified portfolio involves
greater risk than investing in a diversified portfolio.
Although investments in mutual funds involve risk, investing in money
market funds like the U.S. GOVERNMENT MONEY MARKET PORTFOLIO are generally less
risky than investments in other types of funds. This is because the Portfolio
may only invest in high quality securities, limits the average maturity of its
portfolio to 90 days or less, and limits its ability to invest in any particular
security to those that mature in 13 months or less. For purposes of satisfying
the average maturity and maximum maturity requirements, securities with demand
features, are treated as maturing on the date that the Portfolio can demand
repayment of the security. Although the Portfolio seeks to preserve the value of
your investment at $1 per share, it is possible to lose money by investing in
the Portfolio.
***
The Portfolios may use risk management techniques to try to preserve assets
or enhance return. These strategies may present above average risks. Derivatives
may not fully offset the underlying positions and this could result in losses to
a Portfolio that would not otherwise have occurred. Some of our investment
strategies involve additional risks. Like any mutual fund, an investment in a
Portfolio could lose value, and you could lose money. For more detailed
information about the risks associated with the Portfolios, see "Investment
Risks."
An investment in a Portfolio is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. For more information about the risks associated with the Portfolios, see
"Investment Risks."
6
<PAGE> 10
Risk/Return Summary
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how a Portfolio performs. The
following bar charts show each Portfolio's performance for each full calendar
year of operation. The bar charts and tables below demonstrate how returns can
change from year to year. The tables show how each Portfolio's average annual
returns compare with those of a broad measure of market performance. Past
performance does not mean that a Portfolio will achieve similar results in the
future.
LARGE CAPITALIZATION GROWTH PORTFOLIO
ANNUAL RETURNS
F.P.O
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Large Cap Growth Portfolio --% --% --% (since 1-5-93)
S&P 500(2) --% --% --% (since 1-5-93)
Lipper Average(3) --% --% --% (since 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses.
(2) The Standard & Poor's 500 Stock Index (S&P 500)--an unmanaged index of
500 stocks of large U.S. companies--gives a broad look at how stock
prices have performed. These returns do not include the effect of any
sales charges. These returns would be lower if they included the effect
of sales charges. Source:
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
7
<PAGE> 11
Risk/Return Summary
LARGE CAPITALIZATION VALUE PORTFOLIO
ANNUAL RETURNS
F.P.O.
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Large Cap Value Portfolio --% --% --% (since 1-5-93)
S&P 500(2) --% --% --% (since 1-5-93)
Lipper Average(3) --% --% --% (since 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses.
(2) The Standard & Poor's 500 Stock Index (S&P 500)--an unmanaged index of
500 stocks of large U.S. companies--gives a broad look at how stock
prices have performed. These returns do not include the effect of any
sales charges. These returns would be lower if they included the effect
of sales charges. Source:
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
8
<PAGE> 12
Risk/Return Summary
SMALL CAPITALIZATION GROWTH PORTFOLIO
ANNUAL RETURNS
F.P.O.
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Small Cap Growth Portfolio --% --% --% (since 1-5-93)
Russell 2000(2) --% --% --% (since 1-5-93)
Lipper Average(3) --% --% --% (since 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses.
(2) The Russell 2000 Index -- an unmanaged index of the stocks of the 2,000
smallest U.S. companies included in the Russell 3000 Index -- gives a
broad look at how the stock prices of smaller companies have performed.
These returns do not include the effect of any sales charges. These
returns would be lower if they included the effect of sales charges.
Source:
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
9
<PAGE> 13
Risk/Return Summary
SMALL CAPITALIZATION VALUE PORTFOLIO
ANNUAL RETURNS
F.P.O.
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Small Cap Value Portfolio --% --% --% (since 1-5-93)
Russell 2000(2) --% --% --% (since 1-5-93)
Lipper Average(3) --% --% --% (since 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses.
(2) The Russell 2000 Index -- an unmanaged index of the stocks of the 2,000
smallest U.S. companies included in the Russell 3000 Index -- gives a
broad look at how the stock prices of smaller companies have performed.
These returns do not include the effect of any sales charges. These
returns would be lower if they included the effect of sales charges.
Source:
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
10
<PAGE> 14
Risk/Return Summary
INTERNATIONAL EQUITY PORTFOLIO
ANNUAL RETURNS
F.P.O.
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
International Equity Portfolio --% n/a --% (since 1-5-93)
EAFE(2) --% n/a --% (since 1-5-93)
Lipper Average(3) --% n/a --% (since 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses.
(2) The Morgan Stanley Capital International Europe, Australia, Far East
Index (EAFE) -- an unmanaged index of over 1,000 foreign companies
representing 20 stock markets in Europe, Australia, New Zealand and the
Far East -- gives a broad look at how foreign stocks have performed.
These returns do not include the effect of any sales charges. These
returns would be lower if they included the effect of sales charges.
Source:
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
11
<PAGE> 15
Risk/Return Summary
INTERNATIONAL BOND PORTFOLIO
ANNUAL RETURNS
F.P.O.
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
<S> <C> <C> <C> <C>
International Bond Portfolio --% n/a n/a --% (since 5-17-94)
WB Index(2) --% n/a n/a --% (since 5-17-94)
Lipper Average(3) --% n/a n/a --% (since 5-17-94)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses.
(2) The Salomon Smith Barney Non-U.S. World Government Bond Index (WB Index)
-- an unmanaged index of approximately 600 high quality bonds issued in
17 different currencies -- gives a broad look at how foreign bonds have
performed. These returns do not include the effect of any sales charges.
These returns would be lower if they included the effect of sales
charges. Source:
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
12
<PAGE> 16
Risk/Return Summary
TOTAL RETURN BOND PORTFOLIO
ANNUAL RETURNS
F.P.O.
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Total Return Bond Portfolio --% --% --% (since 1-5-93)
LGCI(2) --% --% --% (since 1-5-93)
Lipper Average(3) --% --% --% (since 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses.
(2) The Lehman Government/Corporate Index (LGCI) -- an unmanaged index of
intermediate- and long-term government and corporate debt with an
average maturity of 10 years -- gives a broad look at how bonds have
performed. These returns do not include the effect of any sales charges.
These returns would be lower if they included the effect of sales
charges. Source:
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
13
<PAGE> 17
Risk/Return Summary
INTERMEDIATE-TERM BOND PORTFOLIO
ANNUAL RETURNS
F.P.O.
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Intermediate-Term
Bond Portfolio --% --% --% (since 1-5-93)
LIGC(2) --% --% --% (since 1-5-93)
Lipper Average(3) --% --% --% (since 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses.
(2) The Lehman Intermediate Government/Corporate Index (LIGC) -- an
unmanaged index of U.S. Government bonds and investment grade corporate
bonds with maturities of up to 10 years -- gives a broad look at how
intermediate-term bonds have performed. These returns do not include the
effect of any sales charges. These returns would be lower if they
included the effect of sales charges. Source:
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
14
<PAGE> 18
Risk/Return Summary
MORTGAGE BACKED SECURITIES PORTFOLIO
ANNUAL RETURNS
F.P.O.
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Mortgage Backed
Securities Portfolio --% --% --% (since 1-5-93)
Mortgage Index(2) --% --% --% (since 1-5-93)
Lipper Average(3) --% --% --% (since 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses.
(2) The Salomon Smith Barney Mortgage Backed Security Index (Mortgage Index)
-- an unmanaged index of 30- and 15-year mortgage-related securities
issued by U.S. Government agencies -- gives a broad look at how
mortgage-backed securities have performed. These returns do not include
the effect of any sales charges. These returns would be lower if they
included the effect of sales charges. Source:
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
15
<PAGE> 19
Risk/Return Summary
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
ANNUAL RETURNS
F.P.O.
GRAPH TO COME
Best quarter: _____% ( ___ quarter of 19__)
Worst quarter: ______% ( ___ quarter of 19__)
AVERAGE ANNUAL RETURNS (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
U.S. Government
Money Market Portfolio --% n/a --% (since 1-5-93)
Lipper Average(1) --% n/a --% (since 1-5-93)
7-Day Yield (as of
December 31, 1998)(2) --% n/a
</TABLE>
(1) The Lipper Average is based on the average return of all mutual funds in
the Lipper _____________ category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
(2) The Portfolio's yield is after deduction of expenses.
16
<PAGE> 20
Risk/Return Summary
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold the shares of each Portfolio.
EQUITY PORTFOLIOS
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge (load) imposed on None
purchases (as a percentage of offering price)
Maximum deferred sales charge (load) None
(as a percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed None
on reinvested dividends and other
distributions
Redemption fees None
Exchange fee None
Maximum annual Target Program fee(1) 1.50%(2)
</TABLE>
(1) The Target Program fee only applies to Target Program participants.
(2) Maximum Target Program fee for investors who do not invest in the
Portfolios through an Individual Retirement Account or a qualified
employee benefit plan (together, non-Plan investors). The Maximum Target
Program fee is 1.25% for investors who invest in the Portfolios through
an Individual Retirement Account or a qualified employee benefit plan
(together, Plan investors).
17
<PAGE> 21
Risk/Return Summary
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM PORTFOLIO ASSETS)
<TABLE>
<S> <C>
LARGE CAPITALIZATION GROWTH PORTFOLIO
Management fees .60%
+ Distribution (12b-1) and service fees None
+ Other expenses --
= TOTAL ANNUAL FUND OPERATING EXPENSES --
LARGE CAPITALIZATION VALUE PORTFOLIO
Management fees .60%
+ Distribution (12b-1) and service fees None
+ Other expenses --
= TOTAL ANNUAL FUND OPERATING EXPENSES --
SMALL CAPITALIZATION GROWTH PORTFOLIO
Management fees .60%
+ Distribution (12b-1) and service fees None
+ Other expenses --
= TOTAL ANNUAL FUND OPERATING EXPENSES --
SMALL CAPITALIZATION VALUE PORTFOLIO
Management fees .60%
+ Distribution (12b-1) and service fees None
+ Other expenses --
= TOTAL ANNUAL FUND OPERATING EXPENSES --
INTERNATIONAL EQUITY PORTFOLIO
Management fees .70%
+ Distribution (12b-1) and service fees None
+ Other expenses --
= TOTAL ANNUAL FUND OPERATING EXPENSES --
</TABLE>
18
<PAGE> 22
Risk/Return Summary
INCOME PORTFOLIOS
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge (load) imposed on None
purchases (as a percentage of offering price)
Maximum deferred sales charge (load) None
(as a percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed None
on reinvested dividends and other
distributions
Redemption fees None
Exchange fee None
Maximum annual Target Program fee(1) 1.00%(2)
</TABLE>
(1) The Target Program fee only applies to Target Program participants.
(2) Maximum Target Program fee for non-Plan investors. The Maximum Target
Program fee for Plan investors is 1.35%.
19
<PAGE> 23
Risk/Return Summary
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM PORTFOLIO ASSETS)
<TABLE>
<S> <C>
INTERNATIONAL BOND PORTFOLIO
Management fees .50%
+ Distribution (12b-1) and service fees None
+ Other expenses --
= TOTAL ANNUAL FUND OPERATING EXPENSES --
TOTAL RETURN BOND PORTFOLIO
Management fees .45%
+ Distribution (12b-1) and service fees None
+ Other expenses --
= TOTAL ANNUAL FUND OPERATING EXPENSES --
INTERMEDIATE-TERM BOND PORTFOLIO
Management fees .45%
+ Distribution (12b-1) and service fees None
+ Other expenses --
= TOTAL ANNUAL FUND OPERATING EXPENSES --
MORTGAGE BACKED SECURITIES PORTFOLIO
Management fees .45%
+ Distribution (12b-1) and service fees None
+ Other expenses --
= TOTAL ANNUAL FUND OPERATING EXPENSES --
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
Management fees .25%
+ Distribution (12b-1) and service fees None
+ Other expenses --%
= TOTAL ANNUAL FUND OPERATING EXPENSES --
</TABLE>
20
<PAGE> 24
Risk/Return Summary
FEES AND EXPENSES EXAMPLE
This example will help you compare the fees and expenses of the Portfolios and
compare the cost of investing in the Portfolios with the cost of investing in
other mutual funds. The example assumes that you invest $10,000 in a Portfolio
for the time periods indicated and then sell all of your shares at the end of
those periods. The example also assumes that your investment has a 5% return
each year and that the Portfolio's operating expenses remain the same. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
LARGE CAPITALIZATION GROWTH 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 $-- $-- $-- $--
U.S. GOVERNMENT MONEY MARKET PORTFOLIO $-- $-- $-- $--
</TABLE>
21
<PAGE> 25
How the Portfolios Invest
INVESTMENT OBJECTIVES AND POLICIES
EQUITY PORTFOLIOS
LARGE CAPITALIZATION GROWTH PORTFOLIO
The Portfolio's investment objective is LONG-TERM CAPITAL APPRECIATION. This
means that we seek investments that will increase in value.
In pursuing our objective, we invest in STOCKS OF LARGE COMPANIES we
believe will experience earnings growth at a rate faster than that of the
Standard & Poor's 500 Stock Price Index (the S&P 500). When we consider
investing in a company's stock, we look at several factors to evaluate the
stock's growth potential, including the company's historical profitability, the
economic outlook for the company's industry, the company's position in that
industry, and the qualifications of company management. For example, we may
select a company's stock based on new products or services the company is
introducing. We normally invest at least 80% of the Portfolio's total assets in
common stocks, and at least 65% of its total assets in common stocks of
companies with a total market capitalization of $1.5 billion or more measured at
the time of purchase.
LARGE CAPITALIZATION VALUE PORTFOLIO
The Portfolio's investment objective is TOTAL RETURN consisting of CAPITAL
APPRECIATION and DIVIDEND INCOME. This means that we seek investments that will
increase in value as well as pay the Portfolio dividends.
In pursuing our objective, we invest in STOCKS OF LARGE COMPANIES using
a VALUE INVESTMENT STYLE. That is, we invest in stocks that we believe are
undervalued and have an above average potential to increase in price. We
consider a number of factors in choosing stocks, like a company's sales,
earnings, book value, cash flow and recent performance. We consider selling a
stock if it has increased in value to the point where we no longer consider it
to be undervalued. We normally invest at least 80% of the Portfolio's assets in
common stocks, and at least 65% of its total assets in stocks of companies with
a total market capitalization of $1.5 billion or more (measured at the time of
purchase).
SMALL CAPITALIZATION GROWTH PORTFOLIO
The Portfolio's investment objective is MAXIMUM CAPITAL APPRECIATION. This means
that we seek investments that will increase in value.
In pursuing our objective, we invest in STOCKS OF SMALLER COMPANIES we
believe will experience earnings growth at a rate faster than that of the market
22
<PAGE> 26
How the Portfolios Invest
average. When we consider investing in a company's stock, we look at several
factors to evaluate the stock's growth potential, including the company's
historical profitability, return on capital, the economic outlook for the
company's industry, the company's position in that industry, and the
qualifications of company management. For example, we may select a company's
stock based on new products or services the company is introducing. We normally
invest at least 80% of the Portfolio's total assets in common stocks, and at
least 65% of its total assets in common stocks of companies with a total market
capitalization of less than $1.5 billion (measured at the time of purchase).
SMALL CAPITALIZATION VALUE PORTFOLIO
The Portfolio's investment objective is ABOVE-AVERAGE CAPITAL APPRECIATION. This
means that we seek investments that will increase in value.
In pursuing our objective, we invest in STOCKS OF SMALLER COMPANIES
using a VALUE INVESTMENT STYLE. That is, we invest in stocks that we believe are
undervalued and have an above average potential to increase in price. We
consider a number of factors in choosing stocks, like a company's sales,
earnings, book value, cash flow and recent performance. We consider selling a
stock if it has increased in value to the point where we no longer consider it
to be undervalued. We normally invest at least 80% of the Portfolio's assets in
common stocks, and at least 65% of its total assets in common stocks of
companies with a total market capitalization of less than $1.5 billion.
INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's investment objective is CAPITAL APPRECIATION. This means that we
seek investments that will increase in value.
In pursuing our objective, we invest in STOCKS of companies located in
FOREIGN COUNTRIES. We may invest in stocks of companies in both developed and
developing countries. We normally invest at least 65% of the Portfolio's total
assets in stocks of companies in at least three foreign countries.
The Portfolio may also invest in AMERICAN DEPOSITARY RECEIPTS (ADRS),
AMERICAN DEPOSITARY SHARES (ADSS), GLOBAL DEPOSITARY RECEIPTS (GDRS) and
EUROPEAN DEPOSITARY RECEIPTS (EDRS). ADRs, ADSs, GDRs and EDRs are certificates
- -- usually issued by a bank or trust company -- that represent an equity
investment in a foreign company. ADRs and ADSs are issued by U.S. banks and
trust companies and are valued in U.S. dollars. EDRs and GDRs are issued by
foreign banks and trust companies and are usually valued in foreign currencies.
23
<PAGE> 27
How the Portfolios Invest
INCOME PORTFOLIOS
INTERNATIONAL BOND PORTFOLIO
The Portfolio's investment objective is HIGH TOTAL RETURN. This means that we
seek investments that will increase in value as well as pay income.
In pursuing our objective, we invest in HIGH QUALITY FOREIGN DEBT
OBLIGATIONS issued by foreign governments and their agencies, companies and
financial institutions and by supranational organizations. These obligations may
include mortgage-related securities. We normally invest at least 75% of the
Portfolio's total assets in debt obligations rated A or better by S&P or Moody's
or by another major rating service and unrated debt obligations that we believe
are comparable in quality. However, we may invest up to 25% of the Portfolio's
total assets in HIGH YIELD DEBT OBLIGATIONS -- also known as "JUNK BONDS" --
rated at least B by Standard & Poor's Ratings Group (S&P) or by Moody's
Investors Service (Moody's) or another major rating service and unrated bonds we
believe are comparable in quality. The Portfolio may continue to hold an
obligation if it is later downgraded or no longer rated.
We normally invest at least 65% of the Portfolio's total assets in
foreign bonds issued by governments and companies located in at least three
foreign countries. These issuers may be in developed as well as developing
countries.
The Portfolio is a NON-DIVERSIFIED MUTUAL FUND that generally may invest
a higher percentage of its assets in the securities of fewer issuers than a
diversified fund. This could make the value of the Portfolio's shares more
volatile than the shares of a diversified fund. In addition, economic, political
or regulatory developments could have a greater impact on the value of the
Portfolio's shares than would be the case if the Portfolio were diversified
among more issuers.
TOTAL RETURN BOND PORTFOLIO
The Portfolio's investment objective is TOTAL RETURN consisting of CURRENT
INCOME and CAPITAL APPRECIATION. This means that we seek investments that will
increase in value as well as pay income.
In pursuing our objective, we invest primarily in DEBT OBLIGATIONS
ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT AND ITS AGENCIES, as well as DEBT
OBLIGATIONS ISSUED BY U.S. COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS
AND THEIR AGENCIES. The Portfolio may invest up to 20% of its assets in foreign
debt obligations.
24
<PAGE> 28
How the Portfolios Invest
The Portfolio invests in MORTGAGE-RELATED SECURITIES issued by U.S.
government entities and up to 25% of its assets in privately-issued
mortgage-related securities (not issued or guaranteed by the U.S. Government).
We normally invest at least 90% of the Portfolio's assets in
"investment grade" debt obligations -- debt obligations rated at least BBB by
S&P, Baa by Moody's, or the equivalent by another major rating service, and
unrated debt obligations that we believe are comparable in quality. However, we
may invest up to 10% of the Portfolio's assets in HIGH YIELD DEBT OBLIGATIONS --
also known as "JUNK BONDS" -- which are rated at least B by S&P or Moody's or
another major rating service, and unrated debt obligations that we believe are
comparable in quality. The Portfolio may continue to hold an obligation if it is
later downgraded or no longer rated.
The Portfolio's dollar-weighted average portfolio maturity will
generally be between four and fifteen years.
INTERMEDIATE-TERM BOND PORTFOLIO
The Portfolio's investment objective is CURRENT INCOME and REASONABLE STABILITY
OF PRINCIPAL. This means that we seek investments that will pay dividend and
other income, while attempting to reduce volatility.
In pursuing our objective, we invest in DEBT OBLIGATIONS ISSUED OR
GUARANTEED BY THE U.S. GOVERNMENT, as well as DEBT OBLIGATIONS ISSUED BY U.S.
COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS. The Portfolio may invest
up to 20% of its assets in foreign bonds.
The Portfolio invests in MORTGAGE-RELATED SECURITIES issued or
guaranteed by U.S. government entities and up to 25% of its assets in
privately-issued mortgage-related securities (not issued or guaranteed by the
U.S. Government). These investments may include COLLATERALIZED MORTGAGE
OBLIGATIONS.
We normally invest at least 90% of the Portfolio's assets in
"investment grade" debt obligations -- debt obligations rated at least BBB by
S&P, Baa by Moody's, or the equivalent by another major rating service, and
unrated bonds that we believe are comparable in quality. However, we may invest
up to 10% of the Portfolio's assets in HIGH YIELD DEBT OBLIGATIONS -- also known
as "JUNK BONDS" -- which are rated at least B by S&P or Moody's or another major
rating service, and unrated bonds that we believe are comparable in quality. The
Portfolio may continue to hold an obligation if it is later downgraded or no
longer rated. The Portfolio's dollar-weighted average maturity will generally be
between three and ten years.
25
<PAGE> 29
How the Portfolios Invest
MORTGAGE BACKED SECURITIES PORTFOLIO
The Portfolio's investment objective is HIGH CURRENT INCOME and its secondary
investment objective is CAPITAL APPRECIATION, each to the extent consistent with
the protection of capital. This means we seek investments that will pay income
and which will also increase in value, while attempting to reduce volatility.
In pursuing these objectives, we normally invest at least 65% of the
Portfolio's total assets in MORTGAGE-BACKED DEBT SECURITIES. These securities
will usually be mortgage-related securities issued or guaranteed by U.S.
governmental agencies, including securities issued by the Federal National
Mortgage Association (FNMA or "Fannie Mae") or the Federal Home Loan Mortgage
Corporation (FHLMC or "Freddie Mac") or guaranteed by the Government National
Mortgage Association (GNMA or "Ginnie Mae"). However, we may invest up to 25% of
the Portfolio's total assets in privately-issued mortgage-related securities.
The mortgage-related securities in which the Portfolio invests includes
COLLATERALIZED MORTGAGE OBLIGATIONS issued by U.S. Government-related entities
and by private issuers.
We normally purchase debt securities that are rated at least A by
Moody's or S&P, or the equivalent by another major rating service and unrated
bonds we believe are comparable in quality. The Portfolio may continue to hold
an obligation if it is later downgraded or no longer rated.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The Portfolio's investment objective is MAXIMUM CURRENT INCOME
consistent with the maintenance of LIQUIDITY and the PRESERVATION OF CAPITAL.
This means that we seek income-producing investments with the credit quality and
liquidity to preserve the value of the Portfolio's shares. Because we seek to
maintain the value of the Portfolio's shares at $1.00, we manage the Portfolio
to comply with specific regulations designed for money market funds.
In pursuing our objective, we invest primarily in SECURITIES ISSUED OR
GUARANTEED BY THE U.S. GOVERNMENT that mature in 13 months or less and
REPURCHASE AGREEMENTS relating to those securities.
While we make every effort to maintain a net asset value of $1 per
share, we can't guarantee that we will be successful. So far, the Portfolio's
net asset value per share has never deviated from $1 per share.
* * *
26
<PAGE> 30
How the Portfolios Invest
Although we make every effort to achieve each Portfolio's objective, we
can't guarantee success. Each Portfolio`s investment objective is a fundamental
policy that cannot be changed without shareholder approval. The Board of the
Trust can change investment policies that are not fundamental.
MORTGAGE-RELATED SECURITIES
The INTERNATIONAL BOND, TOTAL RETURN BOND, INTERMEDIATE-TERM BOND and
MORTGAGE BACKED SECURITIES PORTFOLIOS may each invest in MORTGAGE-RELATED
SECURITIES issued or guaranteed by U.S. governmental entities or private
issuers. In addition, the INTERNATIONAL BOND PORTFOLIO may invest in
mortgage-related securities issued or guaranteed by foreign governmental
entities. These securities are usually pass-through instruments that pay
investors a share of all interest and principal payments from an underlying pool
of fixed or adjustable rate mortgages. Mortgage-related securities issued by the
U.S. Government or its agencies include FNMAs, GNMAs and debt securities issued
by the Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"). The U.S.
Government or the issuing agency directly or indirectly guarantees the payment
of interest and principal on these securities. Private mortgage-related
securities that are not guaranteed by U.S. governmental entities generally have
one or more types of credit enhancement to ensure timely receipt of payments and
to protect against default.
Mortgage pass-through securities include collateralized mortgage
obligations, multi-class pass-through securities and stripped mortgage-backed
securities. A COLLATERALIZED MORTGAGE OBLIGATION (CMO) is a security backed by
an underlying portfolio of mortgages or mortgage-backed securities that may be
issued or guaranteed by a bank or by U.S. governmental entities. A MULTI-CLASS
PASS-THROUGH SECURITY is an equity interest in a trust composed of underlying
mortgage assets. Payments of principal of and interest on the mortgage assets
and any reinvestment income thereon provide the funds to pay debt service on the
CMO or to make scheduled distributions on the multi-class pass-through security.
A STRIPPED MORTGAGE-BACKED SECURITY (MBS STRIP) may be issued by U.S.
governmental entities or by private institutions. MBS strips take the pieces of
a debt security (principal and interest) and break them apart. The resulting
securities may be sold separately and may perform differently.
The values of mortgage-backed securities vary with changes in market
interest rates generally and in yields among various kinds of mortgage-related
securities. Such values are particularly sensitive to changes in prepayments of
the underlying mortgages. For example, during periods of falling
27
<PAGE> 31
How the Portfolios Invest
interest rates, prepayments tend to accelerate as homeowners and others
refinance their higher rate mortgages; these prepayments reduce the anticipated
duration of the mortgage-related securities. Conversely, during periods of
rising interest rates, prepayments can be expected to decelerate, which has the
effect of extending the anticipated duration at the same time that the value of
the securities declines. MBS strips tend to be even more highly sensitive to
changes in prepayment and interest rates than mortgage-related securities and
CMOs generally.
ASSET-BACKED SECURITIES
The INTERNATIONAL BOND, TOTAL RETURN BOND, INTERMEDIATE-TERM BOND and MORTGAGE
BACKED SECURITIES PORTFOLIOS may each invest in ASSET-BACKED DEBT SECURITIES. An
asset-backed security is another type of pass-through instrument that pays
interest based upon the cash flow of an underlying pool of assets, such as
automobile loans and credit card receivables.
OTHER INVESTMENTS
In addition to the above principal strategies, we may also use the following
investment strategies to increase the Portfolios' returns or protect their
assets if market conditions warrant.
MONEY MARKET INSTRUMENTS
Under normal circumstances, each Portfolio may invest up to 35% of its total
assets in MONEY MARKET INSTRUMENTS. Money-market obligations include the
commercial paper of U.S. and foreign corporations, short-term obligations of
U.S. and foreign banks, certificates of deposit and short-term obligations
issued or guaranteed by the U.S. Government or its agencies or a foreign
government. The U.S. GOVERNMENT MONEY MARKET PORTFOLIO will normally limit its
investments in these instruments to securities issued or guaranteed by the U.S.
Government or its agencies.
All Portfolios except the International Bond Portfolio will only
purchase money market instruments in one of the two highest short-term quality
ratings of a major rating service. The INTERNATIONAL BOND PORTFOLIO will only
purchase money market instruments in the highest short-term quality rating of a
major rating service. The Portfolios may also invest in money market instruments
that are not rated, but which we believe are of comparable quality to the
instruments described above.
28
<PAGE> 32
How the Portfolios Invest
U.S. GOVERNMENT SECURITIES
The Portfolios may invest in DEBT OBLIGATIONS ISSUED BY THE U.S. TREASURY.
Treasury securities have varying interest rates and maturities, but they are all
backed by the full faith and credit of the U.S. Government.
The Fund may also invest in other DEBT OBLIGATIONS ISSUED OR GUARANTEED
BY THE U.S. GOVERNMENT and government-related entities. Some of these debt
securities are backed by the full faith and credit of the U.S. Government, like
GNMA obligations. Debt securities issued by other government entities, like
obligations of FNMA and the Student Loan Marketing Association (SLMA or "Sallie
Mae"), are not backed by the full faith and credit of the U.S. Government.
However, these issuers have the right to borrow from the U.S. Treasury to meet
their obligations. In contrast, the debt securities of other issuers, like the
Farm Credit System, depend entirely upon their own resources to repay their
debt.
The U.S. Government sometimes "strips" its debt obligations into their
component parts: the U.S. Government's obligation to make periodic interest
payments and its obligation to repay the amount borrowed. These STRIPPED
SECURITIES are sold to investors separately. Stripped securities do not make
periodic interest payments. They are usually sold at a discount and then
redeemed for their face value on their maturity dates. These securities increase
in value when interest rates fall and lose value when interest rates rise.
However, the value of stripped securities generally fluctuates more in response
to interest rate movements than the value of traditional debt obligations. A
Portfolio may try to earn money by buying stripped securities at a discount and
either selling them after they increase in value or holding them until they
mature.
DEBT OBLIGATIONS
In addition to their principal investments, the Large Capitalization Value,
Small Capitalization Value and International Equity Portfolios may invest in
debt obligations issued by U.S. and foreign companies that are rated at least A
by S&P or by Moody's or the equivalent by another major rating service. These
Portfolios may also invest in asset-backed securities from time to time. See
"Asset-Backed Securities" above.
29
<PAGE> 33
How the Portfolios Invest
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we temporarily
invest up to 100% of a Portfolio's assets in money market instruments or U.S.
Government securities. Investing heavily in these securities limits our ability
to achieve capital appreciation, but can help to preserve a Portfolio's assets
when the markets are unstable.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The TOTAL RETURN BOND, INTERMEDIATE-TERM BOND and MORTGAGE BACKED SECURITIES
PORTFOLIOS may each enter into REVERSE REPURCHASE AGREEMENTS and DOLLAR ROLLS.
When a Portfolio enters into a reverse repurchase agreement, the Portfolio
borrows money on a temporary basis by selling a security with an obligation to
repurchase it at an agreed-upon price and time.
When a Portfolio enters into a dollar roll, the Portfolio sells
securities to be delivered in the current month and repurchases substantially
similar (same type and coupon) securities to be delivered on a specified future
date by the same party. The Portfolio is paid the difference between the current
sales price and the forward price for the future purchase as well as the
interest earned on the cash proceeds of the initial sale.
SHORT SALES
The MORTGAGE BACKED SECURITIES PORTFOLIO may make SHORT SALES of a security.
This means that the Portfolio may sell a security that it does not own when we
think the value of the security will decline. The Portfolio generally borrows
the security to deliver to the buyer in a short sale. The Portfolio must then
buy the security at its market price when the borrowed security must be returned
to the lender. Short sales involve additional costs and risks. The Portfolio
must pay the lender interest on the security it borrows, and the Portfolio will
lose money if the price of the security increases between the time of the short
sale and the date when the Portfolio replaces the borrowed security. The
Portfolio may also make SHORT SALES "AGAINST THE BOX." In a short sale against
the box, at the time of sale, the Portfolio owns or has the right to acquire the
identical security at no additional cost. When selling short against the box,
the Portfolio gives up the opportunity for capital appreciation in the security.
30
<PAGE> 34
How the Portfolios Invest
NON-PUBLICLY TRADED SECURITIES
The INTERNATIONAL EQUITY, INTERNATIONAL BOND, TOTAL RETURN BOND and
INTERMEDIATE-TERM BOND PORTFOLIOS may each invest in securities that are not
publicly traded. These securities are typically purchased and sold in privately
negotiated transactions.
REPURCHASE AGREEMENTS
Each Portfolio may also use REPURCHASE AGREEMENTS, where a party agrees to sell
a security to the Portfolio and then repurchase it at an agreed-upon price at a
stated time. This creates a fixed return for the Portfolio.
CONVERTIBLE SECURITIES
Each Portfolio other than the U.S. Government Money Market Portfolio may also
invest in CONVERTIBLE SECURITIES. These are securities -- like bonds, corporate
notes and preferred stock -- that we can convert into the company's common stock
or some other equity security.
DERIVATIVE STRATEGIES
The INTERNATIONAL EQUITY, INTERNATIONAL BOND, TOTAL RETURN BOND,
INTERMEDIATE-TERM BOND and MORTGAGE-BACKED SECURITIES PORTFOLIOS may each use
alternative derivative strategies to try to improve the Portfolio's returns or
protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Fund will not lose money. The derivatives in which these
Portfolios may invest include FUTURES, OPTIONS AND OPTIONS ON FUTURES. In
addition, each of these Portfolios except the Mortgage Backed Securities
Portfolio may enter into FOREIGN CURRENCY EXCHANGE CONTRACTS and purchase
COMMERCIAL PAPER THAT IS INDEXED TO FOREIGN CURRENCY EXCHANGE RATES. Because the
INTERNATIONAL EQUITY and INTERNATIONAL BOND PORTFOLIOS invest a large percentage
of their assets in securities denominated in foreign currencies, we may use
"currency hedges" to help protect the Portfolio's NAVs from declining if a
particular foreign currency were to decrease in value relative to the U.S.
dollar.
Derivatives involve costs and can be volatile. With derivatives, we try
to predict whether the underlying investment -- a security, market index,
currency, interest rate or some other benchmark -- will go up or down at some
future date. We may use derivatives to try to reduce risk or to increase return
consistent with a Portfolio's overall investment objective. We will
31
<PAGE> 35
How the Portfolios Invest
consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use may
not match a Portfolio's underlying holdings. For more information about these
strategies, see the SAI, "Description of the Portfolios, Their Investments and
Risks -- Risk Management and Return Enhancement Strategies."
ADDITIONAL STRATEGIES
The Portfolios may also use additional strategies, such as purchasing
debt securities on a WHEN-ISSUED or DELAYED-DELIVERY basis. When a Portfolio
makes this type of purchase, the price and interest rate are fixed at the time
of purchase, but delivery and payment for the debt obligations take place at a
later time. The Portfolio does not earn interest income until the date the debt
obligations are delivered.
The INTERNATIONAL BOND, TOTAL RETURN BOND, INTERMEDIATE-TERM BOND and
MORTGAGE BACKED SECURITIES PORTFOLIOS may each enter into INTEREST RATE SWAP
TRANSACTIONS. In a swap transaction, a Portfolio and another party "trade"
income streams. The swap is done to preserve a return or spread on a particular
investment or portion of a portfolio or to protect against any increase in the
price of securities the Portfolio anticipates purchasing at a later date.
The Portfolios also follow certain policies when they BORROW MONEY (the
International Bond, Total Return Bond, Intermediate-Term Bond and Mortgage
Backed Securities Portfolios can each borrow up to 33-1/3% of the value of its
total assets, while the other Portfolios may each borrow up to 20% of the value
of its total assets); and hold ILLIQUID SECURITIES (each Portfolio except the
U.S. Government Money Market Portfolio may hold up to 15% of its net assets, and
the U.S. Government Money Market Portfolio may hold up to 10% of its net assets,
in illiquid securities, including securities with legal or contractual
restrictions, those without a readily available market and repurchase agreements
with maturities longer than seven days). Each Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions see the SAI.
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<PAGE> 36
How the Portfolios Invest
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Portfolios is no
exception. Since a Portfolio's holdings can vary significantly from broad
market indices, performance of the Portfolios can deviate from performance of
the indices. This chart outlines the key risks and potential rewards of the
Portfolios' principal and other investments. See, too, "Description of the
Portfolios, Their Investments and Risks" in the SAI.
INVESTMENT TYPE
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
COMMON STOCK - Individual stocks could - Historically, stocks have outperformed
lose value other investments over the long term
Large Cap Growth, - The equity markets could go down, - Generally, economic growth means higher
Large Cap Value, resulting in a decline in value of corporate profits, which
Small Cap Growth and the Portfolio's investments leads to an increase in stock prices,
Small Cap Value known as capital appreciation
Portfolios - Companies that pay dividends may
not do so if they don't have profits - May be a source of dividend income
At least 80% or adequate cash flow
International - Changes in economic or political
Equity Portfolio conditions, both domestic and
international, may result in a
At least 65% decline in value of the Portfolio's
investments
- ----------------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION
STOCKS (MARKET CAPI- - Stocks of small companies are more - Highly successful smaller companies
TALIZATION BELOW volatile and may decline more can outperform larger ones
$1.5 BILLION) than those in S&P 500 Index
Small Cap Growth and - Small companies are more likely to
Small Cap Value reinvest earnings and pay dividends
Portfolios
- Changes in interest rates may affect
At least 65% the securities of small companies
more than the securities
International Equity of larger companies
Portfolio
Percentage varies
</TABLE>
33
<PAGE> 37
How the Portfolios Invest
INVESTMENT TYPE (CONT`D)
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
DEBT OBLIGATIONS - Credit risk -- risk that the - Regular interest income
borrower can't pay back the
Large Cap Value and money borrowed or make interest - The U.S. Government guarantees
Small Cap Value payments interest and principal payments
Portfolios on certain securities
- Market risk -- risk that bonds
Up to 20% may lose value in the market - Generally more secure than stock
because interest rates change since companies must pay their
International Equity or there is a lack of confidence debts before they pay dividends
Portfolio in the borrower
[Up to 35%]
International Bond
Portfolio
[At least 75%]
Total Return Bond
and Intermediate-Term
Bond Portfolios
At least 90%
Mortgage Backed
Securities Portfolio
At least 65%
- -----------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES - Foreign markets, economies - Investors can participate in
and political systems may the growth of foreign markets
International Equity not be as stable as in the and companies operating in
and International U.S., particularly those in those markets
Bond Portfolios developing countries
- Changing value of foreign
At least 65% - Currency risk -- changing currencies
values of foreign currencies
Total Return Bond and - Opportunities for diversification
Intermediate-Term Bond - May be less liquid than
Portfolios U.S. stocks and bonds
Up to 20% - Differences in foreign laws,
accounting standards and
public information, custody
and settlement practices
- Year 2000 conversion may be
more of a problem for some
foreign issuers
</TABLE>
34
<PAGE> 38
How the Portfolios Invest
Investment Type
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
U.S. GOVERNMENT - Not all are insured or guaranteed - Regular interest income
SECURITIES by the government, but only by
the issuing agency - Generally more secure than lower
U.S. Government Money quality debt securities and equity
Market Portfolio - Limits potential for capital securities
appreciation
Up to 100% - May preserve the Portfolio's
- See Market risk assets
Other Portfolios
Up to 100% on
a temporary basis
- -----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET - Limits potential for capital - May preserve the Fund's
INSTRUMENTS appreciation assets
U.S. Government Money - See Credit risk and Market risk.
Market Portfolio
Up to 100%
Other Portfolios
Up to 100% on
a temporary basis
- -----------------------------------------------------------------------------------------------------------------------------
HIGH YIELD SECURITIES - Higher credit risk - May offer higher interest
(JUNK BONDS) income than higher quality
- Higher market risk debt securities.
International Bond - May be more illiquid (harder to
Portfolio value and sell), in which case
valuation would depend more on
Up to 25% investment adviser's judgment than
is generally the case with
Total Return Bond higher-rated securities
and Intermediate-Term
Bond Portfolios
Up to 10%
</TABLE>
35
<PAGE> 39
How the Portfolios Invest
Investment Type
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
MORTGAGE-RELATED - Prepayment risk -- risk that the - Regular interest income
SECURITIES underlying mortgage may be prepaid
partially or completely, generally - The U.S. Government guarantees
International Bond, during periods of falling interest interest and principal payments on
Total Return Bond rates, which could adversely certain securities
and Intermediate-Term affect yield to maturity and
Bond Portfolios require the Portfolio to reinvest - May benefit from security interest
in lower-yielding securities. in real estate collateral
Percentage varies
- Credit risk -- that the underlying - Pass-through instruments provide
Mortgage Backed mortgages will not be paid by greater diversification than
Securities Portfolio debtors or by credit insurers or direct ownership of loans
guarantors of such instruments.
Up to 100% Some private mortgage securities
are unsecured or secured by
lower-rated insurers or guarantors
and thus may involve greater risk
- Market risk
- -----------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED - Prepayment risk - Regular interest income
SECURITIES
- The security interest in the - Prepayment risk is generally lower
Large Cap Value, underlying collateral is not as than with mortgage-related
Small Cap Value, great as with mortgage-related securities
International Bond, securities
Total Return Bond, - Pass-through instruments provide
Intermediate-Term - Credit risk -- that the underlying greater diversification than
Bond and Mortgage receivables will not be paid by direct ownership of loans
Backed Securities debtors or by credit insurers or
Portfolios guarantors of such instruments.
Some asset-backed securities are
Percentage varies unsecured or secured by
lower-rated insurers or guarantors
and thus may involve greater risk
- Market risk
</TABLE>
36
<PAGE> 40
How the Portfolios Invest
Investment Type
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
DERIVATIVES - Derivatives such as futures and - The Portfolio could make money and
options may not fully offset the protect against losses if the
All Portfolios except the underlying positions and this investment analysis proves correct
U.S. Government Money could result in losses to the
Market Portfolio Portfolio that would not have - One way to manage the Portfolio's
otherwise occurred risk/return balance by
Percentage varies locking in the value of an
- Derivatives used for risk investment ahead of time
management may not have the
intended effects and may result in
losses or missed opportunities
- The counterparty to a derivatives
contract could default
- Certain types of derivatives
involve costs to the Portfolio
which can reduce returns
- -----------------------------------------------------------------------------------------------------------------------------
REVERSE REPURCHASE - Use of such instruments and - Use of instruments may magnify
AGREEMENTS AND strategies may magnify underlying underlying investment gains
DOLLAR ROLLS investment losses
Total Return Bond, - Investment cost may exceed
Intermediate-Term potential underlying investment
Bond and Mortgage gains
Backed Securities
Portfolios
Up to 33 1/3%
WHEN-ISSUED AND
DELAYED DELIVERY
SECURITIES
All Portfolios
Percentage varies
- -----------------------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES - May be difficult to value - May offer a more attractive yield
precisely or potential for growth than more
U.S. Government Money widely traded securities
Market Portfolio - May be difficult to sell at the
time or price desired
Up to 10% of net assets
Other Portfolios
Up to 15% of net assets
</TABLE>
37
<PAGE> 41
How the Trust is Managed
MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077
Under a management agreement with the Trust, PIFM manages the Trust's investment
operations, administers its business affairs and is responsible for supervising
the sub-adviser(s) (each an Adviser) for each of the Portfolios. For the fiscal
year ended December 31, 1998, the Fund paid PIFM the management fees, and PIFM
paid each Portfolio's Adviser(s) the sub-advisory fees, set forth in the table
below for each of the Portfolios.
<TABLE>
<CAPTION>
ANNUALIZED
PERCENTAGE
OF AVERAGE
PORTFOLIO NET ASSETS AMOUNT
<S> <C> <C>
Large Capitalization Growth Portfolio .60% $--
Large Capitalization Value Portfolio .60% --
Small Capitalization Growth Portfolio .60% --
Small Capitalization Value Portfolio .60% --
International Equity Portfolio .70% --
International Bond Portfolio .50% --
Total Return Bond Portfolio .45% --
Intermediate-Term Bond Portfolio .45% --
Mortgage Backed Securities Portfolio .45% --
U.S. Government Money Market Portfolio .25% --
</TABLE>
Subject to the supervision of the Board of Trustees of the Trust, PIFM is
responsible for conducting the initial review of prospective Advisers for the
Trust. In evaluating a prospective Adviser, PIFM considers many factors,
including the firm's experience, investment philosophy and historical
performance. PIFM is also responsible for monitoring the performance of the
Trust's Advisers on an ongoing basis.
PIFM and the Trust operate under an exemptive order (the Order) from the
Securities and Exchange Commission that generally permits PIFM to enter into or
amend agreements with Advisers without obtaining shareholder approval each time.
This authority is subject to certain conditions, including the requirement that
the Board of Trustees approve any new or amended agreements with Advisers.
Shareholders of each Portfolio still have the right to terminate these
agreements for the Portfolio at any time by a vote of the majority of
outstanding shares of the Portfolio. The Trust will notify
38
<PAGE> 42
How the Trust is Managed
shareholders of any new Advisers or material amendments to advisory agreements
made pursuant to the Order. On October 30, 1996, the shareholders of the Trust
voted to allow the Trust and PIFM to operate under the Order.
As of April __, 1999, PIFM served as the Manager to all __ of the Prudential
Mutual Funds, and as Manager or administrator to closed-end investment
companies, with aggregate assets of approximately $__ billion.
ADVISERS AND PORTFOLIO MANAGERS
INTRODUCTION
The Advisers are responsible for the day-to-day management of each Portfolio, or
portion thereof, that it manages, subject to the supervision of PIFM and the
Board of Trustees. The Advisers are compensated by PIFM, not the Trust.
The LARGE CAPITALIZATION GROWTH, LARGE CAPITALIZATION VALUE, SMALL
CAPITALIZATION GROWTH and SMALL CAPITALIZATION VALUE PORTFOLIOS each have two
Advisers, each of whom manages approximately 50% of the Portfolio's assets. For
each of these Portfolios, PIFM hired two Advisers with different investment
philosophies. PIFM believes that at any given time, certain investment
philosophies will be more successful than others and that a combination of
different investment approaches may benefit these Portfolios and help reduce
their volatility. PIFM will periodically rebalance these Portfolios to maintain
the approximately equal allocation of their assets between the two Advisers.
Reallocations may result in higher portfolio turnover and correspondingly higher
transactional costs. In addition, Portfolios with two Advisers may experience
wash transactions -- where one Adviser buys a security when the other one sells
it. When this happens, the Portfolio's position in that security remains
unchanged, but the Portfolio has to bear additional transaction costs.
The following sets forth information about each of the Trust's Advisers:
LARGE CAPITALIZATION GROWTH PORTFOLIO
COLUMBUS CIRCLE INVESTORS (CCI) AND OAK ASSOCIATES, LTD. (OAK) are the Advisers
for the Large Capitalization Growth Portfolio. For their services as Advisers,
CCI and Oak each receive a fee from PIFM at the annual rate of .30% of the
average daily net assets of the portion of the Portfolio it manages.
CCI is a Delaware partnership and a subpartnership of PIMCO Advisors L.P., a
leading institutional equity investment firm. As of December 31, 1998,
39
<PAGE> 43
How the Trust is Managed
CCI had approximately $__ billion in assets under management for corporate,
non-profit, government, union and mutual fund clients. The address of CCI is
Metro Center, One Station Place, 8th Floor, Stamford, Connecticut 06902.
ANTHONY RIZZA, a Managing Director of CCI, has managed the assets of the
Portfolio since 1995. Mr. Rizza is a Chartered Financial Analyst and a member of
the Hartford Society of Security Analysts. He has been a portfolio manager with
CCI since 1991.
OAK has specialized in large cap equity investing since it was founded in
1985. Oak provides investment management services to both individual and
institutional clients. As of December 31, 1998, Oak had more than $__ billion in
assets under management. Oak is an Ohio limited liability company. The address
of Oak is 3875 Embassy Parkway, Suite 250, Akron, Ohio 44333. James D.
Oelschlager owns a controlling interest (99%) in Oak.
JAMES D. OELSCHLAGER, President of Oak since 1985, has managed the assets of
the Portfolio since 1995. DONNA BARTON, MARGARET BALLINGER and DOUGLAS MACKAY
assist Mr. Oelschlager in managing the Portfolio's assets. Ms. Barton and Ms.
Ballinger have been with Oak since 1985, and Mr. MacKay has been a research
analyst for Oak since 1990.
LARGE CAPITALIZATION VALUE PORTFOLIO
INVESCO CAPITAL MANAGEMENT, INC. (INVESCO) AND HOTCHKIS AND WILEY are the
Advisers for the Large Capitalization Value Portfolio. For their services as
Advisers, INVESCO and Hotchkis and Wiley each receive a fee from PIFM at the
annual rate of .30% of the average daily net assets of the portion of the
Portfolio it manages.
INVESCO is a Delaware corporation and an indirect, wholly-owned subsidiary
of AMVESCAP PLC, a global money management firm. As of December 31, 1998,
INVESCO had approximately $__ billion in assets under management for clients
located throughout the U.S., Europe and Japan. The address of INVESCO is 1315
Peachtree Street, Suite 500, Atlanta, Georgia 30309.
NIELSON BROWN, a Vice President of INVESCO, has managed the assets of the
Portfolio since its inception. Mr. Brown is a Chartered Financial Analyst and a
member of the Atlanta Society of Financial Analysts. He has been a portfolio
manager with INVESCO since 1989.
40
<PAGE> 44
How the Trust is Managed
HOTCHKIS AND WILEY is a division of The Merrill Lynch Capital Management
Group of Merrill Lynch Asset Management, L.P. Hotchkis and Wiley has specialized
in large-cap equity investing since it was formed in 1980. As of December 31,
1998, Hotchkis and Wiley had approximately $__ billion in assets under
management for corporate, public, endowment and foundation and mutual fund
clients. The address of Hotchkis and Wiley is 800 West Sixth Street, Fifth
Floor, Los Angeles, California 90017.
ROGER DEBARD, Managing Director of Hotchkis and Wiley, has managed the
assets of the Portfolio since 1995. Mr. DeBard is a Chartered Financial Analyst
and has been a portfolio manager for Hotchkis and Wiley since _____.
SMALL CAPITALIZATION GROWTH PORTFOLIO
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT (NICHOLAS-APPLEGATE) and INVESTMENT
ADVISERS, INC. (IAI) are the Advisers for the Small Capitalization Growth
Portfolio. For their services as Advisers, Nicholas-Applegate and IAI each
receive a fee from PIFM at the annual rate of .30% of the average daily net
assets of the portion of the Portfolio it manages.
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
Nicholas-Applegate Capital Management Holdings, Inc., a California corporation
controlled by Arthur E. Nicholas. As of December 31, 1998, Nicholas-Applegate
managed a total of approximately $__ billion in 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 address of Nicholas-Applegate is 600 West Broadway, 29th Floor,
San Diego, California 92101.
CATHERINE S. SOMHEGYI, Chief Investment Officer -- Global Equity of
Nicholas-Applegate, oversees the team which has managed the assets of the
Portfolio since its inception.
IAI has provided investment advice to corporate, public, jointly-trusteed,
endowment and foundation and mutual fund clients since it was formed in 1947.
IAI is a wholly-owned subsidiary of IAI Holdings, Inc., which is indirectly
wholly-owned by Lloyds TSB Group plc. As of December 31, 1998, IAI had
approximately $__ billion in assets under management. The address of IAI is 3700
First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440.
41
<PAGE> 45
How the Trust is Managed
MARTIN J. CALIHAN, Vice President of IAI, has managed the assets of the
Portfolio since 1995. Mr. Calihan has been with IAI since 1992 and has managed
portfolios for IAI since 1995.
SMALL CAPITALIZATION VALUE PORTFOLIO
LAZARD ASSET MANAGEMENT (LAM) AND WOOD, STRUTHERS & WINTHROP MANAGEMENT CORP.
(WSW) are the Advisers for the Small Capitalization Value Portfolio. For their
services as Advisers, LAM and WSW each receive a fee from PIFM at the annual
rate of .30% of the average daily net assets of the portion of the Portfolio it
manages.
LAM is a division of Lazard Freres & Co. LLC (Lazard Freres), a New York
limited liability company. LAM provides investment management services to both
individual and institutional clients. As of December 31, 1998, LAM had
approximately $__ billion in assets under management. The address of LAM is 30
Rockefeller Plaza, New York, New York 10112.
HERBERT W. GULLQUIST and EILEEN D. ALEXANDERSON have managed the assets of
the Portfolio since 1995. Mr. Gullquist, a Managing Director and Vice Chairman
of Lazard Freres and Chief Investment Officer of LAM, has been a portfolio
manager with LAM since 1982. Ms. Alexanderson, a Managing Director of Lazard
Freres and a Certified Financial Analyst, has been a portfolio manager with LAM
since 1979.
WSW was founded in 1871 and has specialized in small-cap equity investing
since 1967. WSW provides investment management services to both individual and
institutional clients. As of December 31, 1998, WSW had approximately $___
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), ___% 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
___% of DLJ Inc.Approximately ___% 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.
42
<PAGE> 46
How the Trust is Managed
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 ____ million policyholders. The address of WSW is 277 Park Avenue,
New York, New York 10172.
JAMES A. ENGLE and ROGER W. VOGEL have managed the assets of the Portfolio
since 1995. Mr. Engle has been the Chief Investment Officer of WSW since 1988.
Mr. Vogel, who is Chief Investment Officer at WSW for equity investments, has
been a portfolio manager with WSW since 1993.
INTERNATIONAL EQUITY PORTFOLIO
LAM is the Adviser to the International Equity Portfolio. For its services as
Adviser, LAM receives a fee from PIFM at the annual rate of .40% of the
Portfolio's average daily net assets.
HERBERT W. GULLQUIST and JOHN R. REINSBERG have managed the Portfolio since
its inception. Mr. Gullquist, a Managing Director and Vice Chairman of Lazard
Freres and Chief Investment Officer of LAM, has been a portfolio manager with
LAM since 1982. Mr. Reinsberg is a Managing Director of Lazard Freres and has
been a portfolio manager with LAM since 1991.
INTERNATIONAL BOND PORTFOLIO
DELAWARE INTERNATIONAL ADVISERS LTD. (DIAL) is the Adviser to the International
Bond Portfolio. For its services as Adviser, DIAL receives a fee from PIFM at
the annual rate of .30% of the Portfolio's average daily net assets.
DIAL has specialized in international and global investing since 1990. DIAL
is affiliated with Delaware Management Company and is an indirect, wholly-owned
subsidiary of Lincoln National Corporation, a diversified financial services
organization. As of December 31, 1998, DIAL had approximately $__ billion in
assets under management. The address of DIAL is 80 Cheapside, Third Floor,
London, EC2V 6EE, United Kingdom.
IAN G. SIMS, Deputy Managing Director of DIAL and Chief Investment Officer
for Global Fixed Income Investments, has headed the team managing the Portfolio
since 1997. The other members of the portfolio management team are W. HYWEL
MORGAN, CHRISTOPHER A. MOTH and JOANNA BATES, all of whom are Senior Portfolio
Managers with DIAL.
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<PAGE> 47
How the Trust is Managed
TOTAL RETURN BOND PORTFOLIO AND INTERMEDIATE-TERM BOND PORTFOLIO
PACIFIC INVESTMENT MANAGEMENT COMPANY (PIMCO) is the Adviser to the Total Return
Bond and Intermediate-Term Bond Portfolios. For its services as Adviser, PIMCO
receives a fee from PIFM at the annual rate of .25% of the average daily net
assets of each Portfolio.
PIMCO is a subsidiary of PIMCO Advisors L.P. (PIMCO Advisors). The general
partners of PIMCO Advisors are PIMCO Partners, G.P. and PIMCO Advisors Holdings
L.P. (PAH). PIMCO Partners, G.P. is a general partnership between PIMCO Holding
LLC, a Delaware limited liability company and an indirect wholly-owned
subsidiary of Pacific Life Insurance Company, and PIMCO Partners LLC, a
California limited liability company controlled by the PIMCO Managing Directors.
PIMCO Partners, G.P. is the sole general partner of PAH. As of December 31,
1998, PIMCO had approximately $__ billion of assets under management. The
address of PIMCO is 840 Newport Center Drive, Newport Beach, California 92660.
JOHN L. HAGUE, a Managing Director of PIMCO, has managed the Portfolios
since their inception. Mr. Hague has been a portfolio manager with PIMCO and its
predecessor since 1989.
MORTGAGE BACKED SECURITIES PORTFOLIO AND
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
WELLINGTON MANAGEMENT COMPANY, LLP (WMC) is the Adviser to the Mortgage Backed
Securities and U.S. Government Money Market Portfolios. For its services as
Adviser, WMC receives a fee from PIFM at the annual rate of .25% and .125% of
the average daily net assets of the Mortgage Backed Securities and U.S.
Government Money Market Portfolios, 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 provides investment management services to investment companies,
employee benefit plans, endowment funds, foundations and other institutions and
individuals. As of December 31, 1998, WMC had approximately $___ billion of
assets under management. The address of WMC is 75 State Street, Boston,
Massachusetts 02109.
THOMAS L. PAPPAS, a Senior Vice President of WMC, has managed the Mortgage
Backed Securities Portfolio since its inception. Mr. Pappas has been a portfolio
manager with WMC since 1987. TIMOTHY E. SMITH, a Vice President of WMC, has
managed the U.S. Government Money Market Portfolio since 1997. Mr. Smith has
been a portfolio manager with WMC since 1992.
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<PAGE> 48
How the Trust is Managed
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Trust's
shares under a Distribution Agreement with the Trust.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Trust and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although at this time,
there can be no assurance that there will be no adverse impact on the Trust, the
Manager, the Advisers, the Distributor, the Transfer Agent and the Custodian
have advised the Trust that they have been actively working on necessary changes
to their computer systems to prepare for the year 2000. The Trust and its
Trustees receive and have received since early 1998 satisfactory quarterly
reports from the principal service providers as to their preparations for year
2000 readiness, although there can be no assurance that the service providers
(or other securities market participants) will successfully complete the
necessary changes in a timely manner or that there will be no adverse impact on
the Trust. Moreover, the Trust at this time has not considered retaining
alternative service providers or directly undertaken efforts to achieve year
2000 readiness, the latter of which would involve substantial expenses without
an assurance of success.
Additionally, issuers of securities generally as well as those purchased by
the Portfolios may confront Year 2000 compliance issues which, if material and
not resolved, could have an adverse impact on securities markets and/or a
specific issuer's performance and result in a decline in the value of the
securities held by the Portfolios.
45
<PAGE> 49
PORTFOLIO DISTRIBUTIONS AND TAX ISSUES
Investors who buy shares of the Trust should be aware of some important tax
issues. For example, each Portfolio distributes DIVIDENDS and CAPITAL GAINS, if
any, to shareholders. These distributions are subject to taxes, unless you hold
your shares in a 401(k) plan, an Individual Retirement Account (IRA) or some
other qualified tax-deferred plan or account.
Also, if you sell shares of a Portfolio for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless your shares are
held in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
Each Portfolio distributes DIVIDENDS of any net investment income to
shareholders on a regular basis as set forth below.
- --------------------------------------------------------------------------------
PORTFOLIO DIVIDENDS
- --------------------------------------------------------------------------------
International Bond, Total Return Bond,
Intermediate-Term Bond, Mortgage Backed Securities Declared daily,
and U.S. Government Money Market Portfolios paid monthly
Large Capitalization Growth, Large
Capitalization Value, Small Capitalization Growth,
Small Capitalization Value and International Declared and
Equity Portfolios paid annually
For example, if a Portfolio owns ACME Corp. stock and the stock pays a dividend,
the Portfolio will pay out a portion of this dividend to its shareholders,
assuming the Portfolio's income is more than its costs and expenses. The
dividends you receive from each Portfolio will be taxed as ordinary income,
whether or not they are reinvested in the Portfolio.
For Portfolios that invest in foreign securities, the amount of income
available for distribution to shareholders will be affected by any foreign
currency gains or losses generated by the Fund and cannot be predicted. This
fact, coupled with the different tax and accounting treatment of certain
currency gains and losses, increases the possibility that distributions, in
whole or in part, may be a return of capital to shareholders.
Each Portfolio also distributes CAPITAL GAINS to shareholders -- typically
once a year --which are generated when the Portfolio sells its assets for a
profit. For example, if a Portfolio bought 100 shares of ACME Corp. stock
46
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PORTFOLIO DISTRIBUTIONS AND TAX ISSUES
for a total of $1,000 and later sold the shares for a total of $1,500, the
Portfolio has capital gains of $500, which it will pass on to shareholders
(assuming the Portfolio's total gains are greater than any losses it may have).
Capital gains are taxed differently depending on how long the Portfolio holds
the security -- the longer a security is held before it is sold, the lower the
capital gains tax rate, up to a point.
For your convenience, a Portfolio's distributions of dividends and capital
gains are AUTOMATICALLY REINVESTED in the Portfolio without any sales charge. If
you ask us to pay the distributions in cash, we will send you a check if your
account is with the Transfer Agent. Otherwise, if your account is with a broker
you will receive a credit to your account. Shareholders participating in the
Target Program and investing through a Plan account are not eligible to receive
dividends and capital gains distributions in cash. Whether you receive these
distributions in additional shares or in cash, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or
account.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of a Portfolio as part of a qualified tax-deferred plan or account, your taxes
are deferred, so you will not receive a Form 1099. However, you will receive a
Form 1099 when you take any distributions from your qualified tax-deferred plan
or account.
Portfolio distributions are generally taxable to you in the calendar year
they are received, except when we declare certain dividends in the fourth
quarter and actually pay them in January of the following year. In such cases,
the dividends are treated as if they were paid on December 31 of the prior year.
Corporate shareholders are eligible for the 70% dividends-received deduction for
certain dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Trust with your tax
identification number and certifications as to your tax status, and you fail to
do this, we will withhold and pay to the U.S. Treasury 31% of your distributions
and sale proceeds. If you are subject to backup withholding, we will withhold
and pay to the
47
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Portfolio Distributions and Tax Issues
U.S. Treasury 31% of your distributions. Dividends of net investment income and
short-term capital gains paid to a nonresident foreign shareholder generally
will be subject to a U.S. withholding tax of 30%. This rate may be lower,
depending on any tax treaty the U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of a Portfolio just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day and
soon thereafter received a distribution. That is not so because when dividends
are paid out, the value of each share of the Portfolio decreases by the amount
of the dividend and the market changes (if any) to reflect the payout. The
distribution you receive makes up for the decrease in share value. However, the
timing of your purchase does mean that part of your investment came back to you
as taxable income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts --available to certain taxpayers beginning in 1998
- -- contributions are not tax deductible, but distributions from the plan may be
tax-free. Please contact your financial adviser for information on a variety of
retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of a Portfolio for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified
tax-deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of a Portfolio for a loss,
RECEIPTS FROM SALES
CAPITAL GAIN +$
(TAXES OWED)
OR
CAPITAL LOSS -$
(OFFSET AGAINST GAIN)
48
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Portfolio Distributions and Tax Issues
you may have a capital loss, which you may use to offset certain capital gains
you have.
EXCHANGING your shares of a Portfolio for the shares of another Portfolio of
the Trust is considered a sale for tax purposes. In other words, it's a "taxable
event." Therefore, if the shares you exchanged have increased in value since you
purchased them, you have capital gains, which are subject to the taxes described
above.
Any gain or loss you may have from selling or exchanging Portfolio shares
will not be reported on the Form 1099; however, proceeds from the sale or
exchange will be reported on Form 1099-B. Therefore, unless you hold your shares
in a qualified tax-deferred plan or account, you or your financial adviser
should keep track of the dates on which you buy and sell -- or exchange --
Portfolio shares, as well as the amount of any gain or loss on each transaction.
For tax advice, please see your tax adviser.
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How to Buy, Sell and
Exchange Shares of the Trust
INTRODUCTION
Shares of the Portfolios may be purchased by Target Program participants. Shares
of the Portfolios are also offered to certain investors who do not participate
in the Target Program. These investors include banks, trust companies and other
investment advisory services and certain fee-based programs sponsored by
Prudential Securities and its affiliates for which the Portfolios are available
investment options. Participants in these programs would not have to pay the
Target Program fee, but may have to pay different fees.
THE TARGET PROGRAM
Class Z shares of the Portfolios are offered to participants in the Target
Program. The Target Program is an investment advisory service that provides each
participant with recommendations on how to allocate the participant's assets
among the Portfolios. Prudential Securities identifies each participant's
investment objectives, preferences and risk tolerance by evaluating the
participant's responses to a Questionnaire. Financial advisors of Prudential
Securities will help Target Program participants to complete this Questionnaire.
Prudential Securities then uses an investment profile matrix and an asset
allocation methodology developed by Ibbotson Associates, Inc., an investment
consulting firm, to translate the investment needs, preferences and attitudes
expressed in each participant's Questionnaire into a recommended allocation of
the participant's assets among the Portfolios. Prudential Securities provides
each Target Program participant with a written Evaluation that sets forth its
recommendation. Under the Target Program, Prudential Securities provides
recommendations, but does not have the authority to make investment decisions
for any participant. Target Program participants must make their own investment
decisions and may implement or disregard any of Prudential Securities' asset
allocation recommendations.
Prudential Securities will provide all Target Program participants with a
quarterly account statement (Quarterly Account Monitor), which provides a
comprehensive review of a participant's investment performance. The Quarterly
Account Monitor also includes commentaries from the Advisers, as well as
information on dividends, distributions and portfolio transactions.
Financial advisors of Prudential Securities may review a participant's
Evaluation and Quarterly Account Monitors periodically with the participant and
may arrange for Prudential Securities to prepare a new Evaluation for the
participant based on changes in the participant's financial status.
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How to Buy, Sell and
Exchange Shares of the Trust
Target Program Fees. Prudential Securities receives a quarterly fee for the
services it provides to Target Program investors. These fees are in addition to
the expenses of the Portfolios. Financial advisors receive a portion of the
Target Program fees. The quarterly Target Program fee is calculated as a
percentage of a participant's investment in the Portfolios. The fee for
investments in the equity Portfolios differs from the fees for investments in
the fixed income Portfolios. In addition, the fees charged to individual
retirement accounts and employee benefit plans (collectively, Plans) are
different than the fees charged to non-Plan investors. This table shows the
maximum annual Target Program fees as a percentage of a participant's average
daily net assets invested in the Portfolios.
<TABLE>
<CAPTION>
MAXIMUM ANNUAL TARGET PROGRAM FEES
NON-PLAN INVESTORS PLAN INVESTORS
<S> <C> <C>
Amounts invested in Large Capitalization 1.5% 1.25%
Growth, Large Capitalization Value, Small
Capitalization Growth, Small Capitalization
Value and International Equity Portfolios
Amounts invested in International Bond, 1.0% 1.35%
Total Return Bond, Intermediate-Term Bond,
Mortgage Backed Securities and U.S.
Government Money Market Portfolios
</TABLE>
The maximum Target Program fees may be changed by Prudential Securities upon
notice to Target Program participants. A participant may negotiate lower fees if
the participant's investment exceeds $100,000. Fiduciary accounts that have a
common trustee (unaffiliated with Prudential Securities) may be aggregated for
purposes of determining whether the Target Program fee may be subject to
negotiation, [provided that the aggregate investment of such accounts in the
Target Program is at least $250,000]. Prudential Securities will consider a
number of factors in negotiating fees for such a participant, including the size
of the participant's account and other accounts with Prudential Securities.
Before you open a Target Program account, you must notify Prudential Securities
of any factors that may make you eligible for a reduction of the Target Program
fee. Independent plan fiduciaries should consider, in a prudent manner, the
relationship of Target Program fees to be paid by their Plans along with the
level of services provided by Prudential Securities.
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How to Buy, Sell and
Exchange Shares of the Trust
Because the quarterly Target Program fee paid by non-Plan investors for
investments in equity Portfolios is higher than the fee for investments in fixed
income Portfolios, Prudential Securities receives higher compensation if a
non-Plan investor chooses to invest in equity Portfolios instead of fixed income
Portfolios. As a result, Prudential Securities will be presented with a conflict
of interest when it makes recommendations to non-Plan investors on specific
Portfolios in which to invest.
You may elect to have your Target Program fee automatically deducted from
your securities account or billed to you quarterly. All Target Program fees will
be reflected in your monthly account statement. The initial fee is based on the
value of your initial investment in the Portfolios. The initial fee covers the
period from your initial purchase through the last day of the calendar quarter
and is pro rated accordingly. After you pay the initial fee, the quarterly
Target Program fee covers the calendar quarter during which you pay the fee. If
you choose to be billed, you must pay the initial fee by check within 45
calendar days after your initial purchase.
If you choose to have the Target Program fee automatically deducted from
your account, the fee will be deducted on the sixth business day of each
calendar quarter. If you don't have sufficient liquid assets (e.g., cash or
non-Target money market fund shares) in your account to pay the fee, Prudential
Securities will automatically redeem an appropriate number of shares of the
Portfolios you own to cover the fee. If you are a non-Plan investor, Prudential
Securities would redeem shares of the Portfolio in which you have the largest
investment to cover the shortfall. If you invest through a Plan, Prudential
Securities would redeem shares from all Portfolios in which you invest on a pro
rata basis to cover the shortfall.
If you choose to be billed for the Target Program fee, you must pay the fee
by check within 45 days after the end of the last calendar quarter. If you do
not pay the fee when it is due, Prudential Securities will automatically deduct
the fee from your account. If you don't have sufficient liquid assets to cover
the fee, Prudential Securities will automatically redeem an appropriate number
of shares of the Portfolios you own to cover the shortfall.
The following investors may participate in the Target Program without paying
the quarterly fee:
- banks, trust companies and other investment advisory services and
certain fee-based programs sponsored by Prudential Securities and its
affiliates for which the Portfolios are an available option
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How to Buy, Sell and
Exchange Shares of the Trust
- Trustees of the Trust
- employees of Prudential Securities, PIFM and their subsidiaries and
family members of such persons maintaining an employee-related account
at Prudential Securities
In addition, the Target Program fee may be reduced or waived for the
following investors:
- certain banks, trust companies or unaffiliated investment advisers who
maintain accounts with Prudential Securities
- personal trusts that participate in The Prudential Bank Personal Trust
Program administered by Prudential Bank & Trust (as trustee) or its
affiliates.
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
To purchase shares of the Portfolios through the Target Program, you must open a
securities account with Prudential Securities or its affiliates. You must pay
for Portfolio shares 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. If you already have an account with
Prudential Securities, you can pay for Portfolio shares by using free credit
cash balances in your account or through the redemption of non-Target money
market fund shares held in your account.
Minimum Investment Requirements. The minimum initial investment for Plan
accounts is $10,000. The minimum initial investment for non-Plan accounts is
$25,000.
The minimum initial investment is reduced to $10,000 for the following
non-Plan investors:
- custodial accounts established under the Uniform Gifts to Minors Act
- Trustees of the Trust (except that the minimum initial investment
requirement is waived entirely for Trustees who are paid under a
deferred fee agreement with the Trust)
- employees of Prudential Securities, PIFM and their subsidiaries and
family members of such persons maintaining an employee-related account
at Prudential Securities
Fiduciary accounts that have a common trustee (unaffiliated with Prudential
Securities) may be aggregated for purposes of meeting the initial
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How to Buy, Sell and
Exchange Shares of the Trust
minimum investment requirement, provided that the aggregate investment of such
accounts in the Target Program is at least $250,000. The minimum investment
requirement may also be reduced or waived for certain start-up Plans that have
been in existence for less than one year and for certain transfers of assets
from asset allocation programs involving investments in other investment
companies. Prudential Securities may also reduce the minimum initial investment
requirement for any account in its discretion. Before you invest in the
Portfolios, you must notify Prudential Securities of any factors that may make
you eligible for a waiver of the minimum investment requirements.
STEP 2: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of a Portfolio is based on the share value. The
share value of a mutual fund -- known as the NET ASSET VALUE or NAV -- is
determined by a simple calculation -- it's the total value of the Portfolio
(assets minus liabilities) divided by the total number of shares outstanding.
For example, if the value of the investments held by Fund XYZ (minus its
expenses) is $1,000 and there are 100 shares of Fund XYZ owned by shareholders,
the price of one share of the fund -- or the NAV -- is $10 ($1,000 divided by
100). Portfolio securities are valued based upon market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Trust's Board. Most national newspapers report the NAVs of
most mutual funds, which allows investors to know the price of mutual funds
daily.
In determining the NAV of the U.S. GOVERNMENT MONEY MARKET PORTFOLIO, the
Trust values the Portfolio's securities using the amortized cost method. The
Portfolio seeks to maintain an NAV of $1 per share at all times.
We determine the NAV of each Portfolio except the U.S. Government Money
Market Portfolio once each business day at 4:15 p.m. New York time (4:30 p.m.
for the U.S. Government Money Market Portfolio) on days that the New York Stock
Exchange is open for trading. We do not determine NAV on days when we have not
received any orders to purchase, sell or exchange, or when changes in the value
of a Portfolio's investments do not materially affect its NAV.
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How to Buy, Sell and
Exchange Shares of the Trust
WHAT PRICE WILL YOU PAY FOR SHARES OF THE PORTFOLIOS?
You will pay the NAV next determined after we receive your order to purchase.
STEP 3: ADDITIONAL SHAREHOLDER SERVICES
As a shareholder of the Trust, each Target Program participant can take
advantage of the following services and privileges:
The PruTector Program. Optional group term life insurance -- which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market declines -- is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Portfolios. To reduce fund expenses, we will
send one annual shareholder report, one semi-annual shareholder report and one
annual prospectus per household, unless you instruct us otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Trust for cash (in the form of a check) at any
time, subject to certain restrictions, by contacting your Prudential Securities
financial advisor or Prusec registered representative.
When you sell shares of a Portfolio -- also known as redeeming your shares
- -- the price you will receive will be the NAV next determined after Prudential
Securities or Prusec receives your order to sell.
Generally, we will pay you for the shares that you sell within seven days
after Prudential Securities [or Prusec] receives your sell order. If you are
selling shares you recently purchased with a check, we may delay your sale until
your check clears, which can take up to 10 days.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the
Portfolios, or when we may delay paying you the proceeds from a sale. This may
happen during unusual market conditions or emergencies when a Portfolio can't
determine the value of its assets or sell its holdings. If you invest
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How to Buy, Sell and
Exchange Shares of the Trust
by check, we will only process your redemptions after your check clears. This
can take up to 10 calendar days. You can avoid delay if you purchase shares by
wire, certified check or cashier's check. For more information, see the SAI,
"Purchase, Redemption and Pricing of Trust Shares -- Sale of Shares."
SMALL ACCOUNTS
If you make a sale that reduces your Target Program account to less than
$10,000, the Trust may sell the rest of your shares and close your account. We
will give you 30 days' notice, during which time you can purchase additional
shares to avoid this action.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares in a Portfolio for shares in another Portfolio of
the Trust without payment of any exchange fee. You may not exchange shares of
the Portfolios for shares of other Prudential Mutual Funds. If you wish to use
the exchange privilege, contact your Prudential Securities financial advisor or
Prusec registered representative. We may change the terms of the exchange
privilege after giving you 60 days' notice.
Remember, as we explained in the section entitled "Portfolio Distributions
and Tax Issues -- If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account -- Exchange Privilege."
FREQUENT TRADING
You should not use the Portfolios for frequent trading in response to short-term
changes in the market. Doing this may make it harder for us to efficiently
manage the Portfolios, and it also increases transaction costs. If we believe
you are engaged in this kind of trading, we reserve the right to refuse any of
your purchase orders or exchanges. The Trust will reject all exchanges and
purchases from any person or group that we believe is following a market timing
strategy unless we have an agreement to follow certain procedures, including a
daily dollar limit on trading.
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<PAGE> 60
Financial Highlights
The financial highlights will help you evaluate each Portfolio's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that particular Portfolio, assuming
reinvestment of all dividends and other distributions. The information is for
the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
LARGE CAPITALIZATION GROWTH PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by ______________________ LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
LARGE CAP GROWTH PORTFOLIO (FISCAL YEARS ENDED 12-31)
- ----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995(2) 1994(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 12.97 $ 12.13 $ 9.74 $ 9.91
INCOME FROM INVESTMENT OPERATIONS:
Net investment income --(3) .02 .10 .10
Net realized and unrealized gain (loss)
on investment transactions 2.61 2.33 2.41 (.16)
TOTAL FROM INVESTMENT OPERATIONS 2.61 2.35 2.51 (.06)
- ----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.01) (.02) (.10) (.10)
Distributions in excess of
net investment income -- -- (.01) (.01)
Distributions from net realized gains (1.99) (1.49) (.01) --
TOTAL DISTRIBUTIONS (2.00) (1.51) (.12) (.11)
NET ASSET VALUE, END OF YEAR $ 13.58 $ 12.97 $ 12.13 $ 9.74
TOTAL RETURN(1) 20.77% 21.09% 25.76% (.68)%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $ 243,895 $ 220,782 $ 180,077 $ 142,072
Average net assets (000) $ 242,233 $ 202,736 $ 162,982 $ 129,687
RATIOS TO AVERAGE NET ASSETS:
Expenses .73% .82% .78% .81%
Net investment income (.01)% .19% .88% 1.08%
Portfolio turnover 82% 65% 154% 24%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
(3) Less than $.005 per share.
57
<PAGE> 61
Financial Highlights
LARGE CAPITALIZATION VALUE PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by ____________________ LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
LARGE CAP VALUE PORTFOLIO (FISCAL YEARS ENDED 12-31)
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996(2) 1995(2) 1994(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 13.97 $ 12.57 $ 10.02 $ 10.11
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .31 .31 .33 .26
Net realized and unrealized gain (loss)
on investment transactions 3.77 2.07 2.89 (.04)
TOTAL FROM INVESTMENT OPERATIONS 4.08 2.38 3.22 .22
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.28) (.31) (.30) (.25)
Distributions in excess of
net investment income -- (.03) -- --
Distributions from net realized gains (1.56) (.64) (.37) (.06)
TOTAL DISTRIBUTIONS (1.84) (.98) (.67) (.31)
NET ASSET VALUE, END OF YEAR $ 16.21 $ 13.97 $ 12.57 $ 10.02
TOTAL RETURN(1) 29.80% 19.17% 32.08% 2.18%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $ 275,093 $ 227,706 $ 187,596 $ 142,219
Average net assets (000) $ 253,579 $ 208,898 $ 163,124 $ 128,865
RATIOS TO AVERAGE NET ASSETS:
Expenses .72% .77% .76% .81%
Net investment income 1.90% 2.33% 2.83% 2.66%
Portfolio turnover 21% 22% 59% 6%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
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Financial Highlights
SMALL CAPITALIZATION GROWTH PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by _____________________ LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
SMALL CAP GROWTH PORTFOLIO (FISCAL YEARS ENDED 12-31)
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995(2) 1994(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 14.93 $ 14.15 $ 11.59 $ 11.86
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (.05) (.02) .02 .01
Net realized and unrealized gain
(loss)
on investment transactions 3.02 2.63 2.84 (.27)
TOTAL FROM INVESTMENT OPERATIONS 2.97 2.61 2.86 (.26)
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- -- (.02) (.01)
Distributions from net realized gains (2.33) (1.83) (.28) --
TOTAL DISTRIBUTIONS (2.33) (1.83) (.30) (.01)
NET ASSET VALUE, END OF YEAR $ 15.57 $ 14.93 $ 14.15 $ 11.59
TOTAL RETURN(1) 20.85% 18.88% 24.62% (2.19)%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $ 165,898 $ 147,469 $ 121,533 $ 96,462
Average net assets (000) $ 156,570 $ 141,496 $ 107,649 $ 87,403
RATIOS TO AVERAGE NET ASSETS:
Expenses .79% .89% .85% .93%
Net investment income (.36)% (.32)% .12% .10%
Portfolio turnover 106% 108% 120% 97%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
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Financial Highlights
SMALL CAPITALIZATION VALUE PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by _____________________ LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
SMALL CAP VALUE PORTFOLIO (FISCAL YEARS ENDED 12-31)
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997(2) 1996(2) 1995(2) 1994(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 15.22 $ 13.07 $ 11.07 $ 12.72
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .08 .11 .14 .11
Net realized and unrealized gain (loss)
on investment transactions 4.37 2.71 2.00 (1.49)
TOTAL FROM INVESTMENT OPERATIONS 4.45 2.82 2.14 (1.38)
- --------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.08) (.11) (.14) --
Distributions in excess of
net investment income (.01) -- -- --
Distributions from net realized gains (2.08) (.56) -- (.27)
TOTAL DISTRIBUTIONS (2.17) (.67) (.14) (.27)
NET ASSET VALUE, END OF YEAR $ 17.50 $ 15.22 $ 13.07 $ 11.07
TOTAL RETURN(1) 29.98% 21.75% 19.21% (11.03)%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $163,414 $126,672 $97,594 $84,163
Average net assets (000) $144,160 $110,564 $88,085 $83,891
RATIOS TO AVERAGE NET ASSETS:
Expenses .81% .92% 1.00% .93%
Net investment income .45% .77% 1.14% .88%
Portfolio turnover 36% 60% 110% 97%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
60
<PAGE> 64
Financial Highlights
INTERNATIONAL EQUITY PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by _____________________ LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO (FISCAL YEARS ENDED 12-31)
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995(2) 1994(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 14.82 $ 13.64 $ 11.95 $ 13.09
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .21 .25 .17 .06
Net realized and unrealized gain (loss)
on investment transactions 1.32 1.79 1.67 (.01)
TOTAL FROM INVESTMENT OPERATIONS 1.53 2.04 1.84 .05
- --------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.41) (.22) (.11) (.01)
Distributions from net realized gains (1.67) (.64) (.04) (1.07)
Distributions in excess
of net realized gains -- -- -- (.11)
TOTAL DISTRIBUTIONS (2.08) (.86) (.15) (1.19)
NET ASSET VALUE, END OF YEAR $ 14.27 $ 14.82 $ 13.64 $ 11.95
TOTAL RETURN(1) 10.60% 15.25% 15.38% .18%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $237,851 $240,563 $191,598 $188,025
Average net assets (000) $245,536 $221,626 $183,414 $179,614
RATIOS TO AVERAGE NET ASSETS:
Expenses .93% .99% 1.02% 1.07%
Net investment income 1.15% 1.77% 1.32% .47%
Portfolio turnover 37% 39% 76% 116%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
61
<PAGE> 65
Financial Highlights
INTERNATIONAL BOND PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by _____________________ LLP, independent accountants, and the financial
highlights for the year ended December 31, 1996 and the period from May 17, 1994
through December 31, 1994, were audited by other independent auditors, whose
reports were unqualified.
<TABLE>
<CAPTION>
INTERNATIONAL BOND PORTFOLIO (FISCAL YEARS ENDED 12-31)
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994(1)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 10.17 $ 10.19 $ 9.57 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .42 .51 .572 .272
Net realized and unrealized gain (loss)
on investment transactions (1.00) (.08) .82 (.19)
TOTAL FROM INVESTMENT OPERATIONS (.58) .43 1.39 .08
- --------------------------------------------------------------------------------------------------------------------
LOSS DISTRIBUTIONS:
Dividends from net investment income -- (.21) (.57) (.27)
Distributions in excess of
net investment income (.06) -- -- (.24)
Distributions from net realized gains -- (.24) (.20) --
Tax return of capital distributions (.36) -- -- --
TOTAL DISTRIBUTIONS (.42) (.45) (.77) (.51)
NET ASSET VALUE, END OF YEAR $ 9.17 $ 10.17 $ 10.19 $ 9.57
TOTAL RETURN(4) (5.73)% 4.45% 14.66% 71%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $ 31,189 $ 41,780 $ 34,660 $ 21,447
Average net assets (000) $ 35,163 $ 38,788 $ 29,510 $ 15,366
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.35% 1.34% 1.00%(2) 1.00%(2),(5)
Net investment income 4.44% 5.02% 5.56%(2) 4.84%(2),(5)
Portfolio turnover 202% 226% 456% 361%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Information shown is for the period from 5-17-94, when investment
operations commenced, through 12-31-94.
(2) Net of expense subsidies. For the period 5-17-94 through 12-31-94, 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 $.21, 1.90% and 3.94%, respectively.
For the year ended 12-31-95, 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 5.40%, respectively.
3 Less than $.005 per share.
4 Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported. 5
Annualized.
62
<PAGE> 66
Financial Highlights
TOTAL RETURN BOND PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by _____________________ LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
TOTAL RETURN BOND PORTFOLIO (FISCAL YEARS ENDED 12-31)
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 10.28 $ 10.62 $ 9.48 $ 10.28
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .57 .57 .62(1) .47(1)
Net realized and unrealized gain (loss)
on investment transactions .35 (.09) 1.18 (.82)
TOTAL FROM INVESTMENT OPERATIONS .92 .48 1.80 (.35)
- -------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.54) (.56) (.58) (.45)
Distributions from net realized gains (.10) (.26) (.08) --
TOTAL DISTRIBUTIONS (.64) (.82) (.66) (.45)
NET ASSET VALUE, END OF YEAR $ 10.56 $ 10.28 $ 10.62 $ 9.48
TOTAL RETURN(2) 9.23% 5.02% 19.63% (3.54)%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $ 50,411 $ 49,218 $ 45,118 $ 31,191
Average net assets (000) $ 48,123 $ 47,246 $ 37,023 $ 31,141
RATIOS TO AVERAGE NET ASSETS:
Expenses .91% .94% .85%(1) .85%(1)
Net investment income 5.54% 5.67% 6.21%(1) 4.90%(1)
Portfolio turnover 323% 340% 141% 121%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of expense subsidies. For the year ended 12-31-94, 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%, respectively. For the
year ended 12-31-95, 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%, respectively.
(2) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
63
<PAGE> 67
Financial Highlights
INTERMEDIATE-TERM BOND PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by _____________________ LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO (FISCAL YEARS ENDED 12-31)
- ------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 10.30 $ 10.51 $ 9.56 $ 10.26
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .58 .59 .63 .49
Net realized and unrealized gain (loss)
on investment transactions .28 (.07) .94 (.71)
TOTAL FROM INVESTMENT OPERATIONS .86 .52 1.57 (.22)
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.57) (.59) (.60) (.48)
Distributions from net realized gains (.17) (.14) (.02) --
TOTAL DISTRIBUTIONS (.74) (.73) (.62) (.48)
NET ASSET VALUE, END OF YEAR $ 10.42 $ 10.30 $ 10.51 $ 9.56
TOTAL RETURN(1) 8.57% 5.22% 16.87% (2.23)%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $95,071 $100,392 $77,125 $62,924
Average net assets (000) $95,575 $81,723 $68,628 $69,602
RATIOS TO AVERAGE NET ASSETS:
Expenses .71% .73% .79% .80%
Net investment income 5.64% 5.69% 6.09% 5.06%
Portfolio turnover 249% 311% 93% 77%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
64
<PAGE> 68
Financial Highlights
MORTGAGE BACKED SECURITIES PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by _____________________ LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
MORTGAGE BACKED SECURITIES PORTFOLIO (FISCAL YEARS ENDED 12-31)
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 10.21 $ 10.31 $ 9.51 $ 10.18
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .64 .65 .68(1) .61(1)
Net realized and unrealized gain (loss)
on investment transactions .23 (.12) .83 (.66)
TOTAL FROM INVESTMENT OPERATIONS .87 .53 1.51 (.05)
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.63) (.63) (.68) (.61)
Distributions in excess of
net investment income -- -- (.03) (.01)
Distributions from net realized gains -- -- -- --
TOTAL DISTRIBUTIONS (.63) (.63) (.71) (.62)
NET ASSET VALUE, END OF YEAR $ 10.45 $ 10.21 $ 10.31 $ 9.51
TOTAL RETURN(2) 8.82% 5.56% 16.18% (.51)%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $ 71,596 $ 73,867 $ 69,759 $ 61,971
Average net assets (000) $ 71,757 $ 72,214 $ 65,149 $ 66,276
RATIOS TO AVERAGE NET ASSETS:
Expenses .88% .91% .85%(1) .85%(1)
Net investment income 6.21% 6.44% 6.79%(1) 6.19%(1)
Portfolio turnover 128% 102% 154% 380%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of expense subsidies. For the year ended 12-31-94, 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, .99% and 6.05%, respectively. For the
year ended 12-31-95, 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 $.67,
.92% and 6.72%, respectively.
(2) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
65
<PAGE> 69
Financial Highlights
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by _____________________ LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET PORTFOLIO (FISCAL YEARS ENDED 12-31)
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .049 .045 .051(1) .037(1)
TOTAL FROM INVESTMENT OPERATIONS .049 .045 .051 .037
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.049) (.045) (.051) (.037)
TOTAL DISTRIBUTIONS (.049) (.045) (.051) (.037)
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00
TOTAL RETURN(2) 4.95% 4.53% 5.25% 3.79%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $42,326 $ 27,397 $ 18,855 $ 21,438
Average net assets (000) $37,675 $ 19,132 $ 20,173 $ 15,048
RATIOS TO AVERAGE NET ASSETS:
Expenses .65% .89% .75%(1) .50%(1)
Net investment income 4.91% 4.49% 5.18%(1) 4.03%(1)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of expense subsidies. For the year ended 12-31-94, 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 $.031, 1.14% and 3.39%, respectively. For the
year ended 12-31-95, 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 $.050,
.80% and 5.13%, respectively.
(2) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
66
<PAGE> 70
APPENDIX I
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.
67
<PAGE> 71
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 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.
68
<PAGE> 72
Issuers rated Prime-2 (or supporting institutions) are considered to
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics of issuers rated
Prime-1 but to a lesser degree. Earnings trends and coverage ratios, while
sound, be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
69
<PAGE> 73
APPENDIX II
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
70
<PAGE> 74
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
71
<PAGE> 75
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
72
<PAGE> 76
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.
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<PAGE> 77
(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
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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.
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
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(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.
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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.
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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 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
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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.
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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
- ----------
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.
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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
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
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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
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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."
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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 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
- ----------
(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.
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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
- ----------
(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.
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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 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
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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
- ----------
(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.
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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 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
- ----------
(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.
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<PAGE> 90
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)
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.
- ----------
(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.
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<PAGE> 91
<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
- ----------
(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).
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<PAGE> 92
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.
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.
PMF. RET. RED. FACT. FEE AFTER
PORTFOLIO FEE (%) (%) 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>
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<PAGE> 93
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)
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.
- ----------
(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.
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<PAGE> 94
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
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<PAGE> 95
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.)
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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.
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<PAGE> 97
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.
(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
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<PAGE> 98
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
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<PAGE> 99
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.
(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
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<PAGE> 100
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
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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.
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
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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.
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
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<PAGE> 103
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
Applicant's 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
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<PAGE> 104
.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 Representation 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 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
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<PAGE> 105
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-Advisor, 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.)
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<PAGE> 106
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- ------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- ------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- ------------------------------------
Additional information about the Trust can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into
this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Portfolios' performance)
SEMI-ANNUAL REPORT
TMF 158A
You can also obtain copies of Trust documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in Washington, DC
(For hours of operation, call
1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
- ------------------------------------
CUSIP Numbers:
LARGE CAPITALIZATION GROWTH: 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
Investment Company Act File No:
811-7064
<PAGE> 107
THE TARGET PORTFOLIO TRUST(R)
Statement of Additional Information
May 1, 1999
The Target Portfolio Trust(R) (the Trust) is an open-end, management
investment company currently composed of ten separate investment portfolios (the
Portfolios) professionally managed by Prudential Investments Fund Management LLC
(PIFM 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>
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 May 1, 1999, a copy of
which may be obtained from the Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund History................................................ B-2
Description of the Portfolios, their Investments and
Risks..................................................... B-2
Investment Restrictions..................................... B-35
Management of the Fund......................................
Control Persons and Principal Holders of Securities......... B-39
Investment Advisory and Other Services...................... B-40
Brokerage Allocation and Other Practices.................... B-46
Capital Shares, Other Securities and Organization........... B-49
Purchase, Redemption and Pricing of Shares.................. B-50
Shareholder Investment Account.............................. B-50
Net Asset Value............................................. B-52
Taxes, Dividends and Distributions.......................... B-54
Performance Information..................................... B-57
Financial Statements........................................
Report of Independent Accountants........................... B-
Appendix A..................................................
Appendix I -- Historical Performance Data................... I-1
Appendix II -- General Investment Information............... II-1
Appendix III -- Information relating to Prudential.......... III-1
Appendix IV -- Glossary of Indices.......................... IV-1
- -------------------------------------------------------------------
</TABLE>
TMF 158 B
<PAGE> 108
FUND HISTORY
The Trust was organized as an unincorporated business trust in 1992 under
the laws of the State of Delaware.
DESCRIPTION OF THE PORTFOLIOS, THEIR INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Trust is an open-end management investment
company. Each of the Portfolios except for the International Bond Portfolio is
classified as a diversified fund. The International Bond Portfolio is a
non-diversified fund.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment
objectives of the Portfolios are set forth in the Trust's Prospectus. While the
principal investment policies and strategies for seeking to achieve the
Portfolios' objectives are described in the Prospectus, the Portfolios may from
time to time also use the securities, instruments, policies and strategies
described below. The Portfolios may not be successful in achieving their
respective objectives and you could lose money.
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.
OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. Securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government include, but are not limited to, GNMA,
FNMA and FHLMC securities. Obligations of GNMA, the Federal Housing
Administration, Farmers Home Administration and the Export-Import Bank are
backed by the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United States, the
Trust must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments. Such securities include obligations issued by the Student Loan
Marketing Association (SLMA), FNMA and FHLMC, each of which may borrow from the
U.S. Treasury to meet its obligations, although the U.S. Treasury is under no
obligation to lend to such entities. GNMA, FNMA and FHLMC may also issue
collateralized mortgage obligations.
STRIPPED U.S. GOVERNMENT SECURITIES. A 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 (1) obligations from which
the interest coupons have been stripped; (2) the interest coupons that are
stripped; and (3) book-entries at a Federal Reserve member bank representing
ownership of obligation components.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A 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. 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 "Mortgage-Backed Securities and Asset Backed Securities" below.
B-2
<PAGE> 109
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.
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 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. [THE FUND
WILL ONLY INVEST IN MBA STRIPS RATED AAA BY MOODY'S OR AAA BY S&P.]
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.
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
B-3
<PAGE> 110
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.
SPECIAL CONSIDERATIONS. Fixed-income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed-rate U.S. Government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. Government securities
will not affect investment income from those securities, they may affect the net
asset value of a 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 "Risk Management and Return
Enhancement Strategies -- Risks of Options Transactions."
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. These custodial receipts include
"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.
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.
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 non-U.S. company or foreign government securities, certificates of
deposit, bankers' acceptances and time deposits of domestic and foreign banks,
and obligations issued or guaranteed by the U.S. Government, its
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<PAGE> 111
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.
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 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, Moody's and other NRSRO's are relative and
subjective and are not absolute standards of quality. Although these ratings are
initial criteria for selection of portfolio investments, each Adviser will also
make its own evaluation of these securities on behalf of the 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, including the risk of default, and changes in
economic or other conditions are more likely to impair the ability of issuers of
these securities to make interest and principal payments than is the case with
respect to issuers of higher-grade bonds.
Generally, medium or lower-rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds" (i.e., securities
rated lower than Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO), offer a higher current yield than is offered by higher-rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the
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<PAGE> 112
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 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.
Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicates. See "Description of Security Ratings."
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.
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During the fiscal year ended December 31, 1998, the monthly dollar-weighted
average ratings of the debt obligations held by the 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
RATINGS INVESTMENTS
- ------- ---------------------------------------------------------
INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM
BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
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AA/Aa % % %
A/A -- % %
BBB/Baa -- % %
BB/Ba -- % %
B/B -- -- --
CCC/Caa -- -- --
CC/Ca -- -- --
C/C -- -- --
Unrated -- -- --
</TABLE>
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.
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. 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.
INFLATION-INDEXED BONDS. The Total Return Bond and Intermediate-Term Bond
Portfolios may invest in inflation-indexed bonds issued by governmental entities
and corporations. Inflation-indexed bonds are fixed income securities whose
principal value is periodically adjusted according to the rate of inflation.
Such bonds generally are issued at an interest rate lower than typical bonds,
but are expected to retain their principal value over time. The interest rate on
these bonds is fixed at issuance, but over the life of the bond this interest
may be paid on an increasing principal value, which has been adjusted for
inflation.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
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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.
A Portfolio's investments in foreign government securities may include debt
securities issued or guaranteed, as to payment of principal and interest, by
governments, semi-governmental entities, governmental agencies, supranational
entities and other governmental entities (collectively, the Government Entities)
of countries considered stable by an Adviser. A "supranational entity" is an
entity constituted by the national governments of several countries to promote
economic development. Examples of such supranational entities include, among
others, the World Bank, the European Investment Bank and the Asian Development
Bank. Debt securities of "semi-governmental entities" are issued by entities
owned by a national, state, or equivalent government or are obligations of a
political unit that are not backed by the national government's "full faith and
credit" and general taxing powers. Examples of quasi-government issuers include,
among others, the Province of Ontario and the City of Stockholm. Foreign
government securities also include mortgage-backed securities issued by foreign
government entities including semi-governmental entities.
A portfolio may invest in mortgage-backed securities issued or guaranteed
by foreign government entities including semi-governmental entities, and Brady
Bonds, which are long term bonds issued by government entities in developing
countries as part of a restructuring of their commercial loans.
The values of foreign investments are affected by changes in currency rates
or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
CURRENCY RISKS. Because the majority of the 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
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currency, it may incur conversion costs. Foreign exchange dealers may realize a
profit on the difference between the price at which they buy and sell
currencies.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES. On January 1, 1999, 11 of the 15 member states of the European
Monetary Union introduced the "euro" as a common currency. During a three year
transitional period, the euro will coexist with each participating state's
currency and on July 1, 2002, the euro is expected to become the sole currency
of the participating states. During the transition period, the Fund will treat
the euro as a separate currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that may occur at
the time of the conversion, such as accrual periods, holiday conventions,
indices, and other features may require the realization of a gain or loss by the
Fund as determined under existing tax law.
The Fund's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Fund's other service providers to address the
conversion. The Fund has not borne any expense relating to these actions.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES
MORTGAGE BACKED SECURITIES -- GENERAL. 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: (1) those issued or guaranteed by the U.S. Government or one of its
agencies or instrumentalities, such as GNMA, FNMA and FHLMC, described under
"U.S. Government Securities" above; (2) those issued by private issuers that
represent an interest in or are collateralized by mortgage backed securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or mortgage backed
securities without a government guarantee but usually having some form of
private credit enhancement. 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.
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: (1) fixed rate level
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payment mortgage loans; (2) fixed rate graduated payment mortgage loans; (3)
fixed rate growing equity mortgage loans; (4) fixed rate mortgage loans secured
by manufactured (mobile) homes; (5) mortgage loans on multifamily residential
properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on
one-to-four family housing units.
FNMA CERTIFICATES. The Federal National Mortgage Association (FNMA) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. FNMA provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. FNMA acquires
funds to purchase home mortgage loans from many capital market investors that
may not ordinarily invest in mortgage loans directly.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) is a
corporate instrumentality of the United States created pursuant to the Emergency
Home Finance Act of 1970, as amended (the FHLMC Act). Its purpose is to promote
development of a nationwide secondary market in conventional residential
mortgages. The principal activity of FHLMC consists of the purchase of first
lien, conventional, residential mortgage loans and participation interests in
such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC Certificates.
FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owned on the underlying pool. FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal.
FHLMC CERTIFICATES. FHLMC guarantees to each registered holder of the
FHLMC Certificate the timely payment of interest at the rate provided for by
such FHLMC Certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC Certificate ultimate collection of all principal on
the related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. The obligations
of FHLMC under its guarantee are obligations solely of FHLMC and are not backed
by the full faith and credit of the U.S. Government.
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,
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participation interests in whole loans and undivided interests in whole loans
and participations comprising another FHLMC Certificate group.
The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if such
mortgage securities are purchased at a discount, an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
(ARMs) are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. Generally, ARMs have a specified maturity
date and amortize principal over their life. In periods of declining interest
rates, there is a reasonable likelihood that ARMs will experience increased
rates of prepayment of principal.
The amount of interest on an ARM is calculated by adding a specified
amount, the "margin," to the index, subject to limitations on the maximum and
minimum interest that can be charged. Because the interest rate on ARMs
generally moves in the same direction as market interest rates, the market value
of ARMs tends to be more stable than that of long-term fixed rate securities.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed-rate or adjustable rate
mortgage loans. Since private mortgage pass-through securities typically are not
guaranteed by an entity having the credit status of GNMA, FNMA and FHLMC, such
securities generally are structured with one or more types of credit
enhancement. Types of credit enhancements are described under "Types of Credit
Enhancement" below.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Multiclass pass-through
securities are equity interests in a trust composed of Mortgage Assets. Payments
of principal and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage
Investment Conduit (REMIC). All future references to CMOs include REMICs.
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
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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 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
REMICs, are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. In order to be able to rely on the
SEC's interpretation, the CMOs and REMICs must be unmanaged, fixed-asset
issuers, that (1) invest primarily in mortgage-backed securities, (2) do not
issue redeemable securities, (3) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (4) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that 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, may not invest more than 5% of its total assets in
a single entity, and may not acquire more than 3% of the voting securities of
any single such entity.
STRIPPED MORTGAGE BACKED SECURITIES. Stripped mortgage backed securities
or MBS strips are derivative multiclass mortgage securities. In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, 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 "U.S.
Government Securities--Mortgage Related Securities Issued or Guaranteed by U.S.
Government Agencies and Instrumentalities" above. [THE FUND WILL ONLY INVEST IN
MBS STRIPS RATED AAA BY MOODY'S OR AAA BY S&P.]
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
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may contain elements of credit support which fall into two categories: (1)
liquidity protection and (2) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to seek to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses resulting from default
seeks to ensure ultimate payment of the obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The degree of credit support provided for each
issue is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquencies or losses in
excess of those anticipated could adversely affect the return on an investment
in a security. A 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
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.
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.
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CONVERTIBLE SECURITIES
Each Portfolio, other than the U.S. Government Money Market Portfolio, may
invest in convertible securities. A convertible security is typically a bond,
debenture, corporate note, preferred stock or other similar security which may
be converted at a stated price within a specified period of time into a
specified number of shares of common stock or other equity securities of the
same or a different issuer. Convertible securities are generally senior to
common stocks in a corporation's capital structure, but are usually subordinated
to similar nonconvertible securities. While providing a fixed income stream
(generally higher in yield than the income derivable from a common stock but
lower than that afforded by a similar nonconvertible security), a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation attendant upon a market
price advance in the convertible security's underlying common stock. Convertible
securities also include preferred stocks, which technically are equity
securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying common stock rises, whereas it tends to decrease as the market value
of the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
LOAN PARTICIPATIONS
The 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 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.
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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.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements whereby the seller of
the security agrees to repurchase that 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. Each Portfolio does not currently intend to invest in repurchase
agreements whose maturities exceed one year. The resale price is in excess of
the purchase price, reflecting an agreed-upon rate of return effective for the
period of time a 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.
The Portfolios will only enter into repurchase transactions with parties
meeting creditworthiness standards approved by the Trustees. Each Adviser will
monitor the creditworthiness of such parties.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The 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
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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 segregate with its custodian cash or other liquid assets
equal in value to its obligations in respect of reverse repurchase agreements
and dollar rolls. Reverse repurchase agreements and dollar rolls involve the
risk that the market value of the securities retained by 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 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.
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 swap transactions. 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.
Each Portfolio may enter into either asset-based interest rate swaps or
liability-based interest rate swaps, depending on whether it is hedging its
assets or its liabilities. The 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 cash or other liquid assets are segregated, the Manager and
the Advisers believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to the borrowing restrictions
applicable to 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 other liquid
assets having an aggregate net asset value at least equal to the accrued excess
will be segregated by a custodian that satisfies the requirements of the
Investment Company Act. To the extent that a Portfolio enters into interest rate
swaps on other than a net basis, the amount segregated 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.
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
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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. This amount will not exceed 5% of
a Portfolio's net assets. 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.
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.
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 not readily marketable in securities markets and securities that have legal
or contractual restrictions on resale (restructured securities). Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a
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"safe harbor" from the registration requirements of the Securities Act for
resales of certain securities to 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 and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Trustees. The Advisers will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the Advisers will consider, among others, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security and (4) the nature of the security and the nature of the marketplace
trades (that is, the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). In addition, in order for
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act to be considered liquid, (a) it must be rated in one of the two highest
rating categories by at least two nationally recognized statistical rating
organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO,
or, if unrated, be of comparable quality in the view of the Adviser; and (2) it
must not be "traded flat" (i.e., without accrued interest) or in default as to
principal or interest. The Portfolio's investments in Rule 144A securities could
have the effect of increasing illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing Rule 144A
securities.
The staff of the Commission has taken the position that purchased
over-the-counter options and the assets used as "cover" for written
over-the-counter options are illiquid securities unless the Portfolio and the
counterparty have provided for the Portfolio, at the Portfolio's election, to
unwind the over-the-counter option. The exercise of such an option ordinarily
would involve the payment by the Portfolio of an amount designated to effect the
counterparty's economic loss from an early termination, but does allow the
Portfolio to treat the assets used as "cover" as "liquid." 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.
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.
INVESTMENT COMPANY SECURITIES
The Portfolios may invest in securities issued by other investment
companies which invest in short-term debt securities and which seek to maintain
a $1.00 net asset value per share (money market funds). The Portfolios may also
invest in securities issued by other investment companies with similar
investment objectives. The International Equity and International Bond
Portfolios may purchase shares of investment companies investing primarily in
foreign securities, including so-called "country funds." Country funds have
portfolios consisting primarily of securities of issuers located in one foreign
country. Securities of other investment companies will be acquired within the
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limits prescribed by the Investment Company Act. As a shareholder of another
investment company, a Portfolio would bear, along with other shareholders, its
pro rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the expenses each Portfolio bears
in connection with its own operations.
RISK MANAGEMENT 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 and to enhance return. A
Portfolio, and thus its investors, may lose money through any unsuccessful use
of these strategies. These strategies include the use of foreign currency
forward contracts, options, futures contracts and options thereon. The
Portfolio's ability to use these strategies may be limited by various factors,
such as market conditions, regulatory limits and tax considerations, and there
can be no assurance that any of these strategies will succeed. See "Taxes,
Dividends and Distributions." If new financial products and risk management
techniques are developed, each Portfolio may use them to the extent consistent
with its investment objectives and policies.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES -- GENERAL.
Participation in the options and futures markets and in currency exchange
transactions involves investment risks and transaction costs to which a
Portfolio would not be subject absent the use of these strategies. A Portfolio,
and thus its investors, may lose money through any unsuccessful use of these
strategies. If an Adviser's predictions of movements in the direction of the
securities, foreign currency or interest rate markets are inaccurate, the
adverse consequences to a Portfolio may leave the Portfolio in a worse position
than if such strategies were not used. Risks inherent in the use of options,
foreign currency and futures contracts and options on futures contracts include
(1) dependence on the Advisor's ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; (5) the risk that
the counterparty may be unable to complete the transaction; and (6) the possible
inability of a 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 assets in connection
with hedging transactions.
OPTIONS TRANSACTIONS. A Portfolio may purchase and write (that is, sell)
put and call options on securities, currencies and financial indices that are
traded on U.S. and foreign securities exchanges or in the over-the-counter
market (OTC) to seek to enhance return or to protect against adverse price
fluctuations in securities in its portfolio. These options will be on debt
securities, aggregates of debt securities, financial indices (for example, S&P
500) and U.S. Government securities. The International 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.
A call option gives the purchaser, in exchange for a premium paid, the
right for a specified period of time to purchase the securities or currency
subject to the option at a specified price (the exercise price or strike price).
The writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise
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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 or currency subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Portfolio, as the writer of a put option, might, therefore,
be obligated to purchase the underlying securities or currency for more than
their current market price.
A Portfolio will write only "covered" options. A written option is covered
if, so long as the Portfolio is obligated under the option, it (1) owns an
offsetting position in the underlying security or currency or (2) segregates
cash or other liquid assets, in an amount equal to or greater than its
obligation under the option. Under the first circumstance, the 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. 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.
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 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 an
increase and, in the case of a covered put option, by a decline in the market
value of the underlying security during the option period.
A 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
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
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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. The Fund may also buy and write
straddles (i.e., a combination of a call and a put written on the same security
at the same strike price where the same segregated collateral is considered
"cover" for both the put and the call). In such cases, the Fund will segregate
with its Custodian cash or other liquid assets equivalent to the amount, if any,
by which the put is "in-the-money, "i.e., the amount by which the exercise price
of the put exceeds the current market value of the underlying security. It is
contemplated that the Fund's use of straddles will be limited to 5% of the
Fund's net assets (meaning that the securities used for cover or segregated as
described above will not exceed 5% of the Fund's net assets at the time the
straddle is written). The writing of a call and a put on the same security at
the same stock price where the call and put are covered by different securities
is not considered a straddle for the purposes of this limit. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected that the premium received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call option is exercised in such a transaction, the
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 the fulfillment of 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. As such,
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the value of an OTC option is particularly dependent upon the financial
viability of the OTC counterparty.
Exchange traded options generally have a continuous liquid market while OTC
options may not. When a 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. With
respect to options written by the Fund, the inability to enter into a closing
purchase transaction could result in material losses to the Portfolio.
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 procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
A call option written by the 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 consideration (or for additional
consideration segregated by its Custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the 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 segregate cash
or other liquid assets 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 segregate cash or other liquid assets with its Custodian equivalent in
value to the exercise price of the option. This means that so long as the
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 segregate with its Custodian for
the term of the option cash or other liquid assets having a value equal to or
greater than the exercise price of the option. In the case of a straddle written
by the Portfolio, the amount segregated will equal the amount, if any, by which
the put is "in-the-money."
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not
currently traded on any exchange. However, the 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.
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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.
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, or at any particular time, and for some exchange-traded
options, no secondary market on an exchange may exist. In such event, it might
not be possible to effect closing transactions in particular options, with the
result that the 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: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (6) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date, to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
In the event of the bankruptcy of a broker through which the 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
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take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities that the 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 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 the policy of each
Portfolio 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 exercises 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, a 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."
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
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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 securities might decline
before they can be sold. This timing risk makes certain strategies involving
more than one option substantially more risky with index options than with stock
options. For example, even if an index call which the 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.
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
and related options which are traded on a commodities exchange or board of trade
to reduce certain risks of its investments and to attempt to enhance returns, in
each case in accordance with regulations of the Commodity Futures Trading
Commission. The Portfolios, and thus their investors, may lose money through any
unsuccessful use of these strategies.
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.
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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 other liquid
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Portfolio upon the proper termination of
the futures contract. The margin deposits made are marked-to-market daily and
the Portfolio may segregate with its Custodian, 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 with its Custodian for the
term of the option cash or other 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 with its Custodian for the term of
the option cash or other liquid assets at all times equal in value to the
exercise price of the put (less any initial margin deposited by the Portfolio
with its Custodian with respect to such option). There is no limitation on the
amount of the Portfolio's assets which can be segregated.
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
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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 to the extent that
the aggregate initial margin and option premium does not exceed 5% of the market
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. Subject to these
limitations and, 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'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 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 CFTC,
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 segregating with its Custodian, cash or other liquid
assets equal in value (when added to any initial or variation margin on deposit)
to the market value of the securities underlying the futures contract. Such a
position may also be covered by owning the securities underlying the futures
contract, or by holding a call option permitting the 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 segregate cash or other liquid assets equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit) with its
Custodian. Alternatively, the 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.
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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
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 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
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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 government actions affecting currency
valuation and the movements of currencies from one country to another. The
quantity of currency underlying option contracts represent odd lots in a market
dominated by transactions between banks; this can mean extra transaction costs
upon exercise. Option markets may be closed while round-the-clock interbank
currency markets are open, and this can create price and rate discrepancies.
FOREIGN CURRENCY FORWARD CONTRACTS. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each enter into foreign currency forward 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-currency 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 may use foreign currency hedging techniques, including
cross-currency hedges, to attempt to protect against declines in the U.S. dollar
value of income available for distribution to shareholders and declines in the
net asset value of a 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 foreign currency forward contract to (1) sell the currency in which
the position being hedged is denominated, or a currency bearing a substantial
correlation to the value of such currency, or (2) purchase either the U.S.
dollar or a foreign currency expected to perform better than the currency being
sold. Position hedges may, therefore, provide protection of net asset value in
the event of a general rise in the U.S. dollar against foreign currencies.
However, a cross-currency hedge cannot protect against exchange rates perfectly,
and if the Adviser is incorrect in its judgment of future exchange rate
relationships, the Portfolio could be in a less advantageous position than if
such a hedge had not been established. [DETERMINE PLACEMENT]]
The precise matching of forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
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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.
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 would incur a gain or a loss to the extent
that there has been movement in forward contract prices. Should forward contract
prices decline during the period between the 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 foreign currency forward 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. Also 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,
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.
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
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which it is denominated and, at maturity, will receive interest and principal
payments thereon in that currency, but the amount of principal payable by the
issuer at maturity will change in proportion to the change (if any) in the
exchange rate between the two specified currencies between the date the
instrument is issued and the date the instrument matures. With respect to its
investments in this type of commercial paper, a Portfolio will segregate cash or
other liquid assets having a value at least equal to the aggregate principal
amount of outstanding commercial paper of this type. While such commercial paper
entails the risk of loss of principal, the potential for realizing gains as a
result of changes in foreign currency exchange rates enables the 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 "Foreign Currency Forward Contracts."
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 foreign currencies and futures
contracts on foreign currencies for bona fide hedging purposes only if there is
segregated with the Portfolio's Custodian an amount of cash or other liquid
assets equal to or greater than the aggregate exercise price of the puts. In
addition, the Portfolio may use futures contracts or related options for
non-hedging or speculative purposes to the extent that aggregate initial margin
and option premiums do not exceed 5% of the market value of the 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 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
with its Custodian, or pledge to a broker as collateral for the option, cash or
other liquid assets or "qualified securities" with a market value at the time
the option is written of not less than 100% of the current index value times the
multiplier times the number of contracts.
If a Portfolio has written an option on an industry or market segment
index, it will segregate with its Custodian, or pledge to a broker as collateral
for the option, at least ten "qualified securities," which are stocks of issuers
in such industry or market segment, with a market value at the time the option
is written of not less than 100% of the current index value times the multiplier
times the number of contracts. Such stocks will include stocks which represent
at least 50% of the weighting of the industry or market segment index and will
represent at least 50% of the Portfolio's holdings in that industry or market
segment. No individual security will represent more than 15% of the amount so
segregated or pledged in the case of broadly-based stock market index options or
25% of such amount in the case of industry or market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will so segregate
or pledge an amount in cash or other liquid assets equal in value to the
difference. In addition, when a 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 other liquid assets
equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the 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 segregated by the Portfolio in cash or
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other liquid assets with its Custodian, it will not be subject to the
requirements described in this paragraph.
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.
OTHER INVESTMENT STRATEGIES
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 segregated pursuant to
applicable regulations that are equal to at least the market value, determined
daily, of the loaned securities. 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. A Portfolio cannot lend more than 33 1/3% of the value
of its total assets (including the amount of the loan collateral).
A loan may be terminated by the borrower 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.
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. 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
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delivery of the securities, the value may be more or less than the purchase
price. A Portfolio will also segregate with a Portfolio's custodian bank cash or
other liquid assets equal in value to commitments for such when-issued or
delayed delivery securities; subject to this requirement, a 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. Subject to the segregation requirement, a Portfolio may purchase
securities without limit. 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.
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.
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 (1)
segregate with its custodian cash or other 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 (2) 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: (1) deposited as collateral for the obligation to replace
securities borrowed to effect short sales and (2) segregated in connection with
short sales.
The Mortgage Backed Securities Portfolio may also make short sales
against-the-box. 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 for, with or without payment of any further
consideration, such securities; provided that if further consideration is
required in connection with the conversion or exchange, cash or other liquid
assets, in an amount equal to such consideration must be segregated for an equal
amount of the securities of the same issuer as 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
(calculated when the loan is made) from banks for temporary, extraordinary or
emergency purposes, for the clearance of transactions or to take advantage of
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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 (calculated when 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.
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 (within 3 days) to reduce its borrowings even
though it may be disadvantageous from an investment standpoint to sell
securities at that time.
SEGREGATED ASSETS
When the Fund is required to segregate assets in connection with certain
portfolio transactions, it will designate cash or liquid assets as segregated
with the Fund's Custodian, State Street Bank and Trust Company (State Street).
"Liquid assets" mean cash, U.S. Government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets equal in value to its obligations in respect of potentially leveraged
transactions, marked-to-market daily. These include forward contracts,
when-issued and delayed delivery securities, futures contracts, written options
and options on futures contracts (unless otherwise covered). If collateralized
or otherwise covered, in accordance with Commission guidelines, these will not
be deemed to be senior securities.
(d) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a temporary defensive strategy or pending
investment of proceeds from sales of the Portfolios' shares, the Large
Capitalization Growth, Large Capitalization Value, Small Capitalization Growth,
Small Capitalization Value, International Equity, International Bond, Total
Return Bond, Intermediate-Term Bond and Mortgage Backed Securities Portfolios
may invest without limit in money market instruments, including commercial paper
of domestic and foreign corporations, certificates of deposit, bankers'
acceptances and other obligations of domestic and foreign banks, and obligations
issued or guaranteed by the U.S. Government, its instrumentalities and its
agencies. Such obligations (other than U.S. Government securities) will be
rated, at the time of purchase, within the two highest quality grades as
determined by an NRSRO, such as Moody's, S&P or Duff & Phelps or, if unrated,
will be of equivalent quality in the judgment of the Portfolios' Advisers. In
addition, the Large Capitalization Value and Small Capitalization Value
Portfolios may invest without limit in corporate and other debt obligations when
the Adviser believes that a temporary defensive position is appropriate.
(e) PORTFOLIO TURNOVER
The portfolio turnover rate for each of the Portfolios may exceed 100%,
although the rate is not expected to exceed 200%. Portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio purchases
or sales (excluding all securities, including options, whose maturities or
expiration date at acquisition were one year or less) by the monthly average
value of
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<PAGE> 141
the long-term portfolio. High portfolio turnover (100% or more) may involve
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by each Portfolio. See "Brokerage Allocation and Other
Practices." In addition, high portfolio turnover may result in increased
short-term capital gains, which when distributed to shareholders, are treated as
ordinary income. See "Taxes, Dividends, and Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of a 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 (1) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are present in person
or represented by proxy or (2) more than 50% of the outstanding shares.
A 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 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.
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<PAGE> 142
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.
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.
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<PAGE> 143
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(**) THE TRUST DURING PAST FIVE YEARS
---------------- ------------- ----------------------
<S> <C> <C>
Eugene C. Dorsey (72) Trustee Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now
Freedom Forum); former Publisher of four
Gannett newspapers and Vice President of
Gannett Co., Inc.; past Chairman, Independent
Sector, Washington, D.C. (largest national
coalition of philanthropic organizations);
former Chairman of the American Council for
the Arts; Director of the advisory board of
Chase Manhattan Bank of Rochester, First
Financial Fund, Inc., and The High Yield Plus
Fund, Inc.; Trustee of Prudential Diversified
Funds and Trustee or Director of [ ]
other funds within the Prudential Mutual
Funds.
Douglas H. McCorkindale (59) Trustee Vice Chairman (since March 1984) and President
(since September 1997) of Gannett Co. Inc.,
Director of Continental Airlines, Inc.,
Gannett Co., Inc., Frontier Corporation,
First Financial Fund, Inc. and The High Yield
Plus Fund, Inc.; Trustee of Prudential
Diversified Funds and Trustee or Director of
2[1] other funds within the Prudential Mutual
Funds.
Thomas T. Mooney (57) Trustee President of the Greater Rochester Metro
Chamber of Commerce; former Rochester City
Manager; Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of
Rochester, The Business Council of New York
State, Executive Service Corps of Rochester,
Monroe County Water Authority, Rochester
Jobs, Inc., Monroe County Industrial
Development Corporation and Northeast Midwest
Institute; President, Director and Treasurer,
First Financial Fund, Inc. and The High Yield
Plus Fund, Inc.; Trustee of Prudential
Diversified Funds and Trustee or Director of
3[1] other funds within the Prudential Mutual
Funds.
*Brian M. Storms (44) President and President Prudential Investments (October 1998-
Trustee present);President of Prudential Mutual
Funds, Annuities and Investment Management
Services (September 1996-October 1998);
Managing Director, Fidelity Investments
Institutional Services Company, Inc. (July
1991-September 1996); President J.K.
Schofield (October 1989-September 1991);
Senior Vice President, INVEST Financial
Corporation (September 1982-October 1989);
Director of Global Utility Fund, Inc.;
Trustee of Prudential Diversified Funds and
President and Trustee or Director of 4[5]
other funds within the Prudential Mutual
Funds.
</TABLE>
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<PAGE> 144
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(**) THE TRUST DURING PAST FIVE YEARS
---------------- ------------- ----------------------
<S> <C> <C>
David F. Connor (35) Secretary Assistant General Counsel (since March 1998) of
PIFM; Associate Attorney, Drinker Biddle &
Reath LLP prior thereto.
Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of
Principal PIFM; First Vice President (since March 1994)
Financial and of Prudential Securities; formerly First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc. and
Vice President (July 1989-March 1994) of
Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments and the Private Asset Group of
The Prudential Insurance Company of America
(Prudential); formerly First Vice President
(February 1993-September 1996) of Prudential
Mutual Fund Management, Inc. and Senior Tax
Manager (1981-January 1993) of Price
Waterhouse LLP.
</TABLE>
- ---------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential, Prudential Securities or PIFM.
** Unless otherwise stated, the address of the directors and officers is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.
The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Advisors and Distributor, decide upon matters of general
policy. The Trustees also review the actions of the Trust's officers, who
conduct and supervise the daily business operations of the Trust.
Trustees and officers of the Trust are also directors, trustees and
officers of some or all of the other investment companies distributed by
Prudential Investment Management Services LLC.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
72, except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. Mr. Dorsey is scheduled to retire on December 31,
1999.
Pursuant to the Management Agreement with the Trust, the Manager pays all
compensation of officers and employees of the Trust as well as the fees and
expenses of all Trustees of the Trust who are affiliated persons of the Manager.
The Trust pays each of its Trustees who is not an affiliated person of the
Manager or a Portfolio's Adviser annual compensation of $ , in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Trustee may change as a result of the introduction of additional funds upon the
boards of which the Trustee may be asked to serve.
Trustees may receive their Trustee's fees pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of Trustee's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an exemptive order
from the Commission, at the daily rate of return of a Portfolio. 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, 1998, Mr. Dorsey elected to receive his Trustee's fees pursuant
to the deferred fee agreement.
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<PAGE> 145
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, 1998 and the aggregate compensation paid to such Trustees for
service on the Trust's Board and the boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1998
COMPENSATION
FROM TRUST
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES
- ----------------------------------------------------------- ------------ -----------------
<S> <C> <C>
Eugene C. Dorsey*.......................................... $-- $135,000(44/74)**
Douglas H. McCorkindale*................................... $-- $ 70,000(23/40)**
Thomas T. Mooney*.......................................... $-- $115,000(35/70)**
Richard A. Redeker (former Trustee)+....................... -- None
Brian M. Storms+........................................... -- None
</TABLE>
- ---------------
* Total compensation from all the Funds in the Fund Complex for the calendar
year ended December 31, 1998 includes amounts deferred at the election of
Trustees under the Funds' deferred compensation plan. Including accrued
interest, total compensation amounted to approximately $ for Mr.
Dorsey, $71,145 for Mr. McCorkindale, and $119,740 for Mr. Mooney.
** Indicates number of funds/portfolios in the Fund Complex (including the
Trust) to which aggregate compensation relates.
+ Interested Trustees do not receive compensation from the Trust or any fund in
the Fund Complex.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April , 1999, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of beneficial interest of the
Portfolios.
As of April , 1999, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of beneficial interest of any Portfolio
were: [ADD INFO]
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS PORTFOLIO (% OF PORTFOLIO)
- ---- ------- --------- ----------------
<S> <C> <C> <C>
[ADD CHART]
</TABLE>
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<PAGE> 146
As of April , 1999, Prudential Securities was record holder for other
beneficial owners of the following shares of beneficial interest outstanding and
entitled to vote in each Portfolio:
<TABLE>
<CAPTION>
NUMBER OF
PORTFOLIO SHARES
--------- ---------
<S> <C>
Large Capitalization Growth Portfolio....................... -- (--%)
Large Capitalization Value Portfolio........................ -- (--%)
Small Capitalization Growth Portfolio....................... -- (--%)
Small Capitalization Value Portfolio........................ -- (--%)
International Equity Portfolio.............................. -- (--%)
International Bond Portfolio................................ -- (--%)
Intermediate-Term Bond Portfolio............................ -- (--%)
Total Return Bond Portfolio................................. -- (--%)
Mortgage Backed Securities Portfolio........................ -- (--%)
U.S. Government Money Market Portfolio...................... -- (--%)
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND ADVISORS
The Manager of the Trust is Prudential Investments Fund Management LLC
(PIFM or the Manager) Gateway Center Three, 100 Mulberry Street, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Trust, comprise the Prudential Mutual Funds. See "How
the Fund is Managed -- Manager" in the Prospectus. As of , PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $ billion. According to the Investment
Company Institute, as of , the Prudential Mutual Funds was the th
largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to the Management Agreement with the Trust (the Management
Agreement), PIFM, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations of
the Trust and the composition of the Trust's Portfolios, including the purchase,
retention, disposition and loan of securities. The Manager is authorized to
enter into subadvisory agreements for investment advisory services in connection
with the management of the Trust and each 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, PIFM is obligated to keep certain books and
records of the Trust. PIFM also administers the Trust's business affairs and, in
connection therewith, furnishes the Trust with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company (the Custodian), the Trust's custodian,
and PMFS, the Trust's transfer and dividend disbursing agent. The management
services of PIFM for the Trust are not exclusive under the terms of the
Management Agreement and PIFM is free to, and does, render management services
to others.
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<PAGE> 147
The following table sets forth the annual management fee rates currently
paid by each Portfolio to PIFM pursuant to the Management Agreement, and the
amount of such fees returned by PIFM, 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 PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Trust's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Trust's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PIFM will be paid by PIFM to the Trust. No jurisdiction
currently limits the Trust's expenses.
In connection with its management of the business affairs of the Trust,
PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Trust's personnel
except the fees and expenses of Trustees who are not affiliated persons of PIFM
or the Trust's Advisers;
(b) all expenses incurred by PIFM or by the Trust in connection with
managing the ordinary course of the Trust's business, other than those assumed
by the Trust as described below; and
(c) the fees payable to each Adviser pursuant to the subadvisory agreements
between PIFM and each Adviser (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Trust is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Trust's Advisers, (c) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent, including the cost of providing records
to the Manager in connection with its obligation of maintaining required records
of the Trust and of pricing the Trust's shares, (d) the charges and expenses of
legal counsel and independent accountants for the Trust, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Trust in
connection with its securities transactions, (f) all taxes and corporate fees
payable by the Trust to governmental agencies, (g) the fees of any trade
associations of which the Trust may be a member, (h) the cost of share
certificates representing shares of the Trust, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Trust and the fees
and expenses involved in registering and maintaining registration of the Trust
and of its shares with the Commission including the preparation and printing of
the Trust's registration statements and prospectuses for such purposes, (k)
allocable communications expenses with respect to investor services and all
expenses of shareholders' and Trustees' meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders in the amount
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<PAGE> 148
necessary for distribution to the shareholders and (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Trust's business.
The Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Trust in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.
For the fiscal years ended December 31, 1998, 1997 and 1996, PIFM received
the following management fees:
<TABLE>
<CAPTION>
MANAGEMENT FEE PAID
--------------------------------------------------------
ANNUALIZED
PERCENTAGE
OF AVERAGE NET
ASSETS AMOUNT
-------------------- --------------------------------
PORTFOLIO 1998 1997 1996 1998 1997 1996
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Large Capitalization Growth Portfolio................. .60% .60% $1,453,397 $1,216,415
Large Capitalization Value Portfolio.................. .60% .60% 1,521,474 1,253,390
Small Capitalization Growth Portfolio................. .60% .60% 939,417 848,974
Small Capitalization Value Portfolio.................. .60% .60% 864,964 663,383
International Equity Portfolio........................ .70% .70% 1,718,754 1,551,382
International Bond Portfolio.......................... .50% .50% 175,813 193,939
Total Return Bond Portfolio........................... .45% .45% 216,559 212,605
Intermediate-Term Bond Portfolio...................... .45% .45% 430,089 367,755
Mortgage Backed Securities Portfolio.................. .45% .45% 322,907 324,962
U.S. Government Money Market Portfolio................ .25% .25% 94,188 47,830
</TABLE>
As noted in the Prospectus, subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Adviser manages the securities held
by the portion of the 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.
Each Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the Investment Company Act) or upon the termination of
the Management Agreement. Each Advisory Agreement may be terminated by the
Trust, PIFM or the Adviser upon not more than 60 days' written notice. Each
Advisory Agreement provides that it will continue in effect for a period of more
than two years from its execution only so long as such continuance is
specifically approved at least annually in accordance with the requirements of
the Investment Company Act.
The Manager and the Trust have received an exemptive order from the
Securities and Exchange Commission which permits the Manager, subject to certain
conditions, to enter into or amend advisory agreements without obtaining
shareholder approval each time. On 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
B-42
<PAGE> 149
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.
The Advisers have agreed to the following fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment adviser.
<TABLE>
<CAPTION>
TOTAL ANNUAL FEE PAID ANNUAL FEE PAID BY THE MANAGER TO
MANAGEMENT BY THE MANAGER THE ADVISER(S) FOR FISCAL YEAR
FEE (AS % OF TO THE ADVISER(S) ENDED DECEMBER 31,
AVERAGE (AS % OF AVERAGE ---------------------------------
PORTFOLIO DAILY NET ASSETS) DAILY NET ASSETS) 1998 1997 1996
--------- ----------------- ----------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio......................... 0.60% 0.30% $726,699 $608,208
Large Capitalization Value
Portfolio......................... 0.60% 0.30% 762,237 626,695
Small Capitalization Growth
Portfolio......................... 0.60% 0.30% 469,709 424,487
Small Capitalization Value
Portfolio......................... 0.60% 0.30% 432,482 331,692
International Equity Portfolio...... 0.70% 0.40% 982,146 886,504
International Bond Portfolio........ 0.50% 0.30% 105,488 116,363
Total Return Bond Portfolio......... 0.45% 0.25% 120,307 118,114
Intermediate-Term Bond Portfolio.... 0.45% 0.25% 238,938 204,308
Mortgage Backed Securities Portfolio... 0.45% 0.25% 179,393 180,534
U.S. Government Money Market
Portfolio......................... 0.25% 0.125% 47,094 23,915
</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 (CCI), Metro Center, One Station Place, 8th
Floor, Stamford, Connecticut 06902, serves as one of two Advisers to the Large
Capitalization Growth Portfolio. CCI has been an Adviser to the Portfolio since
January 2, 1995. 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, 1998, had approximately $ 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 Portfolio effective November 22, 1995. The
agreement between Oak and PIFM was approved by the Portfolio's shareholders at a
Special Meeting of Shareholders held on March 12, 1996. Roger Engemann
Management Co. had previously managed the entire Portfolio from its inception
until January 2, 1995, and a portion of the Portfolio from January 2, 1995 until
November 21, 1995.
Oak was founded in April 1985 and has specialized in the large cap market
since inception. It provides investment management services to both individual
and institutional clients and, as of December 31, 1998, had more than $
billion in assets under management. Oak is registered as an investment adviser
under the Investment Advisers Act of 1940. It is a limited liability company
organized under the laws of the State of Ohio. James D. Oelschlager owns a
controlling interest (99%) of Oak.
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<PAGE> 150
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 has served as an Adviser to
the Portfolio since its inception. INVESCO, a Delaware corporation, is an
indirect, wholly-owned subsidiary of AMVESCAP PLC, a global money management
firm. As of December 31, 1998, INVESCO had approximately $ 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 Merrill Lynch Asset Management, L.P. It was
established in 1980 and has specialized in the large-cap market since its
inception. Hotchkis and Wiley has served as Adviser for a portion of the
Portfolio's assets since January 2, 1995. As of December 31, 1998, Hotchkis and
Wiley had approximately $ 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, the Citibank Funds 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 Nicholas-Applegate Capital Management Holdings, Inc.,
a California corporation controlled by Mr. Arthur E. Nicholas. Mr. Nicholas and
twenty-one other partners manage a staff of over 483 employees. As of December
31, 1998 the firm managed a total of approximately $ 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. Nicholas-Applegate has been an Adviser to the
Portfolio since its inception.
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 has been an Adviser to the Portfolio since January 2,
1995. IAI is a wholly-owned subsidiary of IAI Holdings, Inc., which is
indirectly wholly-owned by Lloyds TBS Group plc. 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, 1998, it managed
approximately $ billion in assets.
SMALL CAPITALIZATION VALUE PORTFOLIO
Lazard Asset Management (LAM), 30 Rockefeller Plaza, New York, New York
10112, serves as one of two Advisers to the Small Capitalization Value Portfolio
of the Trust. LAM has been an Adviser to the Portfolio since January 2, 1995.
LAM is a division of Lazard Freres & Co. LLC, a New York limited liability
company. LAM provides investment management services to both individual and
institutional clients and as of December 31, 1998, had more than $ 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, 1998, had more than $ billion in
assets under management. WSW is a subsidiary of Donaldson, Lufkin & Jenrette
Securities Corporation.
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<PAGE> 151
INTERNATIONAL EQUITY PORTFOLIO
LAM has served as the Adviser to the International Equity Portfolio since
its inception. LAM is more fully described immediately above under "Small
Capitalization Value Portfolio."
INTERNATIONAL BOND PORTFOLIO
Delaware International Advisers Ltd. (DIAL), Third Floor, 80 Cheapside,
London, EC2V 6EE, has served as the Adviser to the International Bond Portfolio
since August 28, 1997. DIAL is affiliated with Delaware Management Company and
is an indirect, wholly-owned subsidiary of Lincoln National Corporation. As of
December 31, 1998, DIAL had approximately $ billion in assets under management
with approximately $3 billion in assets in global/international fixed-income.
INTERMEDIATE-TERM BOND PORTFOLIO AND TOTAL RETURN BOND PORTFOLIO
PIMCO is a subsidiary of PIMCO Advisors L.P. ("PIMCO Advisors"). The
general partners of PIMCO Advisors are PIMCO Partners, G.P. and PIMCO Advisors
Holdings L.P. ("PAH"). PIMCO Partners, G.P. is a general partnership between
PIMCO Holding LLC, a Delaware limited liability company and indirect
wholly-owned subsidiary of Pacific Life Insurance Company, and PIMCO Partners
LLC, a California limited liability company controlled by the PIMCO Managing
Directors. PIMCO Partners, G.P., is the sole general partner of PAH. PIMCO is
registered as an investment advisor with the Commission and as a commodity
trading advisor with the CFTC. As of December 31, 1998, PIMCO had approximately
$ billion of asset 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, 1998, WMC had
approximately $ billion of assets under management.
(B) PRINCIPAL UNDERWRITER AND DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Trust but is not compensated by the
Trust for those services. Prior to June 1, 1998, Prudential Securities
Incorporated (Prudential Securities) was the Trust's distributor. PIMS and
Prudential Securities are subsidiaries of Prudential.
(C) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Trust's portfolio securities
and cash, and in that capacity maintains certain financial and accounting books
and records pursuant to an agreement with the Trust.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Trust.
It is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer agency
services to the Trust, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For
B-45
<PAGE> 152
these services, PMFS receives an annual fee per shareholder account of $35.00.
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, 1998, the Fund incurred the following fees for the services of
PMFS.
<TABLE>
<CAPTION>
PORTFOLIO
---------
<S> <C>
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........................ --
U.S. Government Money Market Portfolio...................... --
</TABLE>
LLP, 1177 Avenue of the Americas, New York, New
York 10036 currently serves as the Trust's independent accountants and, in that
capacity, audits the Trust's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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 expenses 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
B-46
<PAGE> 153
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 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 merchants who effect or are parties to portfolio transactions
of the Trust, an Adviser or an Adviser's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by an
Adviser in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for an
Adviser may be used in managing other investment accounts. Conversely, brokers,
dealers or futures commission merchants furnishing such services may be selected
for the execution of transactions for such other accounts, whose aggregate
assets are far larger than the Trust's, and the services furnished by such
brokers, dealers or futures commission merchants may be used by an Adviser in
providing investment management for the Trust. Commission rates are established
pursuant to negotiations with the broker, dealer or futures commission merchant
based on the quality and quantity of execution services provided by the broker
or futures commission merchant in the light of generally prevailing rates. Each
Adviser's policy is to pay brokers, dealers and futures commission merchants,
other than to an affiliated broker, higher commissions for particular
transactions than might be charged if a different broker had been selected, on
occasions when, in an Adviser's opinion, this policy furthers the objective of
obtaining best price and execution. In addition, each Adviser is authorized to
pay higher commissions on brokerage transactions for the Trust to brokers,
dealers and futures commission merchants, other than to an affiliated broker, in
order to secure research and investment services described above, subject to
review by the Trustees from time to time as to the extent and continuation of
this practice. The allocation of orders among brokers, dealers and futures
commission merchants and the commission rates paid are reviewed periodically by
the Trustees. While such services are useful and important in supplementing its
own research and facilities, the Advisers believe that the value of such
services is not determinable and does not significantly reduce expenses.
Subject to the above considerations, an affiliated broker may act as a
securities broker, dealer or futures commission merchant for the Trust. In order
for an affiliate of an Adviser or Prudential Securities to effect any portfolio
transactions for the Trust, the commissions, fees or other remuneration received
by an affiliated broker must be reasonable and fair compared to the commissions,
fees or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold during a
comparable period of time. This standard would allow an affiliated broker to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Trustees, including a majority of the non-interested Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to an affiliated broker are consistent with the
foregoing standard.
B-47
<PAGE> 154
In accordance with Section 11(a) under the Securities Exchange Act of 1934,
as amended, an affiliated broker may not retain compensation for effecting
transactions on a national securities exchange for the Trust unless the Trust
has expressly authorized the retention of such compensation. Section 11(a)
provides that an affiliated broker must furnish to the Trust at least annually a
statement setting forth the total amount of all compensation retained by such
affiliated broker from transactions effected for the Trust during the applicable
period. Brokerage and futures transactions with an affiliated broker are also
subject to such fiduciary standards as may be imposed by applicable law.
The table below sets forth certain information concerning the payment of
commissions by the Trust, including the commissions paid to Prudential
Securities or any affiliate of the Trust or the Advisers for the three years
ended December 31, 1998. For the three years ended December 31, 1998, the
Intermediate-Term Bond Portfolio, International Bond Portfolio and the U.S.
Government Money Market Portfolio paid no brokerage commissions.
<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO
------------------------------ ------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage commissions
paid by the Portfolio....... $355,856 $210,835 $152,335 $116,061 $378,654 $332,672
Total brokerage commissions
paid to Prudential
Securities or affiliates of
the Trust or the Advisers... -- $ 1,182 9,334 $ 5,910 -- --
Percentage of total brokerage
commissions paid to
Prudential Securities or
affiliates of the Trust or
the Advisers................ -- 5.4% 6.1% 5.1% -- --
Percentage of the aggregate
dollar amount of portfolio
transactions involving the
payment of commissions
through Prudential
Securities or affiliates of
the Trust or the Advisers... -- 7.0% 5.4% 4.6% -- --
</TABLE>
<TABLE>
<CAPTION>
SMALL CAPITALIZATION INTERNATIONAL
VALUE PORTFOLIO EQUITY PORTFOLIO
--------------------------------- ---------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total brokerage commissions paid by
the Portfolio.................... $152,188 $ 86,214 $473,807 $411,014
Total brokerage commissions paid to
Prudential Securities or
affiliates of the Trust or the
Advisers......................... - - - -
Percentage of total brokerage
commissions paid to Prudential
Securities or affiliates of the
Trust or the Advisers............ - - - -
Percentage of the aggregate dollar
amount of portfolio transactions
involving the payment of
commissions through Prudential
Securities or affiliates of the
Trust or the Advisers............ - - - -
</TABLE>
B-48
<PAGE> 155
<TABLE>
<CAPTION>
MORTGAGE BACKED TOTAL RETURN
SECURITIES PORTFOLIO BOND PORTFOLIO
------------------------------------ ------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total brokerage commissions paid by the
Portfolio............................... $5,642 $9,800 $6,573 $7,046
Total brokerage commissions paid to
Prudential Securities or affiliates of
the Trust or the Advisers............... - - - -
Percentage of total brokerage commissions
paid to Prudential Securities or
affiliates of the Trust or the
Advisers................................ - - - -
Percentage of the aggregate dollar amount
of portfolio transactions involving the
payment of commissions through
Prudential Securities or affiliates of
the Trust or the Advisers............... - - - -
</TABLE>
Of the total brokerage commissions paid during the year ended December 31,
1998, the Large Capitalization Growth Portfolio, Large Capitalization Value
Portfolio, Small Capitalization Growth Portfolio, Small Capitalization Value
Portfolio and International Equity 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.
The Trust is required to disclose the Portfolios' holdings of securities of
the Trust's regular brokers and dealers (as defined under Rule 10b-1 of the
Investment Company Act) and their parents at December 31, 1998. [ADD INFO]
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
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."
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 changes in certain investment policies of a Portfolio.
In accordance with the Trust's Declaration of Trust, the Board of Trustees
may authorize the creation of additional series of shares and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine.
Shares of the Trust, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Trust under certain circumstances. Each share is
equal as to earnings, assets and voting privileges. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of a Portfolio is entitled to its portion of all of the Portfolio's assets after
all debts and expenses of the Portfolio have been paid. The Fund's shares do not
have cumulative voting rights for the election of Trustees.
B-49
<PAGE> 156
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% or more
of the Fund's outstanding shares for the purpose of voting on the removal of one
or more Trustees or to transact any other business.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Shares of the Portfolio may be purchased at a price equal to the next
determined net asset value per share.
ISSUANCE OF PORTFOLIO SHARES FOR SECURITIES
Transactions involving the issuance of Portfolio shares for securities
(rather than cash) will be limited to: (i) reorganizations, (ii) statutory
mergers, or (iii) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of a Portfolio, (b) are liquid and not subject
to restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market and (d) are approved by the Trust Manager.
SPECIMEN PRICE MAKE-UP
Using the net asset value of each portfolio at December 31, 1998, the
maximum offering price of the Portfolios' shares are as follows:
<TABLE>
<CAPTION>
LARGE LARGE SMALL SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL INTERNATIONAL
GROWTH VALUE GROWTH VALUE EQUITY BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
offering price and
redemption price... -- -- -- -- -- --
====== ====== ====== ====== ====== ======
<CAPTION>
TOTAL MORTGAGE U.S. GOV'T
RETURN INTERMEDIATE BACKED MONEY
BOND TERM BOND SECURITIES MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net asset value,
offering price and
redemption price... -- -- -- --
====== ====== ====== =====
</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. Shareholders investing
through Plan accounts cannot elect to receive dividends and distributions in
cash. 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.
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.
B-50
<PAGE> 157
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.
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)
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 Investment Plan."
</TABLE>
- ---------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
B-51
<PAGE> 158
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 a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.
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.
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 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.
B-52
<PAGE> 159
Pricing services consider such factors as security prices, yields, maturities,
call features, ratings and developments relating to specific securities in
arriving at securities valuations.
Securities that are actively traded in the over-the-counter market
including listed securities for which the primary market is believed by the
Manager in consultation with the appropriate Adviser to be over-the-counter are
valued at the average of the most recently quoted bid and asked prices provided
by a principal market maker. Securities issued in private placements are valued
at the mean between the bid and asked prices provided by primary market dealers.
Private placement securities for which no bid and asked prices are available and
other securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
investment adviser under procedures described above. Short-term debt securities
are valued at cost, with interest accrued or discount amortized to the date of
maturity, if their original maturity was 60 days or less, unless this is
determined by the Trustees not to represent fair value. Short-term securities
with remaining maturities of 60 days or more, for which market quotations are
readily available, are valued at their current market quotations as provided by
an independent broker/dealer or pricing service. Options on securities that are
listed on an exchange and futures contracts and options thereon traded on a
commodities exchange or board of trade shall be valued at the last sale price at
the close of trading of the applicable exchange or board of trade or, if there
was no sale on the applicable exchange or board of trade, at the average of
quoted bid and asked prices as of the close of such exchange or board of trade.
Over-the-counter options are valued at the mean between bid and asked prices
provided by a dealer. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents at the current rate obtained by a
recognized bank or dealer. Forward currency exchange contracts are valued at the
current cost of covering or offsetting such contracts.
Each 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 New York Stock Exchange is closed on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The U.S. Government Money Market Portfolio uses the amortized cost method
to determine the value of its portfolio securities. The amortized cost method
involves 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 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
B-53
<PAGE> 160
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.
TAXES, DIVIDENDS AND DISTRIBUTIONS
Each Portfolio has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves each Portfolio (but not its shareholders) from paying federal
income tax on income and capital gains which are distributed to shareholders,
and permits net capital gains of each Portfolio (i.e., the excess of net
long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long shareholders
have held their shares in each Portfolio. Net capital gains of each Portfolio
which are available for distribution to shareholders will be computed by taking
into account any capital loss carryforward of each Portfolio.
Qualification of each Portfolio as a regulated investment company requires,
among other things, that (a) each Portfolio derive at least 90% of its annual
gross income (without reduction for losses from the sale or other disposition of
securities or foreign currencies) from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or options thereon or foreign currencies, or other income (including,
but not limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such securities or currencies; (b)
each Portfolio diversify its holdings so that, at the end of each quarter of the
taxable year, (1) at least 50% of the value of each 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 value of each
Portfolio's assets and 10% of the outstanding voting securities of such issuer,
and (2) not more than 25% of the value of each Portfolio's assets is invested in
the securities of any one issuer (other than the U.S. Government securities);
and (c) each Portfolio distribute to its shareholders at least 90% of its net
investment income and net short-term gains (that is the excess of net short-term
capital gains over net long-term capital losses) in each year.
Gains or losses on sales of securities by each Portfolio will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where each Portfolio acquires a put
or writes a call thereon or otherwise holds an offsetting position with respect
to the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by each Portfolio on securities
lapses or is terminated through a closing transaction, such as a repurchase by
each Portfolio of the option from its holder, each Portfolio will generally
realize short-term capital gain or loss. If securities are sold by each
Portfolio pursuant to the exercise of a call option written by it, each
Portfolio will include the premium received in the sale proceeds of the
securities delivered in determining the amount of gain or loss on the sale.
Certain of each Portfolio's transactions may be subject to wash sale, short
sale, constructive sale, anti-conversion and straddle provisions of the Internal
Revenue Code which may, among other things, require each Portfolio to defer
recognition of losses. In addition, debt securities acquired by each Portfolio
may be subject to original issue discount and market discount rules which,
respectively, may cause each Portfolio to accrue income in advance of the
receipt of cash with respect to interest or cause gains to be treated as
ordinary income.
Special rules apply to most options on stock indices, future contracts and
options thereon, and foreign currency forward contracts in which each Portfolio
may invest. These investments will generally constitute Section 1256 contracts
and will be required to be "marked to market" for federal income tax purposes at
the end of each Portfolio's taxable year; that is, treated as having
B-54
<PAGE> 161
been sold at market value. Except with respect to certain foreign currency
forward contracts, sixty percent of any gain or loss recognized on such deemed
sales and on actual dispositions will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock
and on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending on the holding period of the option. In
addition, positions which are part of a "straddle" will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a straddle, each Portfolio may be required to defer the
recognition of losses on positions it holds to the extent of any unrecognized
gain on offsetting positions held by each Portfolio.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time each Portfolio accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
each Portfolio actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
foreign currency forward contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Internal Revenue Code as "Section 988" gains or
losses, increase or decrease the amount of each Portfolio's investment company
taxable income available to be distributed to its shareholders as ordinary
income, rather than increasing or decreasing the amount of each Portfolio's net
capital gain. If Section 988 losses exceed other investment company taxable
income during a taxable year, each Portfolio would not be able to make any
ordinary dividend distributions, or distributions made before the losses were
realized would be recharacterized as a return of capital to shareholders, rather
than as an ordinary dividend, reducing each shareholder's basis in his or her
Portfolio shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV (or net asset value) of a share of each
Portfolio on the reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of each
Portfolio, the investor should carefully consider the impact of dividends or
capital gains distributions which are expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of each
Portfolio by a shareholder will be disallowed to the extent the shares are
replaced within a 61-day period (beginning 30 days before the disposition of
shares). Shares purchased pursuant to the reinvestment of a dividend will
constitute a replacement of shares.
A shareholder who acquires shares of each Portfolio and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of each
Portfolio.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain distributions paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividends and capital
B-55
<PAGE> 162
gain distributions which are effectively connected with a U.S. trade or business
of the foreign shareholder.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent each Portfolio's income is
derived from qualified dividends received by each Portfolio from domestic
corporations. Dividends attributable to foreign corporations, interest income,
capital and currency gain, gain or loss from Section 1256 contracts (described
above), and income from certain other sources will not constitute qualified
dividends. Individual shareholders are eligible for the dividends-received
deduction.
Each Portfolio is required to distribute 98% of its ordinary income in the
same calendar year in which it is earned. Each Portfolio is also required to
distribute during the calendar year 98% of the capital gain net income it earned
during the twelve months ending on October 31 of such calendar year. In
addition, each Portfolio must distribute during the calendar year all
undistributed ordinary income and undistributed capital gain net income from the
prior year or the twelve-month period ending on October 31 of such prior
calendar year, respectively. To the extent it does not meet these distribution
requirements, each Portfolio will be subject to a non-deductible 4% excise tax
on the undistributed amount. For purposes of this excise tax, income on which
each Portfolio pays income tax is treated as distributed.
Each Portfolio may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If each Portfolio acquires and holds stock in a
PFIC beyond the end of the year of its acquisition, each Portfolio will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock or on any gain from disposition of the stock (collectively, PFIC
income), plus interest thereon, even if each Portfolio distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in each Portfolio's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. Each Portfolio may make a "mark-to-market" election with
respect to any marketable stock it holds of a PFIC. If the election is in
effect, at the end of each Portfolio's taxable year, each Portfolio will
recognize the amount of gains, if any, as ordinary income with respect to PFIC
stock. No loss will be recognized on PFIC stock, except to the extend of gains
recognized in prior years. Alternatively, each Portfolio, if it meets certain
requirements, may elect to treat any PFIC in which it invests as a "qualified
electing fund," in which case, in lieu of the foregoing tax and interest
obligation, each Portfolio will be required to include in income each year its
pro rata share of the qualified electing Portfolio's annual ordinary earnings
and net capital gain, even if they are not distributed to each Portfolio; those
amounts would be subject to the distribution requirements applicable to each
Portfolio described above.
Income received by each Portfolio from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which each Portfolio will be subject, since the amount of each
Portfolio's assets to be invested in various countries will vary. Except in the
case of the International Equity and International Bond Portfolios, each
Portfolio does not expect to meet the requirements of the Internal Revenue Code
for "passing-through" to its shareholders any foreign income taxes paid.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in each
Portfolio.
Dividends and distributions may also be subject to state and local taxes.
B-56
<PAGE> 163
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 net 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. This base period return is then multiplied by 365/7 to calculate
the yield on shares of the Portfolio. 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, 1998 were --% and --%, respectively.
Effective Yield = [(base period return+1)365/7]-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 be computed by totaling the
interest earned on all debt obligations during the 30-day period and subtracting
from that amount the total of all expenses incurred during the period, which
include management fees. The 30-day yield is then annualized on a
bond-equivalent basis assuming semi-annual reinvestment and compounding of net
investment income, as described in the Prospectus. Yield is calculated according
to the following formula:
YIELD = 2[(
------ +1)(6) - 1]
a - b
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, 1998 for each of the
International Bond, Total Return Bond, Intermediate-Term Bond and Mortgage
Backed Securities Portfolios was --%, --%, --%, and --%, 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.
B-57
<PAGE> 164
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> <C>
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
</TABLE>
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
The average annual total returns for the one year and five year periods
ended December 31, 1998 and the period since inception (January 5, 1993 for each
Portfolio except the International Bond Portfolio, which commenced operations
May 17, 1994) are set forth below:
<TABLE>
<CAPTION>
ONE YEAR
ENDED
DECEMBER 31, FIVE YEARS ENDED
1998 DECEMBER 31, 1998 SINCE INCEPTION
------------ -------------------------------------- --------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
AVERAGE ANNUAL AVERAGE ANNUAL TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
PORTFOLIO TOTAL RETURN TOTAL RETURN (WITHOUT FEE WAIVERS) TOTAL RETURN (WITHOUT FEE WAIVERS)
--------- -------------- -------------- --------------------- -------------- ---------------------
<S> <C> <C> <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............. --% --% --% --% --%
Total Return Bond
Portfolio............. --% --% --% --% --%
Intermediate-Term Bond
Portfolio............. --% --% --% --% --%
Mortgage Backed
Securities
Portfolio............. --% --% --% --% --%
</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> <C>
Where: P = a hypothetical initial payment of $1,000.
</TABLE>
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.
B-58
<PAGE> 165
The aggregate total returns for each portfolio for the one year and five
year periods ended December 31, 1998 and the period since inception (January 5,
1993 for each Portfolio except the International Bond Portfolio which commenced
operations May 17, 1994) are set forth below:
<TABLE>
<CAPTION>
ONE YEAR
ENDED
DECEMBER 31, FIVE YEARS ENDED
1998 DECEMBER 31, 1998 SINCE INCEPTION
------------ ------------------------------------ ------------------------------------
AGGREGATE AGGREGATE
AGGREGATE AGGREGATE TOTAL RETURN AGGREGATE TOTAL RETURN
PORTFOLIO TOTAL RETURN TOTAL RETURN (WITHOUT FEE WAIVERS) TOTAL RETURN (WITHOUT FEE WAIVERS)
--------- ------------ ------------ --------------------- ------------ ---------------------
<S> <C> <C> <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..... --% --% --% --% --%
Total Return Bond Portfolio...... --% --% --% --% --%
Intermediate-Term Bond
Portfolio...................... --% --% --% --% --%
Mortgage Backed Securities
Portfolio...................... --% --% --% --% --%
</TABLE>
Comparative performance information may be used from time to time in
advertising or marketing the Portfolio shares, including data from Lipper, Inc.,
Morningstar Publications, Inc., Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
B-59
<PAGE> 166
(This Page Intentionally Left Blank)
<PAGE> 167
THE TARGET PORTFOLIO TRUST
Large Capitalization Growth
Portfolio
Portfolio of Investments
December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------- ------------------------------ ------------
<S> <C> <C>
LONG-TERM INVESTMENTS--97.6%
Common Stocks--97.6%
AUTOMOBILES--0.6%
34,400 Ford Motor Co................. $ 2,018,850
------------
BANKS--1.9%
76,000 BankAmerica Corp.............. 4,569,500
67,500 MBNA Corp..................... 1,683,281
------------
6,252,781
------------
BROADCASTING--1.3%
75,793 Tele-Communications, Inc.*.... 4,192,300
------------
BUSINESS SERVICES--0.8%
43,200 Omnicom Group................. 2,505,600
------------
COMPUTERS & BUSINESS EQUIPMENT--17.1%
141,000 3Com Corp.*................... 6,318,563
293,075 Cisco Systems, Inc.*.......... 27,201,023
395,200 Compaq Computer Corp.......... 16,573,700
13,400 International Business
Machines Corp............... 2,475,650
32,800 Pitney Bowes, Inc............. 2,166,850
90,000 Xylan Corp.*.................. 1,580,625
------------
56,316,411
------------
DRUGS & HEALTHCARE--12.5%
52,950 Cardinal Health, Inc.......... 4,017,581
49,800 Eli Lilly & Co................ 4,425,975
27,800 Guidant Corp.................. 3,064,950
62,000 Medtronic, Inc................ 4,603,500
62,600 Merck & Co., Inc.............. 9,245,238
79,600 Pfizer, Inc................... 9,984,825
60,800 Schering-Plough Corp.......... 3,359,200
36,000 Warner-Lambert Co............. 2,706,750
------------
41,408,019
------------
ELECTRONICS--12.9%
213,800 Ascend Communications,
Inc.*....................... 14,057,350
20,000 Aspect Telecommunications
Corp.*...................... 345,000
106,000 Linear Technology Corp....... 9,493,625
200,000 Maxim Integrated Products,
Inc.*...................... 8,737,500
34,700 Motorola, Inc................ 2,118,868
8,300 Perkin-Elmer Corp............ 809,769
110,000 Xilinx Inc.*................. 7,163,750
------------
42,725,862
------------
FINANCIAL SERVICES--9.0%
55,400 Associates First Capital
Corp....................... 2,347,575
26,900 Capital One Financial
Corp....................... 3,093,500
55,900 Chase Manhattan Corp......... 3,804,694
145,550 Citigroup, Inc............... 7,204,725
39,000 Donaldson Lufkin & Jenrette,
Inc........................ 1,599,000
45,900 Fannie Mae................... 3,396,600
75,000 Morgan Stanley Dean
Witter*.................... 5,325,000
72,500 Wells Fargo & Co............. 2,895,469
------------
29,666,563
------------
HOTELS & RESTAURANTS--1.6%
35,300 McDonald's Corp.............. 2,704,863
50,400 Tricon Global Restaurants,
Inc........................ 2,526,300
------------
5,231,163
------------
INDUSTRIAL MACHINERY--3.1%
239,800 Applied Materials, Inc.*..... 10,236,462
------------
INSURANCE--2.5%
65,250 American International Group,
Inc........................ 6,304,781
24,700 CIGNA Corp................... 1,909,619
------------
8,214,400
------------
LIQUOR--1.1%
54,900 Anheuser Busch, Inc.......... 3,602,813
------------
MEDIA--1.3%
90,600 Chancellor Media Corp.*...... 4,337,475
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 61
<PAGE> 168
THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION GROWTH PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------- ----------------------------- -------------
<S> <C> <C>
MISCELLANEOUS--3.1%
257,200 Cendant Corp.*................ $ 4,902,875
48,000 Tyco International Ltd........ 3,621,000
36,322 Waste Management, Inc......... 1,693,513
------------
10,217,388
------------
OIL & GAS--1.7%
66,300 Enron Corp.,.................. 3,783,244
26,100 Exxon Corp.................... 1,908,562
------------
5,691,806
------------
PAPER--0.5%
41,300 Champion International
Corp........................ 1,672,650
------------
RETAIL TRADE--8.3%
57,600 Costco Companies, Inc.*....... 4,158,000
86,800 CVS Corp...................... 4,774,000
86,300 Home Depot, Inc............... 5,280,481
86,300 Safeway Inc.*................. 5,258,906
69,000 Staples, Inc.*................ 3,014,438
59,700 Wal-Mart Stores, Inc.......... 4,861,819
------------
27,347,644
------------
SEMICONDUCTORS & EQUIPMENT--6.3%
170,000 Atmel Corp.*.................. 2,603,125
153,500 Intel Corp.................... 18,199,344
------------
20,802,469
------------
SOFTWARE & SERVICES--9.0%
36,200 America Online, Inc........... 5,792,000
166,900 HBO & Co...................... 4,787,944
93,800 Microsoft Corp.*.............. 13,008,887
180,000 Parametric Technology
Corp.*...................... 2,947,500
57,500 Synopsys, Inc.*............... 3,119,375
------------
29,655,706
------------
TELECOMMUNICATION--2.3%
144,000 CIENA Corp.*................. 2,106,000
93,500 NEXTEL Communications,
Inc........................ 2,208,937
46,700 Tellabs, Inc.*............... 3,201,869
------------
7,516,806
------------
TOBACCO--0.7%
44,400 Philip Morris Co., Inc....... 2,375,400
------------
Total common stocks
(cost $187,130,176)........ 321,988,568
------------
PRINCIPAL
AMOUNT
(000) SHORT-TERM INVESTMENTS--2.7%
- --------
REPURCHASE AGREEMENTS--2.7%
$7,025... State Street Bank & Trust
Co.,
4.25%, dated 12/31/98, due
01/04/99 in the amount of
$7,028,317 (cost
$7,025,000,
collateralized by
$6,720,000 U.S. Treasury
Notes, 5.75%, 8/15/03,
value of collateral
including accrued interest
is $7,166,248)............. 7,025,000
1,850... State Street Bank & Trust
Co.,
3.25%, dated 12/31/98, due
01/04/99 in the amount of
$1,850,668 (cost
$1,850,000,
collateralized by
$1,670,000 U.S. Treasury
Notes, 7.25%, 5/15/04,
value of collateral
including accrued interest
is $1,887,873)............. 1,850,000
------------
Total short-term investments
(cost $8,875,000).......... 8,875,000
------------
TOTAL INVESTMENTS--100.3%
(cost $196,005,176; Note
4)......................... 330,863,568
Liabilities in excess of
other
assets--(0.3%)............. (1,060,911)
------------
NET ASSETS--100%............. $329,802,657
============
</TABLE>
- ---------------
* Non-income producing.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 62
<PAGE> 169
LARGE CAPITALIZATION VALUE PORTFOLIO
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------- ----------------------------- ------------
<S> <C> <C>
LONG-TERM INVESTMENTS--98.9%%
COMMON STOCKS--98.9%
AEROSPACE--3.6%
44,000 Boeing Co..................... $ 1,435,500
51,950 Lockheed Martin Corp.......... 4,402,762
48,800 Northrop Grumman Corp......... 3,568,500
12,900 TRW, Inc...................... 724,819
------------
10,131,581
------------
AGRICULTURE MACHINERY--0.8%
10,000 Deere & Co.................... 331,250
150,900 New Holland NV................ 2,065,444
------------
2,396,694
------------
AIRLINES--0.6%
75,000 Southwest Airlines Co......... 1,682,812
------------
ALUMINUM--1.6%
39,000 Aluminum Company of America... 2,907,938
33,100 Reynolds Metals Co............ 1,743,956
------------
4,651,894
------------
APPAREL & TEXTILES--2.8%
37,500 Intimate Brands, Inc.......... 1,120,312
35,000 Reebok International, Ltd.*... 520,625
114,700 Russell Corp.................. 2,329,844
115,000 Shaw Industries, Inc.......... 2,788,750
55,000 Unifi, Inc.................... 1,075,938
------------
7,835,469
------------
AUTO PARTS--1.2%
54,900 Dana Corp..................... 2,244,037
39,000 Genuine Parts Co.............. 1,304,063
------------
3,548,100
------------
AUTOMOBILES--4.0%
122,000 Ford Motor Co................. 7,159,875
58,000 General Motors Corp........... 4,150,625
------------
11,310,500
------------
BANKS--7.5%
115,960 Bank One Corp................ 5,921,207
46,200 BankAmerica Corp............. 2,777,775
25,000 Chase Manhattan Corp......... 1,701,563
51,700 First Union Corp............. 3,144,006
40,000 Keycorp...................... 1,280,000
45,000 National City Corp........... 3,262,500
35,000 Wachovia Corp................ 3,060,313
------------
21,147,364
------------
BREWERY--0.5%
21,100 Anheuser Busch Companies,
Inc........................ 1,384,687
------------
BUILDING & CONSTRUCTION--0.3%
24,000 Harsco Corp.................. 730,500
------------
BUILDING PRODUCTS--0.9%
45,900 Georgia-Pacific Corp......... 1,092,994
35,000 York International Corp...... 1,428,437
------------
2,521,431
------------
BUSINESS SERVICES--0.4%
35,000 First Data Corp.............. 1,109,063
------------
CHEMICALS--2.5%
42,500 Dow Chemical Co.............. 3,864,844
22,000 Du Pont (E.I.) De Nemours &
Co......................... 1,167,375
27,000 Eastman Chemical Co.......... 1,208,250
25,000 Nalco Chemical Co............ 775,000
------------
7,015,469
------------
COMPUTERS & BUSINESS EQUIPMENT--4.4%
80,000 Compaq Computer Corp......... 3,355,000
36,000 Hewlett-Packard Co........... 2,459,250
14,000 International Business
Machines Corp.............. 2,586,500
30,000 Pitney Bowes, Inc............ 1,981,875
25,000 Sun Microsystems, Inc........ 2,140,625
------------
12,523,250
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 63
<PAGE> 170
THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- --------- ------------------------------ ------------
<S> <C> <C>
CONGLOMERATE--2.5%
59,200 Dover Corp.................... $ 2,168,200
38,300 Hanson PLC. (ADR)............. 1,493,700
44,100 Scana Corp.................... 1,422,225
28,000 Textron, Inc.................. 2,126,250
------------
7,210,375
------------
CONSUMER PRODUCTS--1.3%
33,400 Eastman Kodak Co.............. 2,404,800
45,000 Fortune Brands, Inc........... 1,423,125
------------
3,827,925
------------
DOMESTIC OIL--1.1%
20,000 Atlantic Richfield Co......... 1,305,000
56,600 USX - Marathon Group.......... 1,705,075
------------
3,010,075
------------
DRUGS & HEALTHCARE--7.4%
65,000 Abbott Laboratories........... 3,185,000
66,800 American Home Products
Corp........................ 3,761,675
66,666 Astra AB Class A (ADR)........ 1,379,153
13,000 Baxter International, Inc..... 836,063
28,000 Bristol Myers Squibb Co....... 3,746,750
80,000 Columbia/HCA Healthcare
Corp........................ 1,980,000
15,000 Merck & Co., Inc.............. 2,215,312
55,000 Mylan Laboratories............ 1,732,500
40,000 Schering Plough Corp.......... 2,210,000
------------
21,046,453
------------
ELECTRIC UTILITIES--5.2%
50,000 Central & South West Corp..... 1,371,875
24,000 CMS Energy Corp............... 1,162,500
40,000 DTE Energy Co................. 1,715,000
32,000 Edison International.......... 892,000
27,400 Entergy Corp.................. 852,825
21,000 General Public Utilities
Corp........................ 927,938
40,100 PacifiCorp.................... 844,606
36,000 PECO Energy Co................ 1,498,500
33,835 PP & L Resources, Inc......... 943,151
28,800 Public Service Enterprise
Group, Inc.................. 1,152,000
80,000 Southern Co................... 2,325,000
21,832 Texas Utilities Co............ 1,019,281
------------
14,704,676
------------
ELECTRICAL EQUIPMENT--1.2%
20,000 Emerson Electric Co.......... 1,210,000
40,000 Raytheon Co., Class B........ 2,130,000
------------
3,340,000
------------
ELECTRONICS--1.3%
25,000 Motorola, Inc................ 1,526,563
45,000 Rockwell International
Corp....................... 2,185,312
------------
3,711,875
------------
ENERGY--0.7%
74,000 Illinova Corp................ 1,850,000
------------
FINANCIAL SERVICES--5.9%
60,050 Associates First Capital
Corp....................... 2,544,619
89,500 Federal National Mortgage
Association................ 6,623,000
48,265 Household International,
Inc........................ 1,912,501
40,000 Morgan Stanley Dean Witter
Discover & Co.............. 2,840,000
15,090 Waddell & Reed Financial,
Inc........................ 352,087
67,032 Washington Mutual, Inc....... 2,559,784
------------
16,831,991
------------
FOOD & BEVERAGES--2.3%
150,215 Archer-Daniels Midland Co.... 2,581,820
50,000 PepsiCo, Inc................. 2,046,875
90,000 Tyson Foods, Inc. (Class
A)......................... 1,912,500
------------
6,541,195
------------
FOREST PRODUCTS--2.4%
20,700 Georgia-Pacific Corp......... 1,212,244
50,000 Kimberly-Clark Corp.......... 2,725,000
55,000 Weyerhaeuser Co.............. 2,794,687
------------
6,731,931
------------
GAS & PIPELINE UTILITIES--0.4%
27,000 Eastern Enterprises, Inc..... 1,181,250
------------
HOUSEHOLD APPLIANCES & HOME
FURNISHINGS--1.5%
77,000 Whirlpool Corp............... 4,263,875
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 64
<PAGE> 171
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------- ------------------------------ ------------
<S> <C> <C>
INDUSTRIAL MACHINERY--0.5%
32,000 Caterpillar, Inc.............. $ 1,472,000
------------
INSURANCE--9.4%
75,458 American General Corp......... 5,885,724
19,000 Lincoln National Corp......... 1,554,438
15,000 Loews Corp.................... 1,473,750
57,000 Marsh & McLennan Companies,
Inc......................... 3,330,937
55,000 MGIC Investment Corp.......... 2,189,687
89,175 Old Republic International
Corp........................ 2,006,438
103,000 SAFECO Corp................... 4,422,562
31,000 St. Paul Companies, Inc....... 1,077,250
80,200 TIG Holdings, Inc............. 1,248,113
50,000 Torchmark Corp................ 1,765,625
14,000 Transamerica Corp............. 1,617,000
------------
26,571,524
------------
INTERNATIONAL OIL--4.6%
50,000 Amoco Corp.................... 3,018,750
116,200 Occidental Petroleum Corp..... 1,960,875
75,000 Phillips Petroleum Co......... 3,196,875
50,000 Repsol S.A. (ADR)............. 2,731,250
3,700 Texaco, Inc................... 195,638
65,000 YPF Sociedad Anonima (ADR).... 1,815,937
------------
12,919,325
------------
MINING--1.0%
55,500 Phelps Dodge Corp............. 2,823,562
------------
MISCELLANEOUS--1.1%
82,900 Tenneco, Inc.................. 2,823,782
24,200 Usec, Inc..................... 335,775
------------
3,159,557
------------
PAPER--1.3%
41,999 International Paper Co........ 1,882,080
26,000 Union Camp Corp............... 1,755,000
------------
3,637,080
------------
PETROLEUM SERVICES--0.7%
40,000 Norsk Hydro A S.............. 1,367,500
25,600 Ultramar Diamond Shamrock.... 620,800
------------
1,988,300
------------
PLASTICS--0.2%
42,200 Tupperware Corp.............. 693,663
------------
POLLUTION CONTROL--1.4%
39,961 Browning Ferris Industries,
Inc........................ 1,136,391
58,349 Waste Management, Inc........ 2,720,522
------------
3,856,913
------------
RAILROADS & EQUIPMENT--1.6%
14,000 CSX Corp..................... 581,000
125,000 Norfolk Southern Corp........ 3,960,937
------------
4,541,937
------------
RETAIL TRADE--1.5%
27,200 May Department Stores Co..... 1,642,200
31,800 Penny (J.C.) Co., Inc........ 1,490,625
28,800 Sears, Roebuck & Co.......... 1,224,000
------------
4,356,825
------------
SOFTWARE--0.5%
35,000 Computer Associates
International, Inc......... 1,491,875
------------
STEEL--1.3%
35,000 Nucor Corp................... 1,513,750
100,100 USX-U.S. Steel Group, Inc.... 2,302,300
------------
3,816,050
------------
TELEPHONE--3.3%
49,900 ALLTEL Corp.................. 2,984,644
49,300 AT&T Corp.................... 3,709,825
13,500 GTE Corp..................... 877,500
31,692 SBC Communications, Inc...... 1,699,483
------------
9,271,452
------------
TIRES & RUBBER--0.5%
65,000 Cooper Tire & Rubber Co...... 1,328,438
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 65
<PAGE> 172
THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- ------- ------------------------------ ------------
<S> <C> <C>
TOBACCO--3.6%
193,000 Philip Morris Companies,
Inc......................... $ 10,325,500
------------
TOYS & AMUSEMENTS--0.5%
60,000 Mattel, Inc................... 1,368,750
------------
TRUCKING & FREIGHT Forwarding--0.2% 520,000
20,000 Ryder System, Inc............. ------------
TECHNOLOGY & SERVICES--1.4%
80,000 Electronic Data Systems 4,020,000
Corp........................ ------------
Total common stocks 280,403,186
(cost $200,131,346)......... ------------
SHORT-TERM INVESTMENTS--0.3%
956,726 Seven Seas Series Government
Fund
4.70%**, (cost $956,726).... 956,726
------------
TOTAL INVESTMENTS--99.2%
(cost $201,088,072; Note 4)... 281,359,912
Other assets in excess of
liabilities--0.8%........... 2,127,723
------------
NET ASSETS--100%.............. $283,487,635
============
</TABLE>
- ---------------
* Non-income producing.
** Rate represents yield at purchase date.
ADR--American Depository Receipts.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 66
<PAGE> 173
SMALL CAPITALIZATION GROWTH PORTFOLIO
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- ------- ---------------------------- ------------
<S> <C> <C>
LONG-TERM INVESTMENTS--96.5%
COMMON STOCKS--96.5%
AEROSPACE--0.6%
17,200 Gulfstream Aerospace Corp.... $ 915,900
------------
AIRLINES--1.0%
12,100 America West Holdings
Corp.*..................... 205,700
43,200 SkyWest, Inc................. 1,412,100
------------
1,617,800
------------
APPAREL & TEXTILES--3.6%
34,600 Jones Apparel Group, Inc.*... 763,363
31,650 Mohawk Industries, Inc.*..... 1,331,278
14,900 Nautica Enterprises, Inc.*... 223,500
55,400 Tarrant Apparel Group........ 2,202,150
34,000 The First Years, Inc......... 537,625
11,900 Tommy Hilfiger Corp.
(The)*..................... 714,000
------------
5,771,916
------------
AUTO/TRUCK EQUIPMENT--1.1%
136,400 Aftermarket Technology
Corp*...................... 1,074,150
17,000 Arvin Industries, Inc........ 708,687
------------
1,782,837
------------
BANKS--0.4%
24,300 Dime Community Bancshares.... 501,187
8,700 FirstFed Financial Corp.*.... 155,513
------------
656,700
------------
BROADCASTING--3.9%
72,494 Clear Channel Communications,
Inc.*...................... 3,950,923
27,900 Echostar Communications
Corp....................... 1,349,662
44,700 Sinclair Broadcast Group,
Inc.*...................... 874,444
------------
6,175,029
------------
BUILDING PRODUCTS--0.8%
47,700 Service Experts, Inc.*....... 1,395,225
------------
BUSINESS SERVICES--12.9%
24,600 ADVO, Inc.................... 648,825
107,900 American Management Systems,
Inc.*...................... 4,316,000
61,300 Billing Info Concepts
Corp....................... 674,300
32,900 BISYS Group, Inc. (The)*..... 1,698,462
38,100 Catalina Marketing Corp.*.... 2,605,087
109,800 CCC Information Services
Group, Inc.*............... 1,894,050
20,900 INSpire Insurance Solutions,
Inc.*...................... 384,038
14,000 Kronos, Inc.................. 620,375
53,850 Labor Ready, Inc.*........... 1,060,172
29,700 On Assignment, Inc*.......... 1,024,650
70,000 Quanta Services, Inc.*....... 1,544,375
11,400 Robert Half International,
Inc.*...................... 509,438
31,700 Scientific Games Holdings
Corp.*..................... 598,337
62,500 Telespectrum Worldwide
Inc.*...................... 613,281
40,300 UBICS, Inc.*................. 216,613
73,800 Zebra Technologies Corp.*.... 2,121,750
------------
20,529,753
------------
CHEMICALS--0.6%
6,300 Minerals Technologies,
Inc........................ 257,906
8,300 Waters Corp.................. 724,175
------------
982,081
------------
COMMERCIAL SERVICES--0.3%
19,700 Ogden Corp................... 493,731
------------
COMMUNICATION EQUIPMENT & SERVICES--3.0%
63,200 Centennial Cellular Corp.*... 2,591,200
66,800 Tekelec*..................... 1,106,375
29,700 Xircom, Inc.................. 1,009,800
------------
4,707,375
------------
COMPUTERS & BUSINESS EQUIPMENT--8.6%
228,077 Artesyn Technologies, Inc.... 3,193,078
89,900 Black Box Corp.*............. 3,404,962
57,800 Computer Network
Technology................. 722,500
26,400 Cybex Computer Products
Corp.*..................... 775,500
52,400 InterVoice, Inc.............. 1,807,800
89,800 Mastech Corp.*............... 2,570,525
52,800 Spyglass, Inc................ 1,161,600
------------
13,635,965
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 67
<PAGE> 174
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION GROWTH PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------- ----------------------------- -------------
<S> <C> <C>
CONTRUCTION MATERIALS--0.9%
17,800 Centex Construction Products, $
Inc........................ 723,125
21,000 Granite Construction, Inc.... 704,812
------------
1,427,937
------------
DRUGS & HEALTHCARE--6.8%
28,200 Allegiance Corp.............. 1,314,825
21,400 Alpharma Inc................. 755,688
35,767 Cardinal Health, Inc......... 2,713,821
40,500 First Commonwealth, Inc.*.... 536,625
9,500 IMPATH, Inc.*................ 251,750
8,200 Pacificare Health Systems.... 651,900
13,300 Pediatrix Medical Group,
Inc........................ 797,169
38,400 Resmed, Inc.................. 1,742,400
28,000 Roberts Pharmaceutical
Corp....................... 609,000
42,000 Sunquest Information Systems,
Inc.*...................... 593,250
24,200 Trigon Healthcare, Inc....... 902,962
------------
10,869,390
------------
EDUCATIONAL SERVICES--4.3%
134,900 Apollo Group, Inc.*.......... 4,569,737
63,200 Strayer Education, Inc.*..... 2,227,800
------------
6,797,537
------------
ELECTRONICS--1.6%
13,600 Anaren Microwave, Inc.*...... 287,300
24,900 Cree Research, Inc.*......... 1,192,087
30,700 DSP Group, Inc.*............. 640,863
25,500 Tollgrade Communications,
Inc........................ 490,875
------------
2,611,125
------------
ENERGY--0.5%
24,200 Noble Affiliates, Inc........ 595,925
16,900 Nuevo Energy Co.*............ 194,350
------------
790,275
------------
FINANCIAL SERVICES--5.8%
36,400 AmeriCredit Corp.*........... 502,775
58,800 CMAC Investment Corp......... 2,701,125
40,600 Eaton Vance Corp............. 847,525
47,000 Enhance Financial Services
Group, Inc................. 1,410,000
58,100 Federated Investors, Inc..... $ 1,053,062
54,700 Homegold Financial, Inc...... 27,350
14,000 Metris Companies, Inc........ 704,375
92,200 Right Management Consultants,
Inc.*...................... 1,359,950
85,300 Unicapital Corp.*............ 629,088
------------
9,235,250
------------
FOOD & BEVERAGES--0.5%
13,800 Canandaigua Brands, Inc.*.... 797,813
------------
Homebuilders--2.2%
32,800 Lennar Corp.................. 828,200
27,700 Pulte Corp................... 770,406
31,100 Ryland Group, Inc.*.......... 898,013
64,575 Watsco, Inc.................. 1,081,631
------------
3,578,250
------------
HOME FURNISHINGS--0.5%
8,200 Ethan Allen Interiors,
Inc........................ 336,200
24,000 Stanley Furniture Company,
Inc.*...................... 438,000
------------
774,200
------------
HOUSEHOLD PRODUCTS--0.4%
78,300 WMS Industries, Inc.......... 577,463
------------
INDUSTRIAL MACHINERY--1.8%
13,000 Briggs & Stratton Corp....... 648,375
21,800 Manitowoc Co., Inc.(The)..... 967,375
104,800 PPT Vision, Inc*............. 524,000
15,800 York International Corp...... 644,837
------------
2,784,587
------------
INSURANCE--2.6%
18,400 Amerin Corp.*................ 434,700
26,950 Fidelity National Financial,
Inc........................ 821,975
22,800 First American Financial
Corp....................... 732,450
19,588 MBIA, Inc.................... 1,284,238
4,700 Mutual Risk Management,
Ltd........................ 183,888
12,500 Stewart Information Services
Corp....................... 725,000
------------
4,182,251
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 68
<PAGE> 175
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------- ----------------------------- ------------
<S> <C> <C>
MANUFACTURING--0.9%
34,900 Aptargroup, Inc.............. $ 979,381
93,100 Flanders Corp.*.............. 378,219
------------
1,357,600
------------
MEDIA--2.2%
190,366 Nielsen Media Research,
Inc........................ 3,426,588
------------
MEDICAL & DENTAL SUPPLIES--7.9%
113,100 Mentor Corp.................. 2,650,781
32,200 Patterson Dental Co.*........ 1,400,700
31,900 Perclose, Inc.*.............. 1,056,688
152,800 Respironics, Inc.*........... 3,060,775
53,600 Safeskin Corp.*.............. 1,293,100
13,200 VISX, Inc.*.................. 1,154,175
61,950 Xomed Surgical Products,
Inc.*...................... 1,982,400
------------
12,598,619
------------
MISCELLANEOUS--0.3%
42,000 JLK Direct Distribution,
Inc........................ 427,875
------------
OFFICE EQUIPMENT & SERVICES--1.3%
50,800 Miller (Herman), Inc......... 1,365,250
27,400 United Stationers, Inc.*..... 712,400
------------
2,077,650
------------
OIL FIELD/EQUIPMENT & SERVICES--1.2%
23,900 Gerber Scientific, Inc....... 569,119
80,100 Petroleum Geo-Services ASA
(ADR)*..................... 1,261,575
------------
1,830,694
------------
POLLUTION CONTROL EQUIPMENT &
SERVICES--0.3%
24,800 Superior Services, Inc.*..... 497,550
------------
PRINTING & PUBLISHING--1.7%
8,300 Banta Corp................... 227,213
48,300 Valassis Communications,
Inc.*...................... 2,493,487
------------
2,720,700
------------
PUBLISHING--0.9%
16,000 Houghton Mifflin Co.......... 756,000
45,900 Ziff Davis Incorporated*..... 725,794
------------
1,481,794
------------
RESTAURANTS--0.5%
37,000 Foodmaker, Inc*.............. 816,313
------------
RETAIL TRADE--5.7%
10,800 American Eagle Outfitters,
Inc.*...................... 719,550
35,000 Ames Department Stores,
Inc.*...................... 945,000
39,600 Barnett, Inc.*............... 544,500
20,100 Best Buy Co., Inc............ 1,233,637
25,900 Intimate Brands, Inc......... 773,763
53,500 Lithia Motors, Inc.*......... 882,750
53,700 MSC Industrial Direct,
Inc........................ 1,214,962
49,500 Musicland Stores Corp.*...... 739,406
30,100 Ross Stores, Inc............. 1,185,188
42,300 Trans World Entertainment
Corp.*..................... 806,344
------------
9,045,100
------------
SEMICONDUCTORS & EQUIPMENT--0.8%
28,400 Vitesse Semiconductor
Corp.*..................... 1,295,750
------------
SOFTWARE--4.6%
16,350 Citrix Systems, Inc.*........ 1,586,972
5,000 Henry Jack & Associates,
Inc........................ 248,750
25,700 IMRglobal Corp............... 756,544
39,800 Keane, Inc.*................. 1,589,512
28,800 Siebel Systems Inc.*......... 977,400
30,300 The Learning Company,
Inc.*...................... 785,906
43,600 Timberline Software Corp..... 599,500
15,000 Transaction Systems
Architects, Inc.*.......... 750,000
------------
7,294,584
------------
TELECOMMUNICATION--0.6%
23,600 International Telecomm.
Systems, Inc.*............. 348,100
30,300 Skytel Communications,
Inc.*...................... 670,388
------------
1,018,488
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 69
<PAGE> 176
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION GROWTH PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- ------- ----------------------------- ------------
<S> <C> <C>
TRANSPORTATION--2.4%
84,300 Coach USA, Inc.*............. $ 2,924,156
23,300 Navistar International
Corp.*..................... 664,050
4,500 XTRA Corp.................... 186,188
------------
3,774,394
------------
TRUCKING & FREIGHT--0.5%
16,200 Hertz Corp................... 739,125
------------
Total common stocks
(cost $118,802,226)........ 153,493,214
------------
SHORT-TERM INVESTMENTS--4.4%
OTHER--2.2%
456,000 Seven Seas Money Market Fund
4.89%**.................... 455,817
3,073,000 Seven Seas Series Government
Fund
4.69%**.................... 3,072,950
------------
Total other
(cost $3,528,767).......... 3,528,767
------------
Principal
Amount
(000) COMMERCIAL PAPER--2.2%
- ----------
$ 3,507 Northern States Power. Co.,
5.05%, 1/4/99
(cost $3,505,524).......... 3,505,524
------------
Total short-term investments
(cost $7,034,291).......... 7,034,291
------------
TOTAL INVESTMENTS--100.9%
(cost $125,836,517; Note
4)......................... 160,527,505
Liabilities in excess of
other
assets--(0.9%)............. (1,545,069)
------------
NET ASSETS--100%............. $158,982,436
============
</TABLE>
- ------------------
* Non-income producing security.
** Rate represents yield at purchase date.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 70
<PAGE> 177
SMALL CAPITALIZATION VALUE PORTFOLIO
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<C> <S> <C>
LONG-TERM INVESTMENTS--98.4%
Common Stocks--98.4%
AEROSPACE--0.1%
7,000 Aeroquip-Vickers, Inc......... $ 209,562
------------
APPAREL & TEXTILES--1.6%
137 Albany International Corp.,
Cl. A....................... 2,595
57,100 Culp, Inc..................... 449,662
48,200 Oakley, Inc.*................. 454,887
51,000 Stride Rite Corp.............. 446,250
15,000 Unifi, Inc.................... 293,438
20,100 Unitog Co..................... 577,875
------------
2,224,707
------------
AUTO RELATED--3.0%
21,800 Borg-Warner Automotive,
Inc......................... 1,216,712
35,600 Budget Group, Inc.*........... 565,150
29,800 Modine Manufacturing Co....... 1,080,250
49,648 Myers Industries, Inc......... 1,421,174
------------
4,283,286
------------
AUTOMOBILES--1.2%
13,100 Dura Automotive Systems,
Inc.*....................... 447,037
49,700 Tower Automotive, Inc.*....... 1,239,394
------------
1,686,431
------------
BANKS--4.9%
16,100 Bank United Corp.............. 631,925
17,000 First American Corp........... 754,375
37,000 Firstmerit Corp............... 994,375
29,213 HUBCO, Inc.................... 880,042
45,000 Independent Bank Corp. -
Mass........................ 781,875
35,750 People's Bank................. 987,594
22,000 Southwest Bancorporation of 393,250
Texas, Inc.*................
10,700 Staten Islands Bancorp,
Inc......................... 213,331
35,550 Susquehanna Bancshares,
Inc........................ 727,664
42,400 The Colonial BancGroup,
Inc........................ 508,800
------------
6,873,231
------------
BROADCASTING--0.5%
11,900 NTL, Inc..................... 671,606
------------
BUILDING & CONSTRUCTION--3.3%
47,300 Apogee Enterprises, Inc...... 532,125
33,000 Carlisle Co., Inc............ 1,703,625
18,900 Hughes Supply, Inc........... 552,825
21,800 Jacobs Engineering Group,
Inc.*...................... 888,350
16,500 Martin Marietta Materials,
Inc........................ 1,026,094
------------
4,703,019
------------
BUSINESS SERVICES--0.9%
70,600 Bowne & Co., Inc............. 1,261,975
------------
CHEMICALS--4.1%
36,600 Cambrex Corp................. 878,400
28,250 Ferro Corp................... 734,500
10,500 Fuller (H.B.) Co............. 505,313
33,050 Learonal, Inc................ 1,119,569
64,600 M.A. Hanna Co................ 795,387
57,662 RPM, Inc..................... 922,592
37,400 Schulman (A.), Inc........... 848,512
------------
5,804,273
------------
COMMUNICATION--0.9%
72,200 Allen Telecom, Inc.*......... 482,837
32,700 Vanguard Cellular System,
Inc.*...................... 844,069
------------
1,326,906
------------
COMPUTERS & BUSINESS EQUIPMENT--1.5%
54,600 MTS Systems Corp............. 737,100
61,500 Planar Systems, Inc.*........ 418,969
32,800 Wang Laboratories, Inc.*..... 910,200
------------
2,066,269
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-71
<PAGE> 178
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<C> <S> <C>
CONSTRUCTION & MINING EQUIPMENT--0.6%
50,700 JLG Industries, Inc........... $ 792,188
------------
CONTRUCTION MATERIALS--0.3%
13,200 Lone Star Industries, Inc..... 485,925
------------
DIVERSIFIED INDUSTRIALS--2.8%
35,500 Applied Power, Inc............ 1,340,125
25,200 Brady (W.H.) Co............... 678,825
41,400 Teleflex, Inc................. 1,888,875
------------
3,907,825
------------
DRUGS & HEALTHCARE--5.2%
7,900 ADAC Laboratories*............ 157,753
53,300 Apria Healthcare Group,
Inc.*....................... 476,369
25,500 Arrow International, Inc...... 800,062
15,800 Beckman Coulter, Inc.......... 857,150
21,700 Integrated Health Services,
Inc......................... 306,512
35,000 Invacare Corp................. 840,000
103,100 Perrigo Co.*.................. 908,569
45,100 Sun Healthcare Group, Inc.*... 295,969
49,500 Sunrise Medical, Inc.*........ 615,656
21,100 Vital Signs, Inc.............. 369,250
50,500 West Co., Inc................. 1,802,219
------------
7,429,509
------------
ELECTRIC UTILITIES--1.2%
31,200 Calpine Corp.*................ 787,800
23,000 Sierra Pacific Resources...... 874,000
------------
1,661,800
------------
ELECTRICAL EQUIPMENT--3.1%
64,100 Anixter International,
Inc.*....................... 1,302,031
27,900 Belden, Inc................... 591,131
20,800 Oak Industries, Inc.*......... 728,000
34,200 Technitrol, Inc............... 1,090,125
51,500 Woodhead Industries, Inc...... 669,500
------------
4,380,787
------------
ELECTRONICS--7.9%
29,800 Bell & Howell Co.*............ 1,126,812
39,800 Credence Systems Corp.*....... 736,300
27,700 Dallas Semiconductor Corp.... 1,128,775
12,950 Dynatech Corp.*.............. 35,613
18,000 Electro Scientific
Industries, Inc.*.......... 815,625
22,400 Electronics for Imaging,
Inc.*...................... 900,200
42,400 Esterline Technologies
Corp.*..................... 922,200
20,100 Harman International
Industries, Inc............ 766,313
66,400 Kemet Corp.*................. 747,000
21,700 Lam Research Corp.*.......... 386,531
17,400 Lattice Semiconductor
Corp.*..................... 798,769
56,050 Methode Eletronics, Inc...... 875,781
16,950 Nichols Research Corp.*...... 353,831
87,800 Pioneer Standard Electronics,
Inc........................ 823,125
67,200 VLSI Technology, Inc.*....... 735,000
------------
11,151,875
------------
FOOD - SERVICE/LODGING--1.5%
31,700 Luby's Cafeterias, Inc....... 489,369
64,000 Marcus Corp.................. 1,040,000
23,400 Sbarro, Inc.................. 612,787
------------
2,142,156
------------
FOODS--3.2%
24,800 American Italian Pasta
Co.*....................... 654,100
3,800 Aurora Foods, Inc.*.......... 75,287
7,200 International Multifoods
Corp....................... 185,850
24,150 Lancaster Colony Corp........ 775,819
16,100 Lance, Inc................... 320,994
17,500 Ralcorp Holdings, Inc.*...... 319,375
53,200 Universal Foods Corp......... 1,459,675
32,500 Vlasic Foods International,
Inc.*...................... 773,906
------------
4,565,006
------------
GAS & PIPELINE UTILITIES--1.8%
17,200 KN Energy, Inc............... 625,650
21,600 National Fuel Gas Co......... 976,050
45,100 Wicor, Inc................... 983,744
------------
2,585,444
------------
HOMEBUILDERS--1.3%
12,400 Kaufman & Broad Home Corp.... 356,500
35,400 Toll Brothers, Inc.*......... 798,712
47,900 Walter Industries, Inc.*..... 733,469
------------
1,888,681
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-72
<PAGE> 179
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<C> <S> <C>
HOSPITAL SUPPLIES & SERVICES--1.6%
47,100 Magellan Health Services,
Inc.*....................... $ 394,462
88,650 Sierra Health Services,
Inc.*....................... 1,867,191
------------
2,261,653
------------
HOTELS & RESTAURANTS--1.2%
53,400 Lone Star Steakhouse & Saloon,
Inc.*....................... 490,613
42,900 Prime Hospitality Corp.*...... 453,131
60,400 Ryan's Family Steak Houses,
Inc.*....................... 747,450
------------
1,691,194
------------
HOUSEHOLD APPLIANCES & HOME
FURNISHINGS--2.2%
24,000 Bassett Furniture Industries,
Inc......................... 579,000
40,900 Chromcraft Revington, Inc.*... 677,406
44,700 Furniture Brands
International, Inc.*........ 1,218,075
22,100 Libbey, Inc................... 639,519
------------
3,114,000
------------
INDUSTRIAL & MACHINERY--8.1%
21,100 Briggs & Stratton Corp........ 1,052,362
39,225 Crane Co...................... 1,184,105
41,500 First Brands Corp............. 1,636,656
29,300 Graco, Inc.................... 864,350
12,000 Hussmann International,
Inc......................... 232,500
41,600 MagneTek, Inc.*............... 481,000
63,809 Mark IV Industries, Inc....... 829,517
22,500 OmniQuip International,
Inc......................... 337,500
32,700 Polaris Industries, Inc....... 1,281,431
50,200 Regal-Beloit Corp............. 1,154,600
36,900 Scotsman Industries, Inc...... 758,756
26,400 Standex International Corp.... 693,000
39,900 Watts Industries, Inc., Cl.
A........................... 663,338
27,800 Wyman-Gordon Co.*............. 284,950
------------
11,454,065
------------
INSURANCE--8.2%
46,300 Amerin Corp.*................. 1,093,837
12,900 Arthur J. Gallagher & Co...... 569,213
19,200 Blanch (E.W.) Holdings,
Inc......................... 910,800
7,628 Delphi Financial Group, Inc.,
Cl. A*...................... 399,993
31,200 Enhance Financial Services
Group, Inc.................. 936,000
7,600 Executive Risk, Inc.......... 417,525
31,490 Frontier Insurance Group,
Inc........................ 405,434
34,700 HCC Insurance Holdings,
Inc........................ 611,587
65,100 Horace Mann Educators
Corp....................... 1,855,350
37,700 NAC Re Corp.................. 1,769,544
3,400 Orion Capital Corp........... 135,363
25,000 Poe & Brown, Inc............. 873,437
33,200 Protective Life Corp......... 1,321,775
27,000 Reliance Group Holdings,
Inc........................ 347,625
------------
11,647,483
------------
LEISURE AND RECREATION--0.0%
200 K2, Inc...................... 2,063
------------
MANUFACTURING--2.6%
31,800 ACX Technologies, Inc.*...... 421,350
30,625 Clarcor, Inc................. 612,500
40,000 Flowserve Corp............... 662,500
58,600 Lydall, Inc.*................ 695,875
20,350 Osmonics, Inc.*.............. 171,703
29,000 Roper Industries, Inc........ 590,875
36,500 Silicon Valley Group,
Inc.*...................... 465,375
------------
3,620,178
------------
MISCELLANEOUS--1.4%
36,800 Aptargroup, Inc.............. 1,032,700
36,365 Nielsen Media Research,
Inc........................ 654,570
45,900 Unisource Worldwide, Inc..... 332,775
------------
2,020,045
------------
OFFICE EQUIPMENT--0.4%
23,800 Hon Industries, Inc.......... 569,713
------------
Oil & Gas--1.6%
22,700 Devon Energy Corp............ 696,606
81,200 Helmerich & Payne, Inc....... 1,573,250
------------
2,269,856
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-73
<PAGE> 180
THE TARGET PORTFOLIO TRUST
Small Capitalization Value Portfolio (cont'd)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<C> <S> <C>
OIL & GAS - PRODUCTION/
PIPELINE--1.1%
31,900 Barrett Resources Corp.*...... $ 765,600
48,000 Snyder Oil Corp............... 639,000
23,900 Tuboscope, Inc.*.............. 194,188
------------
1,598,788
------------
OIL-SUPPLIES & CONSTRUCTION--0.4%
50,000 Newpark Resources, Inc.*...... 340,625
12,700 Tidewater, Inc................ 294,481
------------
635,106
------------
PAPER & RELATED PRODUCTS--0.9%
5,200 Chesapeake Corp............... 191,750
62,200 Wausau Paper Co............... 1,100,163
------------
1,291,913
------------
PETROLEUM SERVICES--0.6%
56,300 Varco International, Inc...... 436,325
43,000 Vintage Petroleum, Inc........ 370,875
------------
807,200
------------
PRINTING & PUBLISHING--3.6%
36,350 American Business Products,
Inc......................... 854,225
82,450 Banta Corp.................... 2,257,069
28,800 Gibson Greetings, Inc.*....... 342,000
36,400 Lee Enterprises, Inc.......... 1,146,600
17,900 World Color Press, Inc.*...... 544,831
------------
5,144,725
------------
PROFESSIONAL SERVICES--1.4%
35,900 CDI Corp.*.................... 724,731
29,000 HSB Group, Inc................ 1,190,813
------------
1,915,544
------------
RAILROADS & EQUIPMENT--0.2%
20,000 ABC Rail Products Corp.*...... 243,750
------------
REAL ESTATE INVESTMENT TRUST
--3.1%
39,700 Catellus Development Corp.*... 568,206
17,500 Chateau Communities, Inc...... 512,969
30,000 Felcor Lodging Trust, Inc..... 691,875
33,700 Glenborough Realty Trust,
Inc......................... 686,637
4,800 JDN Realty Corp............... 103,500
22,200 Kilroy Realty Corp............ 510,600
28,600 Liberty Property Trust....... 704,275
18,100 Mack California Realty
Corp....................... 558,838
------------
4,336,900
------------
RETAIL - APPAREL--1.3%
27,300 Lands End, Inc............... 735,394
19,400 Talbots, Inc................. 608,675
16,800 Wet Seal, Inc., Cl. A*....... 507,150
------------
1,851,219
------------
RETAIL - FOOD & DRUGS--1.4%
34,300 General Nutrition Co.*....... 557,375
59,100 Ruddick Corp................. 1,359,300
------------
1,916,675
------------
RETAIL TRADE--1.1%
21,900 Cole National Corp.*......... 375,038
22,700 Eagle Hardware & Garden,
Inc.*...................... 737,750
43,600 Pier 1 Imports, Inc.......... 422,375
------------
1,535,163
------------
SAVINGS AND LOAN--2.1%
22,425 Astoria Financial Corp....... 1,025,944
65,211 Sovereign Bancorp, Inc....... 929,257
37,000 Webster Financial Corp....... 1,015,187
------------
2,970,388
------------
TOYS & AMUSEMENTS--0.5%
31,600 Russ Berrie & Co., Inc....... 742,600
------------
TRUCKING & FREIGHT FORWARDING
--2.5%
32,200 Circle International Group,
Inc........................ 660,100
17,500 CNF Transportation, Inc...... 657,344
37,600 Pittston BAX Group........... 418,300
24,500 Pittston Brinks Group........ 780,938
57,000 Werner Enterprises, Inc...... 1,008,187
------------
3,524,869
------------
Total common stocks
(cost $123,035,577)........ 139,267,551
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-74
<PAGE> 181
<TABLE>
<CAPTION>
VALUE
UNITS DESCRIPTION (NOTE 1)
----- ----------- --------
<C> <S> <C>
WARRANT*--0.0%
33,910 Wilshire Technologies, Inc.
expiring Nov. 28, 2002
(cost $0)................... $ 10,614
------------
Total long-term investments
(cost $123,035,577)......... 139,278,165
------------
SHORT-TERM INVESTMENTS--2.0%
OTHER--0.8%
1,215,896 Seven Seas Money Market Fund
4.89%**
(cost $1,215,896)............. 1,215,896
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
(000) U.S. GOVERNMENT SECURITIES--1.2%
- --------
<C> <S> <C>
United States Treasury Bills,
$ 50 3.87%, 4/8/99................. 49,417
30 3.99%, 4/8/99................. 29,650
55 4.10%, 4/8/99................. 54,358
260 4.18%, 4/8/99................. 256,963
185 4.28%, 4/8/99................. 182,838
15 4.31%, 4/8/99................. 14,825
335 4.33%, 4/8/99................. 331,082
195 4.35%, 4/8/99................. 192,720
55 4.36%, 4/8/99................. 54,357
380 4.38%, 4/8/99................. 375,555
115 4.46%, 4/8/99................. 113,654
------------
Total U.S. government
securities
(cost $1,655,605)........... 1,655,419
------------
Total short-term investments
(cost $2,871,501)........... 2,871,315
------------
TOTAL INVESTMENTS--100.4%
(cost $125,907,078; Note 4)... 142,149,480
Liabilities in excess of other
assets--(0.4%).............. (592,230)
------------
NET ASSETS--100%.............. $141,557,250
============
</TABLE>
- ---------------
* Non-income producing security.
** Rate represents yield at purchase date.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-75
<PAGE> 182
THE TARGET PORTFOLIO TRUST
International Equity Portfolio
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<C> <S> <C>
LONG-TERM INVESTMENTS--98.4%
Common Stocks--98.4%
AUSTRALIA--2.2%
414,622 Broken Hill Proprietary Co.,
Ltd......................... $ 3,053,705
360,500 Westpac Banking Corp.......... 2,412,317
------------
5,466,022
------------
DENMARK--1.3%
34,600 Unidanmark Series A........... 3,126,031
------------
FINLAND--1.2%
222,600 Merita, Ltd., Series A........ 1,405,711
50,280 UPM Kymmene OYJ*.............. 1,400,227
------------
2,805,938
------------
FRANCE--15.8%
27,830 Alcatel Alsthom (Cie
Generale)................... 3,404,707
31,170 Axa-UAP....................... 4,515,775
54,860 Banque Nationale de Paris..... 4,515,574
25,180 Cie De Saint Gobain........... 3,553,393
44,100 Compagnie Generale des
Etablissements Michelin,
Series B.................... 1,762,896
29,420 Cie Generale des Eaux......... 7,629,941
35,600 Elf Aquitaine S.A............. 4,113,325
102,477 Rhone-Poulenc SA, Series A.... 5,271,398
18,200 Suez Lyonnaise des Eaux....... 3,737,006
------------
38,504,015
------------
GERMANY--10.5%
9,212 Allianz A.G................... 3,377,254
36,783 DaimlerChrysler A.G.*......... 3,630,628
112,300 Hoechst A.G................... 4,656,144
75,680 Metro A.G..................... 6,039,506
57,000 Siemens A.G................... 3,676,647
9,360 Thyssen A.G................... 1,735,975
4,395 Viag A.G...................... 2,576,452
------------
25,692,606
------------
HONG KONG--0.9%
90,935 HSBC Holdings PLC........... 2,265,276
-----------
ITALY--6.1%
558,300 Eni SpA..................... 3,646,702
319,300 Instituto Bancario San Paolo
di Torino SpA............. 5,638,852
877,800 Telecom Italia SpA.......... 5,521,256
-----------
14,806,810
-----------
JAPAN--14.6%
203,000 Asahi Breweries, Ltd........ 2,989,783
421 Japan Tobacco, Inc.......... 4,208,138
167,000 Matsushita Electric
Industrial Co., Ltd....... 2,952,968
29,700 Nintendo Co., Ltd........... 2,876,736
260 Nippon Telegraph & Telephone
Corp...................... 2,005,484
411,000 Nissan Motor Co., Ltd....... 1,257,904
88 NTT Mobile Communication
Network, Inc.............. 3,619,637
98,000 Omron Corp.................. 1,341,920
53,100 Orix Corp................... 3,964,299
47,840 Promise Co., Ltd............ 2,488,273
370,000 Ricoh Corp., Ltd............ 3,410,349
41,900 Sony Corp................... 3,050,305
587,000 Sumitomo Trust & Banking
Co., Ltd.................. 1,557,718
-----------
35,723,514
-----------
MALAYSIA--0.3%
408,300 Genting Berhad.............. 620,345
-----------
NETHERLANDS--3.7%
77,500 Heineken N.V................ 4,661,468
20,300 ING Groep N.V............... 1,237,212
45,450 Philips Electronics N.V..... 3,048,225
-----------
8,946,905
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-76
<PAGE> 183
<TABLE>
<CAPTION>
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<C> <S> <C>
SINGAPORE--0.9%
342,000 United Overseas Bank, Ltd..... $ 2,195,760
------------
SPAIN--5.9%
184,400 Argentaria, Caja Postal y
Banco
Hipotecario de Espana,
S.A......................... 4,768,294
129,600 Endesa S.A.................... 3,428,764
142,545 Telefonica de Espana S.A...... 6,328,870
------------
14,525,928
------------
SWEDEN--7.2%
240,300 ABB AB, Series A.............. 2,558,334
224,833 Astra AB, Series B............ 4,565,952
194,100 Electrolux AB, Series B....... 3,332,630
205,900 Nordbanken Holding AB......... 1,317,792
90,600 Svenska Handelsbanken, Series
A........................... 3,813,657
87,000 Volvo AB, Series B............ 1,991,680
------------
17,580,045
------------
SWITZERLAND--6.2%
1,286 Nestle S.A.................... 2,799,112
248 Roche Holdings A.G............ 3,025,755
1,730 The Swatch Group A.G. Series
B........................... 1,070,467
1,416 Societe Generale de
Surveillance
Holding S.A................. 1,386,416
9,420 Zurich
Versicherungs-Gesellschaft... 6,973,968
------------
15,255,718
------------
UNITED KINGDOM--21.6%
162,000 Allied Zurich PLC............. 2,434,441
734,428 British Aerospace PLC......... 6,259,538
394,400 British America Tobacco
Industries PLC.............. 3,472,869
287,500 British Petroleum Co. PLC..... 4,279,781
102,406 Cadbury Schweppes PLC......... 1,752,420
336,999 Diageo PLC.................... 3,737,279
206,740 EMI Group PLC................. 1,384,220
220,700 Granada Group PLC........... $ 3,868,392
248,900 Great Universal Stores
PLC....................... 2,625,876
310,438 Imperial Chemical Industries
PLC....................... 2,689,706
448,000 Mirror Group PLC............ 1,118,325
244,000 National Westminster Bank
PLC....................... 4,722,712
295,739 Prudential Corp. PLC........ 4,511,359
453,600 Royal & Sun Alliance
Insurance Group PLC....... 3,692,707
819,800 Siebe PLC................... 3,221,178
272,200 Unilever PLC................ 3,061,628
-----------
52,832,431
-----------
Total long-term investments
(cost $191,248,598)....... $240,347,344
------------
SHORT-TERM INVESTMENTS--1.7%
Rights Rights*--0.1%
- ----------
143 Telefonica S.A.
expiring 1/30/99
(cost $0)................. 126,377
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
(000) U.S. GOVERNMENT SECURITIES--1.6%
- ----------
<S> <C> <C>
$ 4,035 United States Treasury
Bills,
Zero Coupon, 4/8/99
(cost $3,987,947)......... 3,988,196
-----------
Total short-term investments
(cost $3,987,947)......... 4,114,573
-----------
TOTAL INVESTMENTS--100.1%
(cost $195,236,545; Note
4)........................ 244,461,917
Liabilities in excess of
other
assets--(0.1%)............ (171,107)
-----------
NET ASSETS--100%............ $244,290,810
============
</TABLE>
- ------------------
* Non-income producing securities.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-77
<PAGE> 184
THE TARGET PORTFOLIO TRUST
INTERNATIONAL EQUITY PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
The industry classification of portfolio holdings and other net assets shown as
a percentage of net assets as of December 31, 1998 was as follows:
<TABLE>
<S> <C>
Banking.......................................... 13.1%
Insurance........................................ 10.4
Telecommunications............................... 7.2
Food & Beverage.................................. 5.4
Manufacturing.................................... 4.9
Retail........................................... 4.6
Energy........................................... 4.5
Chemicals........................................ 3.3
Utilities........................................ 3.1
Automobiles...................................... 2.8
Aerospace/Defense................................ 2.6
Consumer Durable Goods........................... 2.6
Electrical Equipment............................. 2.5
Conglomerates.................................... 2.3
Steel - Producers................................ 1.9
Plantations...................................... 1.9
Intergrated Oil.................................. 1.8
Tobacco.......................................... 1.7
U.S Government Securities........................ 1.6
Leasing.......................................... 1.6
Diversified Industries........................... 1.6
Technology....................................... 1.6
Oil & Gas Services............................... 1.5
Industrials...................................... 1.5
Financial Services............................... 1.5
Office Equipment & Supplies...................... 1.4
Natural Resources Sector......................... 1.3
Software......................................... 1.2
Pharmaceuticals.................................. 1.2
Electronics...................................... 1.2
Consumer Goods................................... 1.1
Engineering & Equipment.......................... 1.0
Miscellaneous.................................... 4.2
-----
100.1
Liabilities in excess of other assets............ (0.1)
-----
100.0%
=====
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-78
<PAGE> 185
INTERNATIONAL BOND PORTFOLIO
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
----- ----------- --------
<C> <S> <C>
LONG-TERM INVESTMENTS--88.2%
AUSTRALIA--8.3%
Commonwealth of Australia,
A$ 500 7.00%, 4/15/00.............. $ 315,277
KFW Int'l. Finance,
1,400 7.25%, 7/16/07.............. 950,119
New South Wales Treasury
Corp.,
2,000 8.00%, 12/1/01.............. 1,327,287
-----------
2,592,683
-----------
CANADA--12.4%
Canadian Gov't. Bonds,
C$ 1,300 7.50%, 12/1/03.............. 949,591
1,000 8.75%, 12/1/05.............. 801,832
500 10.25%, 3/15/14............. 505,365
Deutsche Fin(Neth),
1,500 7.00%, 1/7/04............... 1,053,974
Province of Ontario,
750 8.00%, 3/11/03.............. 545,633
-----------
3,856,395
-----------
GERMANY--20.4%
Austrian Gov't. Bonds,
DM 1,000 7.25%, 5/3/07............... 726,029
Finland Gov't. Bonds,
2,000 5.50%, 2/9/01............... 1,226,449
German Gov't. Bonds,
600 6.00%, 1/5/06............... 408,436
1,000 6.00%, 7/4/07............... 689,728
1,000 6.25%, 1/4/24............... 728,729
Halifax PLC,
2,000 5.625%, 7/23/07............. 1,308,637
Nordic Invest. Bank,
2,000 4.875%, 3/1/01.............. 1,235,331
-----------
6,323,339
-----------
NETHERLANDS--10.2%
Dutch Gov't. Bonds,
NLG 4,000 8.25%, 9/15/07.............. 2,785,969
500 7.50%, 1/15/23.............. 370,868
-----------
3,156,837
-----------
NEW ZEALAND--11.2%
Int'l. Bank Recon. & Dev.,
NZ$ 2,500 7.25%, 5/27/03.............. $ 1,377,651
750 5.375%, 11/6/03............. 386,760
New Zealand Gov't. Bonds,
1,250 8.00%, 11/15/06............. 762,997
1,600 7.00%, 7/15/09.............. 942,539
-----------
3,469,947
-----------
SWEDEN--14.5%
Eksportfinans A/S,
SEK 7,000 6.875%, 2/9/04.............. 954,177
Kingdom of Sweden,
6,000 9.00%, 4/20/09.............. 1,030,918
Swedish Export Credit,
6,000 6.50%, 6/5/01............... 779,096
Swedish Gov't. Bonds,
6,000 6.00%, 2/9/05............... 819,786
Toyota Motor Credit,
7,000 7.50%, 8/6/01............... 927,038
-----------
4,511,015
-----------
SWITZERLAND--3.1%
Swiss Gov't. Bonds,
CHF 600 4.50%, 7/8/02............... 476,523
600 4.50%, 10/7/04.............. 494,692
-----------
971,215
-----------
UNITED STATES--8.1%
U. S. Treasury Notes,
US$ 922 3.625%, 7/15/02............. 914,626
1,035 3.375%, 1/15/07............. 1,000,428
609 3.625%, 1/15/08............. 597,428
-----------
2,512,482
-----------
Total long-term investments
(cost US$27,058,702)...... 27,393,913
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-79
<PAGE> 186
THE TARGET PORTFOLIO TRUST
INTERNATIONAL BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
----- ----------- --------
<C> <S> <C>
SHORT-TERM INVESTMENTS--9.5%
AUSTRALIA--5.0%
Commonwealth of Australia,
A$ 1,700 6.25%, 3/15/99.............. $ 1,044,856
Queensland Treasury Corp.,
800 8.00%, 7/14/99.............. 498,560
-----------
1,543,416
-----------
CANADA--2.6%
Canadian Gov't. Bonds,
C$ 1,250 4.75%, 9/15/99.............. 817,141
-----------
UNITED STATES--1.9%
US$ 586 State Street Bank & Trust
Co.,
2.00%, dated 12/31/98, due
1/4/99 in the amount of
$586,130 (cost $586,000;
collateralized by $435,000
U.S. Treasury Bonds,
8.125%, 8/15/21,
approximate value of
collateral including ac-
crued interest is
$599,960)................. 586,000
-----------
Total short-term Investments
(cost US$2,955,363)....... 2,946,557
-----------
TOTAL INVESTMENTS--97.7%
(cost US$30,014,065; Note
4)........................ 30,340,470
Other assets in excess of
liabilities--2.3%......... 701,451
-----------
Net Assets--100%............ $31,041,921
===========
</TABLE>
- ------------------
Portfolio securities are classified according to the securities currency
denomination.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-80
<PAGE> 187
TOTAL RETURN BOND PORTFOLIO
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- ----- ----------- --------
<S> <C> <C> <C>
LONG-TERM
INVESTMENTS--88.7%
Corporate Bonds--27.4%
AIRLINES--2.9%
Continental Airlines,
Inc.,
Ba2 $ 600 9.50%, 12/15/01......... $ 630,000
United Airlines, Inc.,
Baa1 1,000 10.85%, 2/19/15......... 1,309,170
------------
1,939,170
------------
BANKING--5.8%
Asian Development Bank
AAA## 900 5.82%, 6/16/28.......... 928,990
Gs Escrow Corporation
Ba1 1,300 6.75%, 8/1/01........... 1,282,057
Kansallis Osake Pankki,
(Finland),
A3 500 8.65%, 12/29/49......... 507,640
MBNA Bank, Inc.,
Baa1 100 ++ 5.58%, 8/7/01........... 97,590
Baa1 1,100 6.06%, 12/10/02......... 1,094,417
------------
3,910,694
------------
CABLE--1.2%
Tele-Communications,
Inc.,
Baa3 700 ++ 5.81%, 3/12/01.......... 692,275
Baa3 100 ++ 5.99%, 2/2/00........... 99,559
------------
791,834
------------
CONSUMER GOODS--1.8%
Westpoint Stevens, Inc.,
Ba3 1,200 7.88%, 6/15/05.......... 1,218,000
------------
ENERGY--1.6%
Williams Cos., Inc.,
BBB-## 1,100 5.50%, 1/30/00.......... 1,099,054
------------
FINANCIAL SERVICES--6.8%
Goldman Sachs Group,
L.P.
A1 1,000 5.87%, 1/25/01.......... 997,750
Lehman Brothers
Holdings, Inc.,
Baa1 1,000++ 6.06%, 1/14/00.......... 997,480
Baa1 1,100++ 6.21%, 9/3/02........... 1,101,660
Money Store Trust, Inc.,
Aaa 1,200 6.21%, 3/15/12.......... 1,201,974
PaineWebber Group, Inc.,
Baa1 250 6.75%, 2/1/06........... 253,193
------------
4,552,057
------------
HEALTH CARE--0.6%
Columbia/HCA Healthcare
Corp.,
Ba2 450 6.88%, 7/15/01.......... 446,598
------------
RAILROAD--1.8%
Union Pacific Railroad
Co.
NR 1,200 5.95%, 5/22/00.......... 1,199,250
------------
TOBACCO--1.5%
RJR Nabisco, Inc.,
Baa3 1,000 8.00%, 7/15/01.......... 1,002,520
------------
UTILITIES--3.4%
California Energy Co.,
Inc.,
Ba1 1,100 9.88%, 6/30/03.......... 1,231,824
Niagara Mohawk Power
Corp.,
Ba3 1,000 6.88%, 3/1/01........... 1,023,810
------------
2,255,634
------------
Total corporate bonds
(cost $18,244,246).... 18,414,811
------------
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES--33.9%
Federal Home Loan
Mortgage Corp.,
6.00%, 5/15/28 -
5,337 7/1/28................ 5,135,388
6.50%, 9/15/18 -
1,208 12/15/21.............. 127,638
7.50%, 9/1/16 -
6,435 10/1/27............... 6,622,263
752 7.80%, 1/1/24........... 772,763
18 9.25%, 1/1/10........... 18,828
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-81
<PAGE> 188
THE TARGET PORTFOLIO TRUST
TOTAL RETURN BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- ----- ----------- --------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES (CONT'D.)
Federal National
Mortgage Assn.,
$ 1,102 6.143%, 5/1/36.......... $ 1,108,132
712 6.64%, 3/1/26........... 721,390
1,480 7.08%, 1/1/20........... 1,509,148
Government National
Mortgage Assn.,
1,380 6.50%, 7/20/27.......... 1,397,617
6.88%, 2/20/17 -
2,204 2/20/26............... 2,236,052
7.00%, 7/20/22 -
1,459 9/20/25............... 1,480,369
379 7.38%, 6/20/23.......... 385,244
7.50%, 8/15/25 -
1,009 1/15/28............... 1,039,854
Resolution Trust Corp.,
160 9.25%, 6/25/23.......... 159,732
------------
Total U.S. Government
agency
mortgage backed
securities
(cost $22,592,582).... 22,714,418
------------
Collateralized Mortgage
Obligations--7.9%
American Housing Trust
1,
Senior Mortgage Pass
Through Certificate,
Series 1-5 Class A,
Aaa 16 8.63%, 8/25/18.......... 16,687
Champion Home Loan
Equity, Series 1995,
Class A2-3,
Aaa 611 8.57%, 2/25/28.......... 618,755
Countrywide
Collateralized
Mortgage Obligation,
Aa1 112 8.14%, 11/25/24......... 114,423
GMAC Commercial Mortgage
Security, Inc.,
Aa2 677 6.81%, 4/15/08.......... 706,155
Baa2 500 7.15%, 3/15/11.......... 494,177
Headlands Mortgage
Security Inc.,
Mortgage Certificate,
Series 1998-2, Class
A1,
AAA## 3,345 6.75%, 12/25/28......... 3,344,948
------------
Total collateralized
mortgage obligations
(cost $5,273,259)..... 5,295,145
------------
U.S. GOVERNMENT SECURITIES--18.7%
UNITED STATES TREASURY
Notes,
3.625%, 7/15/02
3,174 (TIPS)................ 3,150,377
United States Treasury
Bonds,
203 3.63%, 4/15/28 (TIPS)... 196,695
1,700 6.00%, 2/15/26.......... 1,854,326
1,900 8.00%, 11/15/21......... 2,540,357
400 8.125%, 8/15/19......... 534,188
3,000 9.25%, 2/15/16.......... 4,304,070
------------
Total U.S. government
securities
(cost $12,451,006).... 12,580,013
------------
Foreign Government Bonds--0.8%
Republic of Argentina,
6.19%, 3/31/05
Ba3 592 (cost $547,170)....... 500,409
------------
Total long-term
investments
(cost $59,108,263).... 59,504,796
------------
SHORT-TERM
INVESTMENTS--33.2%
CORPORATE BONDS--13.8%
Banking--3.4%
Capital One Bank,
Baa3 1,200 6.83%, 8/16/99.......... 1,206,732
Baa3 1,100 7.20%, 7/19/99.......... 1,102,376
------------
2,309,108
------------
ENTERTAINMENT--1.7%
Six Flags Entertainment
Corp.,
Baa2 1,200 Zero Coupon, 12/15/99... 1,139,496
------------
FINANCIAL SERVICES--6.4%
AT&T Capital Corp.
Baa3 2,400++ 5.96%, 2/16/99.......... 2,400,456
Heller Financial, Inc.,
A3 800 6.25%, 1/15/99.......... 800,168
A3 1,100 6.41%, 5/3/99........... 1,102,123
------------
4,302,747
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-82
<PAGE> 189
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- ----- ----------- --------
<S> <C> <C> <C>
TELECOMMUNICATIONS--1.5%
TCI Communications,
Inc.,
Baa3 $ 1,000 7.25%, 6/15/99.......... $ 1,008,300
------------
UTILITIES--0.8%
El Paso Electric Co.,
Ba3 500 7.25%, 2/1/99........... 500,405
------------
Total corporate bonds
(cost $9,244,426)... 9,260,056
------------
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES--15.6%
Federal Home Loan
Mortgage Corp.,
8,800 6.00%, 12/1/99.......... 8,692,728
Federal National
Mortgage Assn.,
46.8 8.50%, 4/1/99........... 47
Government National
Mortgage Assn.,
1,750 6.50%, 12/15/99......... 1,767,780
------------
Total U.S. Government
agency mortgage backed
securities
(cost $10,432,517).... 10,460,555
------------
U.S. GOVERNMENT SECURITIES--1.0%
United States Treasury
Bills,
60 + 4.03%, 3/4/99........... 59,559
180 + 4.31%, 5/27/99.......... 176,825
10 + 4.34%, 3/4/99........... 9,926
220 + 4.38%, 3/4/99........... 218,378
230 + 4.43%, 3/4/99........... 228,248
------------
Total U.S. government securities
(cost $692,948)......... 692,936
------------
FOREIGN SECURITIES--1.6%
Petroleas Mexicano,
6.67%, 3/8/99
Ba2 1,100 (cost $1,091,690)..... 1,083,500
------------
Repurchase Agreement--1.2%
774 State Street Bank & Trust Co.,
2.00%, dated 12/31/98
due 1/4/99 in the
amount of $774,172
(cost $774,000,
collateralized by
$580,000 U.S.
Treasury Notes,
8.125%, 8/15/19,
value of collateral
including accrued
interest is
$790,703)............ 774,000
------------
Total short-term
investments
(cost $22,235,581)... 22,271,047
------------
Total Investments, Before Outstanding
Options Written--121.9%
(cost $81,343,844; Note
4)................... 81,775,843
------------
OUTSTANDING CALL OPTIONS
Contracts WRITTEN*
---------
7 United States Treasury
Bond Futures, 8.00%
3/22/99
expiring 2/19/99
@$138.00............. (656)
OUTSTANDING PUT OPTIONS
WRITTEN*
4 United States Treasury
Bond Futures, 8.00%
3/22/99
expiring 2/19/99
@$120.00............. (688)
4 United States Treasury
Bond Futures, 8.00%
3/22/99
expiring 2/19/99
@$122.00............. (1,250)
------------
Total outstanding
options written
(premium received
$2,872).............. (2,594)
------------
TOTAL INVESTMENTS, NET OF OUTSTANDING
OPTIONS WRITTEN--121.9%
(cost $81,340,972)..... 81,773,249
Other liabilities in
excess of
other
assets--(21.9%)...... (14,695,087)
------------
NET ASSETS--100%....... $ 67,078,162
============
</TABLE>
- ---------------
* Non-income producing securities.
+ Pledged as initial margin on financial futures
contracts.
++ Rate shown reflects current rate on variable rate
instrument.
# Figures are actual and not rounded to the nearest
thousand.
## Standard & Poor's Rating.
(TIPS)--Treasury inflation protection securities.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-83
<PAGE> 190
THE TARGET PORTFOLIO TRUST
Intermediate-Term Bond Portfolio
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- ----- ----------- --------
<S> <C> <C> <C>
LONG-TERM
INVESTMENTS--93.1%
CORPORATE BONDS--32.2%
AIRLINES--1.8%
United Airlines, Inc.,
Baa1 $ 1,500 10.85%, 2/19/15.......... $ 1,963,755
------------
BANKING--4.2%
MBNA America Bank,
Baa1 1,000 5.54%, 4/13/00........... 989,430
Baa1 2,000 5.62%, 12/10/02.......... 1,989,850
Sumitomo Trust & Banking
Co., Ltd.,
Baa1 1,500 9.40%, 12/29/49.......... 1,427,603
------------
4,406,883
------------
FINANCIAL SERVICES--7.0%
Goldman Sachs Group,
L.P.,
A1## 1,900 5.38%, 1/25/01........... 1,895,725
Lehman Brothers Holdings,
Inc.,
Baa1 2,000 5.96%, 1/14/00........... 1,994,960
A## 1,500 5.58%, 9/3/02............ 1,502,263
PaineWebber Group, Inc.,
Baa1 2,000 5.82%, 11/27/00.......... 2,003,100
------------
7,396,048
------------
INDUSTRIALS--8.5%
Cox Communications, Inc.,
Baa2 300 6.15%, 8/1/03............ 305,553
GS Escrow Corp.,
Ba1 600 6.75%, 8/1/01............ 591,719
TCI Communications, Inc.,
Baa3 400 5.82%, 3/12/01........... 395,586
Baa3 1,800 6.46%, 3/6/00............ 1,822,626
Union Pacific Corp.,
NR 2,000 5.95%, 5/22/00........... 1,998,750
Westpoint Stevens, Inc.,
NR 1,800 7.88%, 6/15/05........... 1,827,000
Williams Companies, Inc.,
Baa 2,000 5.50%, 1/30/00........... 1,998,280
------------
8,939,514
------------
TOBACCO--1.8%
RJR Nabisco, Inc.,
Baa3 1,250 8.00%, 7/15/01........... 1,253,150
Baa3 600 8.63%, 12/1/02........... 609,576
------------
1,862,726
------------
UTILITIES--8.9%
California Energy Co.,
Inc.,
Ba1 2,000 9.88%, 6/30/03........... 2,239,680
Niagara Mohawk Power
Corp.,
Ba3 2,000 6.88%, 3/1/01............ 2,047,620
Texas Utilities Co.,
Baa 3,000 5.94%, 10/15/01.......... 3,017,490
Baa3 2,000 6.50%, 8/16/02........... 2,050,748
------------
9,355,538
------------
Total corporate bonds
(cost $33,731,738)..... 33,924,464
------------
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES--34.7%
Federal Home Loan
Mortgage Corp.,
17,546 6.00%, 4/1/24 - 7/1/28... 17,529,144
6.50%, 9/15/18 -
2,001 12/15/21............... 211,727
5,970 7.50%, 4/1/25 - 9/1/28... 6,200,875
90 9.25%, 1/1/10............ 95,081
Federal National Mortgage
Assn.,
159 6.20%, 12/1/30........... 159,848
1,800 6.15%, 12/1/29........... 1,810,687
1,425 6.64%, 3/1/26............ 1,442,780
700 7.00%, 8/1/24............ 710,507
1,056 7.76%, 7/1/25............ 1,072,077
Government National
Mortgage Assn.,
6.88%, 5/20/23 -
3,332 2/20/26................ 3,380,407
906 7.00%, 10/20/24.......... 918,310
758 6.88%, 6/20/23........... 770,487
Resolution Trust Corp.,
321 9.25%, 6/25/23........... 319,468
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-84
<PAGE> 191
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- ----- ----------- --------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES--(CONT'D.)
Student Loan Marketing
Assn., Student Loan
Trust
$ 1,895 5.54%, 4/25/07........... $ 1,874,869
------------
Total U.S. Government
agency mortgage
backed securities
(cost $36,622,047)..... 36,496,267
------------
COLLATERALIZED MORTGAGE
OBLIGATIONS--10.3%
Champion Home Loan
Equity, Series 1995,
Class A2-3,
AAA## 917 8.31%, 2/25/28........... 935,948
Countrywide
Collateralized
Mortgage Obligation,
Aa1 112 8.14%, 11/25/24.......... 114,422
Federal National Mortgage
Association Guaranteed,
633 6.00%, 12/25/08.......... 630,190
Federal National Mortgage
Association Guaranteed
Certificate, Remic
Trust 1997-1, Class A,
459 6.50%, 2/18/04........... 458,618
Government National
Mortgage Assn., Remic
Trust 1995- 2, Class
Kq,
3,000 8.50%, 3/20/25........... 3,163,359
Residential Accredit
Loans, Inc., Series
1997 Qs5, Class A9,
AAA## 3,000 7.25%, 6/25/27........... 3,057,708
Residential Asset
Securities Corp.,
Series 1996 Ks4, Class
A2,
Aaa 826 5.95%, 10/25/27.......... 799,209
Southern Pacific Secured
Assets Corp.,
AAA## 1,779 5.39%, 7/25/26........... 1,738,500
------------
Total collateralized
mortgage
obligations
(cost $10,947,244)..... 10,897,954
------------
FOREIGN GOVERNMENT OBLIGATIONS--0.8%
Republic of Argentina,
Ba3 949 6.19%, 3/31/05......... 802,243
------------
U.S. GOVERNMENT SECURITIES--15.1%
United States Treasury
Notes,
$ 5,120 3.625%, 7/15/02 (TIPS)... $ 5,081,650
United States Treasury
Bonds,
304 3.625%, 4/15/28 (TIPS)... 295,042
700 6.00%, 2/15/26........... 763,546
700 8.00%, 11/15/21.......... 935,921
1,800 8.875%, 8/15/17.......... 2,535,462
4,400 9.25%, 2/15/16........... 6,312,636
------------
Total U.S. government
securities
(cost $16,063,737)..... 15,924,257
------------
Total long-term
investments
(cost $97,364,766)..... 98,045,185
------------
SHORT-TERM
INVESTMENTS--13.3%
CORPORATE BONDS--10.8%
BANKING--2.8%
Bank Of Tokyo Mitsubishi,
Ltd.,
A1 1,000 5.94%, 1/19/99........... 1,000,000
Capital One Bank,
Baa3 1,900 7.20%, 7/19/99........... 1,904,104
------------
2,904,104
------------
FINANCIAL SERVICES--3.3%
AT&T Capital Corp.,
Baa3 100 5.96%, 2/16/99........... 100,019
Heller Financial, Inc.,
A3 1,500 6.25%, 1/15/99........... 1,500,315
A3 1,900 6.41%, 5/3/99............ 1,903,667
------------
3,504,001
------------
INDUSTRIALS--1.8%
NWCG Holdings Corp.,
Ba2 2,000 Zero Coupon, 6/15/99..... 1,934,460
------------
Utilities--2.9%
Long Island Lighting Co.,
Baa3 1,535 7.30%, 7/15/99........... 1,552,453
Texas-New Mexico Power
Co.,
Baa3 1,500 12.50%, 1/15/99.......... 1,502,445
------------
3,054,898
------------
Total corporate bonds
(cost $11,390,611)..... 11,397,463
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-85
<PAGE> 192
THE TARGET PORTFOLIO TRUST
INTERMEDIATE-TERM BOND PORTFOLIO (CONT'D)
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- ----- ----------- --------
<S> <C> <C> <C>
CORPORATE NOTE--0.4%
General Electric Capital
Corp.,
A1## 400 5.14%, 1/12/99........... $ 399,200
------------
U.S. GOVERNMENT AGENCY MORTGAGE
Backed Securities
Federal National Mortgage Assn.,
2 8.50%, 4/1/99............ 147
2 8.50%, 7/1/99............ 1,889
------------
Total U.S. government
agency
mortgage backed
securities
(cost $2,135).......... 2,036
------------
U.S. GOVERNMENT SECURITIES--1.0%
United States Treasury
Bills,
10 + 3.79%, 3/4/99............ 9,927
140 + 4.03%, 3/4/99............ 138,971
50 + 4.06%, 2/4/99............ 49,790
170 + 4.31%, 5/27/99........... 166,995
320 + 4.38%, 3/4/99............ 317,640
330 + 4.43%, 3/4/99............ 327,486
------------
Total U.S. government
securities
(cost $1,010,868)...... 1,010,809
------------
REPURCHASE AGREEMENT--1.1%
State Street Bank & Trust
Co.,
1,167 3.25%, dated 12/31/98 due
1/4/99 in the amount of
$1,167,421 (cost
$1,167,000:
collateralized by
$845,000 U.S. Treasury
Notes, 8.50%, 2/15/20,
value of collateral
including accrued
interest -
$1,196,756)............ 1,167,000
------------
Total short-term
investments
(cost $13,972,468)..... 13,976,508
------------
TOTAL INVESTMENTS, BEFORE OUTSTANDING
OPTIONS WRITTEN--106.4%
(cost $111,337,234; Note
4)..................... 112,021,693
</TABLE>
<TABLE>
<CAPTION>
VALUE
CONTRACTS DESCRIPTION (NOTE 1)
--------- ----------- --------
<S> <C> <C> <C>
OUTSTANDING CALL OPTIONS
WRITTEN*
12 United States
Treasury Bond
Futures, 8.00%,
3/22/99
expiring 2/20/99
@$138.00........... $ (1,125)
OUTSTANDING PUT OPTIONS
WRITTEN*
6 United States
Treasury Bond
Futures, 8.00%,
3/22/99 expiring
2/20/99 @$122.00... (1,875)
6 United States
Treasury Bond
Futures, 8.00%,
3/22/99 expiring
2/20/99 @$120.00... (1,031)
------------
Total outstanding
options written
(premiums received
$4,340)............ (4,031)
------------
TOTAL INVESTMENTS, NET OF
OUTSTANDING OPTIONS
WRITTEN--106.4%
(cost
$111,332,894)...... 112,017,662
Other liabilities in
excess of other
assets--(6.4%)..... (6,735,069)
------------
Net Assets--100%..... $105,282,593
============
</TABLE>
- ---------------
* Non-income producing securities.
+ Pledged as initial margin on futures contracts.
## Standard & Poor's Rating.
(TIPS)--Treasury inflation protection securities.
L.P.--Limited Partnership.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-86
<PAGE> 193
MORTGAGE BACKED SECURITIES PORTFOLIO
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
----- ----------- --------
<C> <S> <C>
LONG-TERM INVESTMENTS--99.2%
COLLATERALIZED MORTGAGE
OBLIGATIONS--32.6%
Chase Commercial Mortgage
Securities Corp.,
$ 1,000 7.37%, 2/19/07.............. $ 1,079,075
Federal Home Loan Mortgage
Corp.,
221 5.50%, 8/15/21, PAC......... 216,372
350 5.80%, 8/15/19, PAC......... 349,563
100 5.95%, 6/15/19, PAC......... 100,343
3,719 6.00%, 5/15/08 - 5/15/23,
PAC....................... 3,698,487
1,560 6.50%, 8/15/06 - 11/15/22,
PAC....................... 1,576,036
359 7.00%, 3/15/23, PAC......... 375,715
289 7.25%, 1/15/07, PAC......... 291,917
4,454 7.50%, 6/15/22, PAC I/O..... 452,993
1,778 8.00%, 8/15/04 - 7/15/21,
PAC....................... 1,868,915
840 9.00%, 7/01/08 - 10/15/20... 883,141
Federal National Mortgage
Assn.,
1,482 5.00%, 10/25/20 - 3/25/21,
PAC....................... 1,438,301
862 5.941%, 1/25/09............. 858,756
1,733 6.00%, 4/25/08 - 10/25/22,
PAC....................... 1,710,739
800 6.25%, 1/25/09, PAC......... 799,000
1,023 6.50%, 2/25/06 - 12/25/23,
PAC....................... 1,018,742
2,704 7.00%, 9/25/19 - 9/25/20,
PAC/IO.................... 563,384
903 7.385%, 3/25/21............. 924,359
719 7.50%, 5/25/07 - 7/25/22.... 745,589
774 8.00%, 8/25/06 - 5/25/24.... 820,298
848 8.50%, 7/25/18 - 6/25/21,
PAC....................... 891,718
First Boston Mortgage
Securities,
775 Zero Coupon, 4/25/17, P/O... 664,544
887 6.96%, 6/20/29.............. 910,785
775 8.985%, 4/25/17, I/O........ 153,594
First Union-Lehman Brothers
Commercial Mortgage,
1,000 6.60%, 11/18/29............. 1,037,500
Salomon Brothers Mortgage Securities,
319 6.00%, 12/26/11............. 320,097
-----------
Total collateralized mortgage obligations
(cost $22,794,321).......... 23,749,963
-----------
U.S. GOVERNMENT AGENCY MORTGAGE
PASS-THROUGH OBLIGATIONS--65.0%
Federal Home Loan Mortgage
Corp.,
$ 341 6.00%, 5/01/11............... $ 342,809
389 6.50%, 2/01/04............... 392,358
14 7.25%, 7/01/06............... 14,278
161 7.50%, 3/01/08............... 164,288
75 8.25%, 12/01/05 - 5/01/08.... 78,805
314 8.50%, 6/01/03 - 7/01/21..... 331,497
124 8.75%, 12/01/08.............. 130,287
385 9.00%, 1/01/02 - 10/01/05.... 402,211
26 10.00%, 1/01/04.............. 27,456
48 10.50%, 11/01/19............. 53,198
48 11.50%, 3/01/16.............. 53,804
21 12.75%, 11/01/13............. 22,917
25 13.25%, 5/01/13.............. 29,270
5 14.00%, 6/01/11.............. 5,822
Federal National Mortgage
Assn.,
200 6.00%, 5/25/10............... 201,124
792 6.00%, 8/01/11............... 794,283
162 6.199%, 12/01/27............. 163,179
713 6.217%, 8/01/28.............. 716,750
500 6.447%, 1/01/08.............. 525,940
504 6.55%, 9/01/07............... 532,320
595 6.981%, 6/01/07.............. 634,175
284 7.024%, 6/01/07.............. 305,466
507 7.04%, 3/01/07............... 549,138
292 7.50%, 2/01/20............... 301,611
159 7.75%, 10/01/19.............. 165,422
1,032 8.00%, 3/01/07 - 12/01/22.... 1,072,766
1,510 8.50%, 1/01/07 - 6/01/10..... 1,565,973
204 9.75%, 8/01/10 - 11/01/16.... 216,901
Government National Mortgage
Assn.,
2,601 6.50%, 5/15/23 - 9/15/28..... 2,628,090
11,404 7.00%, 7/15/16 - 4/15/26..... 11,672,449
14,110 7.50%, 3/15/07 - 6/15/24..... 14,555,177
2,744 8.00%, 1/15/08 - 8/15/22..... 2,857,614
960 8.25%, 6/20/17 - 7/20/17..... 997,401
222 8.50%, 3/15/05 - 4/20/17..... 235,483
3,111 9.00%, 10/20/01 - 1/15/20.... 3,329,835
975 9.50%, 9/15/02 - 1/15/21..... 1,046,229
1 13.00%, 2/15/11.............. 797
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-87
<PAGE> 194
THE TARGET PORTFOLIO TRUST
MORTGAGE BACKED SECURITIES PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
----- ----------- --------
<C> <S> <C>
U.S. GOVERNMENT AGENCY MORTGAGE
PASS-THROUGH OBLIGATIONS (CONT'D.)
$ 76 13.50%, 6/15/10 -
11/15/12.................. $ 88,656
90 14.00%, 6/15/11 - 4/15/12... 105,284
40 16.00%, 4/15/12 - 5/15/12... 47,233
-----------
Total U.S. Government agency
mortgage pass-through
obligations
(cost $46,493,201)........ 47,358,296
-----------
U.S. GOVERNMENT SECURITIES--1.6%
United States Treasury Bond,
775 12.00%, 8/15/13
(cost $1,194,204)......... 1,183,208
-----------
Total long-term investments
(cost $70,481,726)........ 72,291,467
-----------
SHORT-TERM INVESTMENT--0.4%
REPURCHASE AGREEMENT--0.4%
Warburg Dillon Reed LLC,
252 4.65%, dated 12/31/98, due
1/4/99 in the amount of
$252,130 (cost $252,000;
collateralized by $212,000
U.S. Treasury Bonds,
7.25%, 5/15/16, value of
the collateral including
accrued interest is
$258,076)................. 252,000
-----------
TOTAL INVESTMENTS--99.6%
(cost $70,733,726; Note
4)........................ 72,543,467
Other assets in excess of
liabilities--0.4%......... 326,448
-----------
NET ASSETS--100%............ $72,869,915
===========
</TABLE>
- ---------------
I/O--Interest Only Security.
PAC--Planned Amortization Class.
P/O--Principal Only.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B-88
<PAGE> 195
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
----- ----------- --------
<S> <C> <C>
FEDERAL HOME LOAN BANK--1.4%
$ 2,000 5.50%, 3/19/99.......................... $ 1,999,654
------------
FEDERAL HOME LOAN MORTGAGE CORP.--68.2%
560 5.03%, 2/11/99.......................... 556,792
20,000 5.85%, 2/25/99.......................... 19,844,625
30,000 4.93%, 2/26/99.......................... 29,769,933
25,000 4.97%, 3/15/99.......................... 24,748,049
20,000 4.93%, 3/17/99.......................... 19,796,458
------------
94,715,857
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--13.7%
11,584 5.04%, 1/26/99........................... 11,543,456
5,520 5.02%, 2/19/99........................... 5,482,283
2,000 5.625%, 5/6/99........................... 1,999,178
------------
19,024,917
------------
REPURCHASE AGREEMENTS--27.0%
9,347 Lehman Brothers Hldgs., Inc., 4.875%,
dated 12/31/98, due 1/4/99 in the
amount of $9,352,063 (cost
$9,347,000; collateralized by
$29,400,000 U.S. Treasury Strips,
2/15/19, value of collateral including
accrued interest - $9,693,368)......... 9,347,000
9,347 PaineWebber Inc., 4.85%, dated
12/31/98, due 1/4/99 in the amount
of $9,352,037 (cost
$9,347,000; collateralized by
$8,950,000 U.S. Treasury Notes,
5.75%, 8/15/03, value of
collateral including accrued
interest - $9,526,688)................. 9,347,000
$ 9,347 Paribas, 4.80%, dated
12/31/98, due 1/4/99 in the
amount of $9,351,985 (cost
$9,347,000; collateralized
by $9,042,000 U.S. Treasury
Notes, 5.875%, 9/30/02,
value of collateral
including accrued interest
- $9,526,641)......................... $ 9,347,000
9,347 Swiss Bank Corp., 4.65%,
dated 12/31/98, due 1/4/99
in the amount of $9,351,829
(cost $9,347,000;
collateralized by
$7,122,000 U.S. Treasury
Bonds, 7.875%, 2/15/21,
value of collateral
including accrued interest
- $9,553,495)......................... 9,347,000
------------
37,388,000
------------
TOTAL INVESTMENTS--110.3%
(amortized cost
$153,128,428*)........................ 153,128,428
Liabilities in excess of
other
assets--(10.3%)............ (14,279,941)
------------
NET ASSETS--100%............. $138,848,487
=== ============
</TABLE>
- ---------------
* Federal income tax basis of portfolio securities is the same as for financial
reporting purposes.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 89
<PAGE> 196
THE TARGET PORTFOLIO TRUST
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
SMALL
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO VALUE PORTFOLIO
<S> <C> <C> <C> <C>
ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
Investments, at value* $330,863,568 $281,359,912 $160,527,505 $ 142,149,480
- ---------------------------------------------------------------------------------------------------------------------------------
Cash 1,112 15,552 1,968 10,972
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign currency, at value
(cost $14,790; $125,299; $77,610) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 873,292 726,118 606,638 637,949
- ---------------------------------------------------------------------------------------------------------------------------------
Receivable for investments sold 829,753 2,394,728 1,212,700 161,801
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends and interest receivable 98,340 490,521 43,714 153,250
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred expenses and other assets 4,397 4,373 2,944 2,449
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets 332,670,462 284,991,204 162,395,469 143,115,901
LIABILITIES
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased 1,737,636 610,660 2,792,191 967,400
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for Fund shares reacquired 877,676 717,330 463,647 412,672
- ---------------------------------------------------------------------------------------------------------------------------------
Accrued expenses and other
liabilities 86,104 26,997 75,172 137,736
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends payable -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding options written
(premium received $2,872 and
$4,340) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Withholding taxes payable -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred trustees' fees 6,541 6,541 6,541 6,541
- ---------------------------------------------------------------------------------------------------------------------------------
Due to Manager 159,848 142,041 75,482 34,302
- ---------------------------------------------------------------------------------------------------------------------------------
Due to broker-variation margin
payable -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,867,805 1,503,569 3,413,033 1,558,651
NET ASSETS $329,802,657 $283,487,635 $158,982,436 $ 141,557,250
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets were comprised of:
Shares of beneficial interest,
at par $ 18,028 $ 17,866 $ 10,360 $ 9,451
- ---------------------------------------------------------------------------------------------------------------------------------
Paid-in capital, in excess of
par 187,102,837 197,955,280 125,141,167 124,754,936
- ---------------------------------------------------------------------------------------------------------------------------------
187,120,865 197,973,146 125,151,527 124,764,387
Under (over) distribution of net
investment
income (loss) -- 331,461 -- 44,045
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated net realized gains
(losses) 7,823,400 4,911,188 (860,079) 506,416
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized
appreciation/depreciation 134,858,392 80,271,840 34,690,988 16,242,402
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, December 31, 1998 $329,802,657 $283,487,635 $158,982,436 $ 141,557,250
- ---------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest
issued
and outstanding 18,028,136 17,866,011 10,360,162 9,450,715
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering price
and redemption price per share $18.29 $15.87 $15.35 $14.98
- ---------------------------------------------------------------------------------------------------------------------------------
*Identified cost of investments. $196,005,176 $201,088,072 $125,836,517 $ 125,907,078
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 90
<PAGE> 197
<TABLE>
<CAPTION>
INTERNATIONAL U.S. GOVERNMENT
EQUITY INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM MORTGAGE BACKED MONEY
PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO SECURITIES PORTFOLIO MARKET PORTFOLIO
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
$244,461,917 $ 30,340,470 $ 81,775,843 $ 112,021,693 $ 72,543,467 $ 153,128,428
- -----------------------------------------------------------------------------------------------------------------------------
3,074 189 225 959 723 --
- -----------------------------------------------------------------------------------------------------------------------------
13,132 -- 125,199 77,223 -- --
- -----------------------------------------------------------------------------------------------------------------------------
265,926 81,826 248,360 290,253 92,860 10,338,811
- -----------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
686,175 798,245 845,609 1,439,507 509,785 55,166
- -----------------------------------------------------------------------------------------------------------------------------
4,417 4,643 977 1,695 1,431 781
- -----------------------------------------------------------------------------------------------------------------------------
245,434,641 31,225,373 82,996,213 113,831,330 73,148,266 163,523,186
- -----------------------------------------------------------------------------------------------------------------------------
-- -- 15,459,534 8,173,391 -- --
- -----------------------------------------------------------------------------------------------------------------------------
916,924 115,358 359,882 274,374 164,990 24,582,304
- -----------------------------------------------------------------------------------------------------------------------------
71,622 35,558 41,738 30,203 67,144 49,433
- -----------------------------------------------------------------------------------------------------------------------------
-- 11,753 9,273 15,471 11,698 1,517
- -----------------------------------------------------------------------------------------------------------------------------
-- -- 2,594 4,031 -- --
- -----------------------------------------------------------------------------------------------------------------------------
7,997 2,386 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
6,541 5,132 6,541 6,541 6,541 6,541
- -----------------------------------------------------------------------------------------------------------------------------
140,747 13,265 25,555 40,212 27,978 34,904
- -----------------------------------------------------------------------------------------------------------------------------
-- -- 12,934 4,514 -- --
- -----------------------------------------------------------------------------------------------------------------------------
1,143,831 183,452 15,918,051 8,548,737 278,351 24,674,699
$244,290,810 $31,041,921 $67,078,162 $105,282,593 $72,869,915 $138,848,487
- -----------------------------------------------------------------------------------------------------------------------------
15,724
$ $ 3,261 $ 6,392 $ 10,159 $ 6,960 $ 138,848
- -----------------------------------------------------------------------------------------------------------------------------
196,242,244 30,232,750 66,697,891 104,979,871 71,365,949 138,709,639
- -----------------------------------------------------------------------------------------------------------------------------
196,257,968 30,236,011 66,704,283 104,990,030 71,372,909 138,848,487
(179,460) (55,493) 137,282 (15,471) 167,819 --
- -----------------------------------------------------------------------------------------------------------------------------
(1,045,188) 533,458 (49,964) (271,215) (480,554) --
- -----------------------------------------------------------------------------------------------------------------------------
49,257,490 327,945 286,561 579,249 1,809,741 --
- -----------------------------------------------------------------------------------------------------------------------------
$244,290,810 $31,041,921 $67,078,162 $105,282,593 $72,869,915 $138,848,487
- -----------------------------------------------------------------------------------------------------------------------------
15,724,520 3,261,234 6,392,408 10,159,386 6,960,553 138,848,487
- -----------------------------------------------------------------------------------------------------------------------------
$15.54 $9.52 $10.49 $10.36 $10.47 $1.00
- -----------------------------------------------------------------------------------------------------------------------------
$195,236,545 $30,014,065 $81,343,844 $111,337,234 $70,733,726 $153,128,428
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 91
<PAGE> 198
THE TARGET PORTFOLIO TRUST
STATEMENTS OF OPERATIONS
For The Year Ended December 31, 1998
<TABLE>
<CAPTION>
SMALL
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO VALUE PORTFOLIO
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Income
Interest $ 372,347 $ 154,546 $ 322,663 $ 280,255
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends 1,387,164 6,526,484 371,729 1,679,145
- -----------------------------------------------------------------------------------------------------------------------------------
Less: Foreign withholding taxes (1,054) (36,458) (2,436) (1,176)
- -----------------------------------------------------------------------------------------------------------------------------------
Total income 1,758,457 6,644,572 691,956 1,958,224
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses
Management fee 1,666,766 1,692,469 975,926 922,536
- -----------------------------------------------------------------------------------------------------------------------------------
Custodian's fees and expenses 85,000 96,000 92,000 100,700
- -----------------------------------------------------------------------------------------------------------------------------------
Transfer agent's fees and expenses 104,500 108,600 104,000 92,000
- -----------------------------------------------------------------------------------------------------------------------------------
Registration fees 2,000 36,000 20,500 35,800
- -----------------------------------------------------------------------------------------------------------------------------------
Reports to shareholders 10,000 29,000 33,000 33,000
- -----------------------------------------------------------------------------------------------------------------------------------
Audit fees and expenses 13,500 13,500 13,500 13,500
- -----------------------------------------------------------------------------------------------------------------------------------
Legal fees and expenses 7,000 7,000 7,000 7,000
- -----------------------------------------------------------------------------------------------------------------------------------
Trustees' fees and expenses 2,300 2,300 2,300 2,300
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of organization
expenses 81 81 81 81
- -----------------------------------------------------------------------------------------------------------------------------------
Insurance 4,600 4,800 2,900 1,900
- -----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous 469 1,647 2,375 4,347
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,896,216 1,991,397 1,253,582 1,213,164
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (137,759) 4,653,175 (561,626) 745,060
- -----------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Investment transactions 35,920,680 30,983,706 2,228,053 11,100,287
- -----------------------------------------------------------------------------------------------------------------------------------
Financial futures contracts -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign currency transactions -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total net realized gain (loss) 35,920,680 30,983,706 2,228,053 11,100,287
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation on:
Investments 67,508,676 (9,079,959) 1,353,560 (23,613,476)
- -----------------------------------------------------------------------------------------------------------------------------------
Financial futures contracts -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign currencies -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Options written -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation 67,508,676 (9,079,959) 1,353,560 (23,613,476)
- -----------------------------------------------------------------------------------------------------------------------------------
Net gain (loss) 103,429,356 21,903,747 3,581,613 (12,513,189)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $103,291,597 $ 26,556,922 $ 3,019,987 $ (11,768,129)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 92
<PAGE> 199
<TABLE>
<CAPTION>
INTERNATIONAL U.S. GOVERNMENT
EQUITY INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM MORTGAGE BACKED MONEY
PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO SECURITIES PORTFOLIO MARKET PORTFOLIO
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
$ 433,181 $ 1,516,220 $3,920,382 $ 6,447,203 $5,039,270 $5,749,917
- ---------------------------------------------------------------------------------------------------------------------------
5,912,254 -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
(615,167) (6,667) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
5,730,268 1,509,553 3,920,382 6,447,203 5,039,270 5,749,917
- ---------------------------------------------------------------------------------------------------------------------------
1,724,342 153,602 278,041 455,487 331,815 266,250
- ---------------------------------------------------------------------------------------------------------------------------
296,000 145,000 112,000 96,000 79,000 74,000
- ---------------------------------------------------------------------------------------------------------------------------
102,000 36,000 42,500 47,000 51,400 19,000
- ---------------------------------------------------------------------------------------------------------------------------
52,000 25,000 25,000 28,000 13,000 186,000
- ---------------------------------------------------------------------------------------------------------------------------
21,000 69,000 15,000 15,000 12,000 24,000
- ---------------------------------------------------------------------------------------------------------------------------
20,000 13,500 13,500 13,500 13,500 5,000
- ---------------------------------------------------------------------------------------------------------------------------
7,000 12,000 7,000 7,000 7,000 7,000
- ---------------------------------------------------------------------------------------------------------------------------
2,300 2,300 2,300 2,300 2,300 2,300
- ---------------------------------------------------------------------------------------------------------------------------
81 10,596 81 81 81 81
- ---------------------------------------------------------------------------------------------------------------------------
4,400 600 300 1,200 1,000 900
- ---------------------------------------------------------------------------------------------------------------------------
2,159 3,975 3,877 3,083 2,828 2,422
- ---------------------------------------------------------------------------------------------------------------------------
2,231,282 471,573 499,599 668,651 513,924 586,953
- ---------------------------------------------------------------------------------------------------------------------------
3,498,986 1,037,980 3,420,783 5,778,552 4,525,346 5,162,964
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
19,759,420 504,219 1,421,793 128,797 708,087 (1,050)
- ---------------------------------------------------------------------------------------------------------------------------
-- -- 676,591 1,595,922 (104,986) --
- ---------------------------------------------------------------------------------------------------------------------------
(754,781) 229,666 (7,388) 9,565 -- --
- ---------------------------------------------------------------------------------------------------------------------------
19,004,639 733,885 2,090,996 1,734,284 603,101 (1,050)
- ---------------------------------------------------------------------------------------------------------------------------
13,709,952 892,569 (453,350) (87,326) (603,723) --
- ---------------------------------------------------------------------------------------------------------------------------
-- -- (155,867) (243,988) -- --
- ---------------------------------------------------------------------------------------------------------------------------
59,593 (123,677) (32,735) (93,156) -- --
- ---------------------------------------------------------------------------------------------------------------------------
-- -- 278 309 -- --
- ---------------------------------------------------------------------------------------------------------------------------
13,769,545 768,892 (641,674) (424,161) (603,723) --
- ---------------------------------------------------------------------------------------------------------------------------
32,774,184 1,502,777 1,449,322 1,310,123 (622) (1,050)
- ---------------------------------------------------------------------------------------------------------------------------
$36,273,170 $ 2,540,757 $4,870,105 $ 7,088,675 $4,524,724 $5,161,914
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 93
<PAGE> 200
THE TARGET PORTFOLIO TRUST
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO
----------------------------- ----------------------------- -----------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
----------------------------- ----------------------------- -----------------------------
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment
income (loss) $ (137,759) $ (12,653) $ 4,653,175 $ 4,815,417 $ (561,626) $ (556,708)
- ------------------------------------------------------------------------------------------------------------------------
Net realized gain
(loss) on
investment and
foreign currency
transactions 35,920,680 24,436,720 30,983,706 25,006,548 2,228,053 24,119,898
- ------------------------------------------------------------------------------------------------------------------------
Net change in
unrealized
appreciation/
depreciation of
investments 67,508,676 20,104,947 (9,079,959) 35,519,278 1,353,560 5,445,586
- ------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in net
assets
resulting from
operations 103,291,597 44,529,014 26,556,922 65,341,243 3,019,987 29,008,776
- ------------------------------------------------------------------------------------------------------------------------
Dividends and
Distributions
Dividends from net
investment income -- (46,217) (4,404,065) (4,345,386) -- --
- ------------------------------------------------------------------------------------------------------------------------
Dividends in excess
of net investment
income -- (60,960) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Distributions from
net
realized gains (21,568,633) (31,971,788) (27,679,090) (24,366,069) (6,691,785) (21,977,874)
- ------------------------------------------------------------------------------------------------------------------------
Tax return of
capital
distributions -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (21,568,633) (32,078,965) (32,083,155) (28,711,455) (6,691,785) (21,977,874)
- ------------------------------------------------------------------------------------------------------------------------
Fund share
transactions(a)
Net proceeds from
shares sold 61,539,874 47,455,937 61,726,845 54,334,008 47,314,663 38,578,759
- ------------------------------------------------------------------------------------------------------------------------
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions 21,112,171 31,377,043 31,419,758 28,089,014 6,560,196 21,564,493
- ------------------------------------------------------------------------------------------------------------------------
Cost of shares
reacquired (78,466,932) (68,170,878) (79,225,934) (71,665,460) (57,118,761) (48,745,293)
- ------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in net
assets from Fund
share
transactions 4,185,113 10,662,102 13,920,669 10,757,562 (3,243,902) 11,397,959
- ------------------------------------------------------------------------------------------------------------------------
Total increase
(decrease) 85,908,077 23,112,151 8,394,436 47,387,350 (6,915,700) 18,428,861
NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Beginning of year 243,894,580 220,782,429 275,093,199 227,705,849 165,898,136 147,469,275
- ------------------------------------------------------------------------------------------------------------------------
End of year(b) $329,802,657 $243,894,580 $283,487,635 $275,093,199 $158,982,436 $165,898,136
- ------------------------------------------------------------------------------------------------------------------------
(a) Fund share transactions are at $1 per share for the U.S. Government Money
Market Portfolio.
(b) Under
distribution of
net investment
income $ -- -- $ 331,461 $ 470,031 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SMALL CAPITALIZATION
VALUE PORTFOLIO
--------------------------------
Year Ended December 31,
--------------------------------
1998 1997
<S> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
- ---------------------------------------------------------------
OPERATIONS
Net investment
income (loss) $ 745,060 $ 655,639
- ---------------------------------------------------------------
Net realized gain
(loss) on
investment and
foreign currency
transactions 11,100,287 17,387,992
- ---------------------------------------------------------------
Net change in
unrealized
appreciation/
depreciation of
investments (23,613,476) 18,899,607
- ---------------------------------------------------------------
Net increase
(decrease) in net
assets
resulting from
operations (11,768,129) 36,943,238
- ---------------------------------------------------------------
Dividends and
Distributions
Dividends from net
investment income (616,180) (664,037)
- ---------------------------------------------------------------
Dividends in excess
of net investment
income -- (94,907)
- ---------------------------------------------------------------
Distributions from
net
realized gains (11,204,352) (17,432,911)
- ---------------------------------------------------------------
Tax return of
capital
distributions -- --
- ---------------------------------------------------------------
Total distributions (11,820,532) (18,191,855)
- ---------------------------------------------------------------
Fund share
transactions(a)
Net proceeds from
shares sold 51,340,282 44,917,116
- ---------------------------------------------------------------
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions 11,566,933 17,747,752
- ---------------------------------------------------------------
Cost of shares
reacquired (61,175,473) (44,673,985)
- ---------------------------------------------------------------
Net increase
(decrease) in net
assets from Fund
share
transactions 1,731,742 17,990,883
- ---------------------------------------------------------------
Total increase
(decrease) (21,856,919) 36,742,266
NET ASSETS
- ---------------------------------------------------------------
Beginning of year 163,414,169 126,671,903
- ---------------------------------------------------------------
End of year(b) $141,557,250 $ 163,414,169
- ---------------------------------------------------------------
(a) Fund share transactions are at $1 per share for the U.S. Government Money
Market Portfolio
(b) Under distribution
of net investment
income $ 44,045 --
- ---------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 94
<PAGE> 201
<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,
- ------------------------------ ----------------------------- ----------------------------- ----------------------------
1998 1997 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
$ 3,498,986 $ 2,820,604 $ 1,037,980 $ 1,560,613 $ 3,420,783 $ 2,668,018 $ 5,778,552 $ 5,389,243
- -----------------------------------------------------------------------------------------------------------------------------------
19,004,639 25,216,162 733,885 (2,969,114 ) 2,090,996 995,324 1,734,284 1,604,324
- -----------------------------------------------------------------------------------------------------------------------------------
13,769,545 (1,064,582) 768,892 (880,530 ) (641,674) 580,802 (424,161) 772,378
- -----------------------------------------------------------------------------------------------------------------------------------
36,273,170 26,972,184 2,540,757 (2,289,031 ) 4,870,105 4,244,144 7,088,675 7,765,945
- -----------------------------------------------------------------------------------------------------------------------------------
(1,532,425) (2,820,604) (1,037,980) -- (3,376,862) (2,523,654 ) (5,900,704) (5,281,003)
- -----------------------------------------------------------------------------------------------------------------------------------
-- (3,343,171) (211,923) (227,344 ) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(12,786,060) (25,343,801) (129,221) (14,562 ) (2,089,757) (465,731 ) (1,685,532) (1,471,335)
- -----------------------------------------------------------------------------------------------------------------------------------
-- -- -- (1,320,129 ) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(14,318,485) (31,507,576) (1,379,124) (1,562,035 ) (5,466,619) (2,989,385 ) (7,586,236) (6,752,338)
- -----------------------------------------------------------------------------------------------------------------------------------
397,245,964 355,674,205 10,468,976 10,444,049 32,010,608 14,859,623 59,709,544 29,443,555
- -----------------------------------------------------------------------------------------------------------------------------------
13,933,450 30,918,137 1,318,338 1,488,888 5,274,697 2,845,116 7,214,518 6,439,182
- -----------------------------------------------------------------------------------------------------------------------------------
(426,694,187) (384,768,978) (13,095,621) (18,672,976 ) (20,021,411) (17,766,511 ) (56,214,686) (42,217,583)
- -----------------------------------------------------------------------------------------------------------------------------------
(15,514,773) 1,823,364 (1,308,307) (6,740,039 ) 17,263,894 (61,772 ) 10,709,376 (6,334,846)
- -----------------------------------------------------------------------------------------------------------------------------------
6,439,912 (2,712,028) (146,674) (10,591,105 ) 16,667,380 1,192,987 10,211,815 (5,321,239)
- -----------------------------------------------------------------------------------------------------------------------------------
237,850,898 240,562,926 31,188,595 41,779,700 50,410,782 49,217,795 95,070,778 100,392,017
- -----------------------------------------------------------------------------------------------------------------------------------
$244,290,810 $ 237,850,898 $ 31,041,921 $31,188,595 $ 67,078,162 $50,410,782 $105,282,593 $ 95,070,778
- -----------------------------------------------------------------------------------------------------------------------------------
-- $ 316,826 -- -- $ 137,282 $ 223,566 -- $ 218,646
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
U.S. GOVERNMENT
MORTGAGE BACKED MONEY
SECURITIES PORTFOLIO MARKET PORTFOLIO
----------------------------- -----------------------------------
Year Ended December 31, Year Ended December 31,
----------------------------- -----------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
$ 4,525,346 $ 4,459,335 $ 5,162,964 $ 1,850,349
- -----------------------------------------------------------------------------------
603,101 197,457 (1,050) (469)
- -----------------------------------------------------------------------------------
(603,723) 1,432,889 -- --
- -----------------------------------------------------------------------------------
4,524,724 6,089,681 5,161,914 1,849,880
- -----------------------------------------------------------------------------------
(4,414,869) (4,425,133 ) (5,161,914) (1,849,880)
- -----------------------------------------------------------------------------------
-- -- -- --
- -----------------------------------------------------------------------------------
-- -- -- --
- -----------------------------------------------------------------------------------
-- -- -- --
- -----------------------------------------------------------------------------------
(4,414,869) (4,425,133 ) (5,161,914) (1,849,880)
- -----------------------------------------------------------------------------------
17,198,222 13,448,142 3,570,979,025 1,070,854,061
- -----------------------------------------------------------------------------------
3,666,643 3,643,014 4,089,479 1,601,795
- -----------------------------------------------------------------------------------
(19,700,312) (21,027,273 ) (3,478,545,549) (1,057,527,680)
- -----------------------------------------------------------------------------------
1,164,553 (3,936,117 ) 96,522,955 14,928,176
- -----------------------------------------------------------------------------------
1,274,408 (2,271,569 ) 96,522,955 14,928,176
- -----------------------------------------------------------------------------------
71,595,507 73,867,076 42,325,532 27,397,356
- -----------------------------------------------------------------------------------
$ 72,869,915 $71,595,507 $ 138,848,487 $ 42,325,532
- -----------------------------------------------------------------------------------
$ 167,819 $ 57,342 -- --
- -----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 95
<PAGE> 202
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
LARGE CAPITALIZATION
GROWTH PORTFOLIO
------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995(b) 1994(b)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $13.58 $12.97 $12.13 $9.74 $9.91
- ---------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (loss) (.01) --(c) .02 .10 .10
- ---------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on
investment transactions 6.00 2.61 2.33 2.41 (.16)
- ---------------------------------------------------------------------------------------------------------
Total from investment
operations 5.99 2.61 2.35 2.51 (.06)
- ---------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income -- (.01) (.02) (.10) (.10)
- ---------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- -- -- (.01) (.01)
- ---------------------------------------------------------------------------------------------------------
Distributions from net realized gains (1.28) (1.99) (1.49) (.01) --
- ---------------------------------------------------------------------------------------------------------
Total distributions (1.28) (2.00) (1.51) (.12) (.11)
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of year $18.29 $13.58 $12.97 $12.13 $9.74
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 44.22% 20.77% 21.09% 25.76% (.68)%
- ---------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $329,803 $243,895 $220,782 $180,077 $142,072
- ---------------------------------------------------------------------------------------------------------
Average net assets (000) $277,794 $242,233 $202,736 $162,982 $129,687
- ---------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .68% .73% .82% .78% .81%
- ---------------------------------------------------------------------------------------------------------
Net investment income (loss) (.05)% (.01)% .19% .88% 1.08%
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate 54% 82% 65% 154% 24%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
(b) Calculated based upon average shares outstanding during the year.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 96
<PAGE> 203
<TABLE>
<CAPTION>
LARGE CAPITALIZATION SMALL CAPITALIZATION
VALUE PORTFOLIO GROWTH PORTFOLIO
- ------------------------------------------------------------ -----------------------------------------------------------
Year Ended December 31, Year Ended December 31,
- ------------------------------------------------------------ -----------------------------------------------------------
1998 1997 1996(b) 1995(b) 1994(b) 1998 1997 1996 1995(b) 1994(b)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
$16.21 $13.97 $12.57 $10.02 $10.11 $15.57 $14.93 $14.15 $11.59 $11.86
- ----------------------------------------------------------------------------------------------------------------------------
.28 .31 .31 .33 .26 (.05) (.05) (.02) .02 .01
- ----------------------------------------------------------------------------------------------------------------------------
1.34 3.77 2.07 2.89 (.04) .48 3.02 2.63 2.84 (.27)
- ----------------------------------------------------------------------------------------------------------------------------
1.62 4.08 2.38 3.22 .22 .43 2.97 2.61 2.86 (.26)
- ----------------------------------------------------------------------------------------------------------------------------
(.27) (.28) (.31) (.30) (.25) -- -- -- (.02) (.01)
- ----------------------------------------------------------------------------------------------------------------------------
-- -- (.03) -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
(1.69) (1.56) (.64) (.37) (.06) (.65) (2.33) (1.83) (.28) --
- ----------------------------------------------------------------------------------------------------------------------------
(1.96) (1.84) (.98) (.67) (.31) (.65) (2.33) (1.83) (.30) (.01)
- ----------------------------------------------------------------------------------------------------------------------------
$15.87 $16.21 $13.97 $12.57 $10.02 $15.35 $15.57 $14.93 $14.15 $11.59
- ----------------------------------------------------------------------------------------------------------------------------
10.25% 29.80% 19.17% 32.08% 2.18% 2.55% 20.85% 18.88% 24.62% (2.19)%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
$283,488 $275,093 $227,706 $187,596 $142,219 $158,982 $165,898 $147,469 $121,533 $96,462
- ----------------------------------------------------------------------------------------------------------------------------
$282,078 $253,579 $208,898 $163,124 $128,865 $162,654 $156,570 $141,496 $107,649 $87,403
- ----------------------------------------------------------------------------------------------------------------------------
%
.71 .72% .77% .76% .81% .77% .79% .89% .85% .93%
- ----------------------------------------------------------------------------------------------------------------------------
1.65% 1.90% 2.33% 2.83% 2.66% (.35)% (.36)% (.32)% .12% .10%
- ----------------------------------------------------------------------------------------------------------------------------
24% 21% 22% 59% 6% 69% 106% 108% 120% 97%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 97
<PAGE> 204
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
SMALL CAPITALIZATION
VALUE PORTFOLIO(e)
----------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $17.50 $15.22 $13.07 $11.07 $12.72
- -------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (loss) .08 .08 .11 .14 .11
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on
investment transactions (1.27) 4.37 2.71 2.00 (1.49)
- -------------------------------------------------------------------------------------------------------
Total from investment
operations (1.19) 4.45 2.82 2.14 (1.38)
- -------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (.07) (.08) (.11) (.14) --
- -------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- (.01) -- -- --
- -------------------------------------------------------------------------------------------------------
Distributions from net realized gains (1.26) (2.08) (.56) -- (.27)
- -------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- -- -- --
- -------------------------------------------------------------------------------------------------------
Tax return of capital distributions -- -- -- -- --
- -------------------------------------------------------------------------------------------------------
Total distributions (1.33) (2.17) (.67) (.14) (.27)
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.98 $17.50 $15.22 $13.07 $11.07
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN(d) (6.62)% 29.98% 21.75% 19.21% (11.03)%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $141,557 $163,414 $126,672 $97,594 $84,163
- -------------------------------------------------------------------------------------------------------
Average net assets (000) $153,756 $144,160 $110,564 $88,085 $83,891
- -------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .79% .81% .92% 1.00% .93%
- -------------------------------------------------------------------------------------------------------
Net investment income (loss) .48% .45% .77% 1.14% .88%
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate 39% 36% 60% 110% 97%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of investment operations of the International Bond Portfolio.
(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 year.
(f) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 98
<PAGE> 205
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
EQUITY PORTFOLIO BOND PORTFOLIO
- ------------------------------------------------------------ -------------------------------------------------------------
MAY 17,
1994(a)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, THROUGH
- ------------------------------------------------------------ -------------------------------------------- DECEMBER 31,
1998 1997 1996 1995(e) 1994(e) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
$14.27 $14.82 $13.64 $11.95 $13.09 $9.17 $10.17 $10.19 $9.57 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
.23 .21 .25 .17 .06 .31 .42 .51 .57(c) .27(c)
- ------------------------------------------------------------------------------------------------------------------------------
1.98 1.32 1.79 1.67 (.01) .45 (1.00) (.08) .82 (.19)
- ------------------------------------------------------------------------------------------------------------------------------
2.21 1.53 2.04 1.84 .05 .76 (.58) .43 1.39 .08
- ------------------------------------------------------------------------------------------------------------------------------
(.10) (.41) (.22) (.11) (.01) (.31) -- (.21) (.57) (.27)
- ------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- (.06) (.06) -- -- (.24)
- ------------------------------------------------------------------------------------------------------------------------------
(.84) (1.67) (.64) (.04) (1.07) (.04) --(f) (.24) (.20) --
- ------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- (.11) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- (.36) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
(.94) (2.08) (.86) (.15) (1.19) (.41) (.42) (.45) (.77) (.51)
- ------------------------------------------------------------------------------------------------------------------------------
$15.54 $14.27 $14.82 $13.64 $11.95 $9.52 $9.17 $10.17 $10.19 $9.57
- ------------------------------------------------------------------------------------------------------------------------------
15.49% 10.60% 15.25% 15.38% .18% 8.55% (5.73)% 4.45% 14.66% .71%
- -----------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
$244,291 $237,851 $240,563 $191,598 $188,025 $31,042 $31,189 $41,780 $34,660 $21,447
- ------------------------------------------------------------------------------------------------------------------------------
$246,335 $245,536 $221,626 $183,414 $179,614 $30,720 $35,163 $38,788 $29,510 $15,366
- ------------------------------------------------------------------------------------------------------------------------------
.91% .93% .99% 1.02% 1.07% 1.54% 1.35% 1.34% 1.00%(c) 1.00%(b)(c)
- ------------------------------------------------------------------------------------------------------------------------------
1.42% 1.15% 1.77% 1.32% .47% 3.38% 4.44% 5.02% 5.56%(c) 4.84%(b)(c)
- ------------------------------------------------------------------------------------------------------------------------------
45% 37% 39% 76% 116% 110% 202% 226% 456% 361%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 99
<PAGE> 206
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
TOTAL RETURN
BOND PORTFOLIO
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- ------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $10.56 $10.28 $10.62 $9.48 $10.28
- ------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income .58 .57 .57 .62(a) .47(a)
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on
investment transactions .27 .35 (.09) 1.18 (.82)
- ------------------------------------------------------------------------------------------------------
Total from investment
operations .85 .92 .48 1.80 (.35)
- ------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (.58) (.54) (.56) (.58) (.45)
- ------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
Distributions from net realized gains (.34) (.10) (.26) (.08) --
- ------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
Total distributions (.92) (.64) (.82) (.66) (.45)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.49 $10.56 $10.28 $10.62 $9.48
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN(b) 8.28% 9.23% 5.02% 19.63% (3.54)%
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $67,078 $50,411 $49,218 $45,118 $31,191
- ------------------------------------------------------------------------------------------------------
Average net assets (000) $61,786 $48,123 $47,246 $37,023 $31,141
- ------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .81% .91% .94% .85%(a) .85%(a)
- ------------------------------------------------------------------------------------------------------
Net investment income 5.54% 5.54% 5.67% 6.21%(a) 4.90%(a)
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate 327% 323% 340% 141% 121%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of expense subsidies.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 100
<PAGE> 207
<TABLE>
<CAPTION>
INTERMEDIATE-TERM MORTGAGE BACKED
BOND PORTFOLIO SECURITIES PORTFOLIO
- ---------------------------------------------------------- --------------------------------------------------------
Year Ended December 31, Year Ended December 31,
- ---------------------------------------------------------- --------------------------------------------------------
1998 1997 1996 1995 1994 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
$ 10.42 $ 10.30 $ 10.51 $ 9.56 $ 10.26 $ 10.45 $ 10.21 $ 10.31 $ 9.51 $ 10.18
- -----------------------------------------------------------------------------------------------------------------------
.63 .58 .59 .63 .49 .64 .64 .65 .68(a) .61(a)
- -----------------------------------------------------------------------------------------------------------------------
.09 .28 (.07) .94 (.71) .01 .23 (.12) .83 (.66)
- -----------------------------------------------------------------------------------------------------------------------
.72 .86 .52 1.57 (.22) .65 .87 .53 1.51 (.05)
- -----------------------------------------------------------------------------------------------------------------------
(.61) (.57) (.59) (.60) (.48) (.63) (.63) (.63) (.68) (.61)
- -----------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- (.03) (.01)
- -----------------------------------------------------------------------------------------------------------------------
(.17) (.17) (.14) (.02) -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
(.78) (.74) (.73) (.62) (.48) (.63) (.63) (.63) (.71) (.62)
- -----------------------------------------------------------------------------------------------------------------------
$10.36 $10.42 $10.30 $10.51 $9.56 $10.47 $10.45 $10.21 $10.31 $9.51
- -----------------------------------------------------------------------------------------------------------------------
7.09% 8.57% 5.22% 16.87% (2.23)% 6.37% 8.82% 5.56% 16.18% (.51)%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
$105,283 $95,071 $100,392 $77,125 $62,924 $72,870 $71,596 $73,867 $69,759 $61,971
- -----------------------------------------------------------------------------------------------------------------------
$101,219 $95,575 $81,723 $68,628 $69,602 $73,737 $71,757 $72,214 $65,149 $66,276
- -----------------------------------------------------------------------------------------------------------------------
.66% .71% .73% .79% .80% .70% .88% .91% .85%(a) .85%(a)
- -----------------------------------------------------------------------------------------------------------------------
5.71% 5.64% 5.69% 6.09% 5.06% 6.14% 6.21% 6.44% 6.79%(a) 6.19%(a)
- -----------------------------------------------------------------------------------------------------------------------
249% 249% 311% 93% 77% 24% 128% 102% 154% 380%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 101
<PAGE> 208
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
U.S. GOVERNMENT
MONEY
MARKET PORTFOLIO
----------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income .048 .049 .045 .051(a) .037(a)
- -------------------------------------------------------------------------------------------------------
Total from investment
operations .048 .049 .045 .051 .037
- -------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (.048) (.049) (.045) (.051) (.037)
- -------------------------------------------------------------------------------------------------------
Total distributions (.048) (.049) (.045) (.051) (.037)
- -------------------------------------------------------------------------------------------------------
Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN(b) 4.88% 4.95% 4.53% 5.25% 3.79%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $138,848 $42,326 $27,397 $18,855 $21,438
- -------------------------------------------------------------------------------------------------------
Average net assets (000) $106,500 $37,675 $19,132 $20,173 $15,048
- -------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .55% .65% .89% .75%(a) .50%(a)
- -------------------------------------------------------------------------------------------------------
Net investment income 4.85% 4.91% 4.49% 5.18%(a) 4.03%(a)
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of expense subsidies.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
Total return for periods of less than a full year are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page 51
B - 102
<PAGE> 209
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 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. 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,
should have earnings growth 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, are undervalued; Small Capitalization Growth
Portfolio--maximum capital appreciation through investment primarily in small
company common stocks that in the investment advisor's opinion should have
earnings growth faster than that of a market average companies; Small
Capitalization Value Portfolio--above average capital appreciation through
investment in common small company stocks that, in the adviser's opinion, are
undervalued or overlooked in the marketplace; International Equity
Portfolio--capital appreciation through investment primarily in stocks of
companies domiciled outside the United States; International Bond
Portfolio--high total return through investment primarily in high quality
foreign debt securities; 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
capital 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 sixty days or less are valued at
amortized cost which approximates market value. The amortized cost method
involves valuing a security at its cost on the date of purchase and thereafter
assuming a constant amortization to maturity of the difference between the
principal amount due at maturity and cost. Short-term securities held by the
other portfolios which mature in more than sixty 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 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.
- --------------------------------------------------------------------------------
B - 103
<PAGE> 210
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
from 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 year.
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.
FOREIGN CURRENCY FORWARD CONTRACTS: The International Equity Portfolio,
International Bond Portfolio, Intermediate-Term Bond Portfolio and Total Return
Bond Portfolio may enter into foreign currency forward contracts in order to
hedge their exposure to changes in foreign currency exchange rates on their
foreign portfolio holdings. A foreign currency forward contract is a commitment
to purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Portfolio enters into foreign currency forward 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 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.
- --------------------------------------------------------------------------------
B - 104
<PAGE> 211
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. Net investment income,
net realized gains and net assets were not affected by this change.
<TABLE>
<CAPTION>
PAID-IN ACCUMULATED NET
CAPITAL IN NET GAIN/ INVESTMENT
PORTFOLIO REF. EXCESS OF PAR LOSS INCOME
- --------------------- ------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Large Capitalization
Growth............. c,d $ 2,634,615 $(2,772,374) $ 137,759
Large Capitalization
Value.............. d 3,001,151 (2,613,471) (387,680)
Small Capitalization
Growth............. c,d (207,970) (353,656) 561,626
Small Capitalization
Value.............. d 1,662,180 (1,577,345) (84,835)
International
Equity............. a,d,e 9,655,686 (7,192,839) (2,462,847)
International Bond... a,b (400,824) (70,413) 471,237
Total Return Bond.... a,b,d 340,514 (210,309) (130,205)
Intermediate-Term
Bond............... a,b,d 384,043 (272,078) (111,965)
</TABLE>
- ---------------
(a) Reclass of net foreign currency gains/losses.
(b) Reclass of dividends in excess of net investment income.
(c) Reclass of net operating losses.
(d) Reclass of distributions/redemption distributions.
(e) Reclass of passive foreign investment companies' gains.
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 tax-paying 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's manager is Prudential Investments Fund Management LLC ('PIFM')
pursuant to which PIFM 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. PIFM supervises the
advisers' performance of advisory services and makes recommendations to the
Trustees as to whether the advisers' contracts should be renewed, modified or
terminated. PIFM pays for the costs pursuant to the advisory agreements, the
cost of compensation of officers of the Fund, occupancy and certain clerical and
accounting costs of the Fund. The Fund bears all other costs and expenses.
The advisers noted below each furnishe 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) are divided between the two advisers as PIFM 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.
<TABLE>
<CAPTION>
PORTFOLIO ADVISER
- ------------------------- ------------------------------------------
<S> <C>
Large Capitalization
Growth................. Oak Associates, Ltd., and
Columbus Circle Investors
Large Capitalization
Value.................. INVESCO Capital Management, Inc. and
Hotchkis and Willey
Small Capitalization
Growth................. Nicholas-Applegate Capital Management
and Investment Advisors, Inc.
Small Capitalization
Value.................. Wood, Struthers & Winthrop Management
Corp. and Lazard Asset Management
International Equity..... Lazard Asset Management
International Bond....... Delaware International Advisers Ltd.
Total Return Bond and
Intermediate-Term
Bond................... Pacific Investment Management Co.
Mortgage Backed
Securities and U.S.
Government Money
Market................. Wellington Management Company, LLP
</TABLE>
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of the average daily net assets of the Portfolios specified below
and PIFM, 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 had a distribution agreement with Prudential Securities
Incorporated ('PSI') for distribution of the Fund's shares. PSI served the Fund
without compensation. Effective June 1, 1998, Prudential Investment Management
Services LLC ('PIMS') became the distributor of the Fund and serves the Fund
under the same terms and conditions as under the agreement with PSI.
PIFM, PSI and PIMS are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
B - 105
<PAGE> 212
- --------------------------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS
WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent. The following amounts represent the
fees PMFS charged for the year ended December 31, 1998 as well as the fees due
PMFS as of December 31, 1998.
<TABLE>
<CAPTION>
AMOUNT INCURRED
FOR THE AMOUNT DUE
YEAR ENDED AS OF
DECEMBER 31, DECEMBER 31,
PORTFOLIO 1998 1998
- -------------------------------- ---------------- ------------
<S> <C> <C>
Large Capitalization Growth..... $104,000 $9,300
Large Capitalization Value...... 105,700 9,400
Small Capitalization Growth..... 104,000 9,000
Small Capitalization Value...... 89,000 9,000
International Equity............ 102,200 9,000
International Bond.............. 33,300 2,900
Total Return Bond............... 41,600 3,800
Intermediate-Term Bond.......... 46,000 4,400
Mortgage Backed Securities...... 49,100 4,400
U.S. Government Money Market.... 17,700 2,100
</TABLE>
For the year ended December 31, 1998, PSI earned approximately $2,700 and
$10,500 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, 1998 were as
follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- ------------------------------------ ------------ ------------
<S> <C> <C>
Large Capitalization Growth......... $145,083,038 $164,216,644
Large Capitalization Value.......... 65,756,716 75,890,819
Small Capitalization Growth......... 108,701,849 121,868,075
Small Capitalization Value.......... 58,289,278 61,097,158
International Equity................ 106,570,816 126,772,097
International Bond.................. 32,598,383 33,866,356
Total Return Bond................... 256,662,873 222,850,789
Intermediate-Term Bond.............. 286,908,180 254,829,589
Mortgage Backed Securities.......... 33,637,340 17,356,713
</TABLE>
The federal income tax basis and unrealized appreciation/depreciation of
each of the Portfolios' investments, excluding written options as of December
31, 1998, were as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED GROSS UNREALIZED
PORTFOLIO BASIS APPRECIATION APPRECIATION DEPRECIATION
- ---------------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Large Capitalization
Growth.............. $196,151,144 $ 134,712,424 $143,114,577 $ 8,402,153
Large Capitalization
Value............... 201,088,072 80,271,840 91,353,485 11,081,645
Small Capitalization
Growth.............. 125,836,517 34,690,988 41,038,381 6,347,393
Small Capitalization
Value............... 126,193,395 15,956,085 30,694,040 14,737,955
International
Equity.............. 197,621,727 46,840,190 62,270,909 15,430,719
International Bond.... 30,014,065 326,405 737,256 410,851
Total Return Bond..... 81,383,641 392,202 542,239 150,037
Intermediate-Term
Bond................ 111,341,635 680,058 1,080,305 400,247
Mortgage Backed
Securities.......... 70,733,726 1,809,741 2,086,796 277,055
</TABLE>
For federal income tax purposes, the Mortgage Backed Securities Portfolio
had a capital loss carryforward as of December 31, 1998 of approximately
$458,600 which expires in 2002. Such carryforward is after utilization of
approximately $625,000 against net taxable gains realized and recognized during
the year ended December 31, 1998. 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, the International Bond Portfolio and International Equity Portfolio
are electing to treat net currency losses of approximately $41,400 and $171,500,
respectively and the Small Capitalization Growth Portfolio, the Total Return
Bond Portfolio, the Intermediate Term Bond Portfolio and the Mortgage Backed
Portfolio are electing to treat net capital losses of approximately $860,100,
$155,500, $374,100 and $22,000, respectively, incurred in the two-month period
ended December 31, 1998 as having been incurred in the following year.
At December 31, 1998, the Total Return and Intermediate-Term Bond
Portfolios bought financial futures contracts. The unrealized appreciation on
such contracts as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Total Return Bond Portfolio:
VALUE AT VALUE AT UNREALIZED
NUMBER OF EXPIRATION DECEMBER 31, TRADE APPRECIATION
CONTRACTS TYPE DATE 1998 DATE (DEPRECIATION)
- ---------- --------------- ---------- ------------ ----------- --------------
<C> <S> <C> <C> <C> <C>
Long Positions:
123 5 yr. T-Note Mar. 1999 $13,941,281 $14,078,695 $ (137,414)
13 10 yr. T-Note Mar. 1999 1,549,031 1,569,242 (20,211)
7 Eurodollar Dec. 2000 1,657,600 1,656,513 1,087
7 Eurodollar Mar. 2001 1,658,913 1,656,800 2,113
7 Eurodollar Jun. 2001 1,658,388 1,655,863 2,525
3 Eurodollar Sept. 2001 710,550 712,163 (1,613)
1 Eurodollar Dec. 2001 236,488 235,475 1,013
1 Eurodollar Mar. 2002 236,688 235,525 1,163
1 Eurodollar Jun. 2002 236,625 235,463 1,162
12 90 day LIBOR Mar. 2000 2,360,924 2,356,366 4,558
--------------
$ (145,617)
==========
</TABLE>
- --------------------------------------------------------------------------------
B - 106
<PAGE> 213
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO:
VALUE AT VALUE AT UNREALIZED
NUMBER OF EXPIRATION DECEMBER 31, TRADE APPRECIATION
CONTRACTS TYPE DATE 1998 DATE (DEPRECIATION)
- ---------- --------------- ---------- ------------ ----------- --------------
<C> <S> <C> <C> <C> <C>
Long Positions:
200 5 yr. T-Note Mar. 1999 $22,668,750 $22,771,875 $ (103,125)
11 Eurodollar Mar. 2001 2,606,863 2,610,000 (3,137)
11 Eurodollar Jun. 2001 2,606,037 2,608,062 (2,025)
11 Eurodollar Sept. 2001 2,605,350 2,606,538 (1,188)
11 Eurodollar Dec. 2000 2,604,800 2,609,775 (4,975)
18 90 day LIBOR Mar. 2000 3,537,979 3,531,142 6,837
--------------
$ (107,613)
==========
</TABLE>
Transactions in options written during the year ended December 31, 1998,
were as follows:
<TABLE>
<CAPTION>
NUMBER OF PREMIUMS
TARGET TOTAL RETURN CONTRACTS RECEIVED
- ---------------------------------------- --------- --------
<S> <C> <C>
Options outstanding at December 31,
1997.................................. -- $ --
Options written......................... 15 2,872
------- --------
Options outstanding at December 31,
1998.................................. 15 $ 2,872
======= =======
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF PREMIUMS
INTERMEDIATE-TERM BOND PORTFOLIO CONTRACTS RECEIVED
- ---------------------------------------- --------- --------
<S> <C> <C>
Options outstanding at December 31,
1997.................................. -- $ --
Options written......................... 24 4,340
------- -------
Options outstanding at December 31,
1998.................................. 24 $ 4,340
======= =======
</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,
1998, PIFM and Prudential Bank & Trust owned 259,262 and 223,374 shares of the
International Bond Portfolio, respectively.
Transactions in shares of beneficial interest during the year ended
December 31, 1998 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........................... 3,830,971 1,197,514 (4,954,992) 73,493
Large Capitalization Value
Portfolio........................... 3,668,396 1,982,225 (4,758,185) 892,436
Small Capitalization Growth
Portfolio........................... 3,052,747 408,882 (3,755,087) (293,458)
Small Capitalization Value
Portfolio........................... 3,013,164 779,594 (3,677,883) 114,875
International Equity Portfolio........ 25,575,077 901,284 (27,414,057) (937,696)
International Bond Portfolio.......... 1,135,046 142,350 (1,417,310) (139,914)
Total Return Bond Portfolio........... 2,988,954 497,282 (1,866,519) 1,619,717
Intermediate-Term Bond Portfolio...... 5,691,190 690,608 (5,350,123) 1,031,625
Mortgage Backed Securities Portfolio.. 1,637,945 349,295 (1,876,495) 110,745
</TABLE>
Transactions in shares of beneficial interest during the year ended
December 31, 1997 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........................... 3,273,409 2,367,133 (4,709,116) 931,426
Large Capitalization Value
Portfolio........................... 3,430,654 1,783,097 (4,539,037) 674,714
Small Capitalization Growth
Portfolio........................... 2,375,813 1,448,105 (3,049,714) 774,204
Small Capitalization Value
Portfolio........................... 2,564,741 1,051,562 (2,602,621) 1,013,682
International Equity Portfolio........ 23,121,459 2,177,188 (24,872,919) 425,728
International Bond Portfolio.......... 1,097,817 157,365 (1,963,982) (708,800)
Total Return Bond Portfolio........... 1,432,562 273,531 (1,719,713) (13,620)
Intermediate-Term Bond Portfolio...... 2,836,650 620,854 (4,075,790) (618,286)
Mortgage Backed Securities Portfolio.. 1,308,386 354,474 (2,049,370) (386,510)
</TABLE>
B - 107
<PAGE> 214
THE TARGET PORTFOLIO TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Trustees of
The Target Portfolio Trust
1177 Avenue of the Americas
New York, New York
February 19, 1999
- --------------------------------------------------------------------------------
B - 108
<PAGE> 215
APPENDIX I -- HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart illustrates that large pension plans use the methods listed in
the percentages indicated for the period December 1977 through December 1987.
HOW YOU ALLOCATE YOUR ASSETS
MAINLY DETERMINES YOUR RETURN
(BASED ON A STUDY OF LARGE PENSION PLANS)
[PIE CHART]
<TABLE>
<CAPTION>
<S> <C>
Security Selection Other..................... 6.7%
Asset Allocation............................. 91.5%
Market Timing................................ 1.8%
</TABLE>
Source: Financial Analysts Journal, May/June 1991: "Deteminants of
Portfolio Performance II: An Update," by Gary Brinson, Brian Singer and Gilbert
Beebower. Results are based on the 10-year performance records of 82 pension
funds. The study updates and supports a similar study done in 1986. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any TARGET Portfolio.
I-1
<PAGE> 216
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(VALUE OF $1 INVESTED ON 12/31/25 THROUGH 12/31/98)
<TABLE>
<CAPTION>
Dollars
-------
<S> <C>
Inflation..................................... $ 9
T-Bills....................................... $ 15
Bonds......................................... $ 44
Common Stock.................................. $2,351
Small Stock................................... $5,117
</TABLE>
Source: Ibbotson Associates. Used with permission. This chart is for
illustrative purposes only and is not indicative of the past, present, or future
performance of any TARGET Portfolio.
Generally, stock returns are due to capital appreciation and reinvesting
any gains. Bond returns are due mainly to reinvesting interest. Also, stock
prices usually are more volatile than bond prices over the long-term.
SMALL STOCK returns for 1926-1980 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. For 1981 through 1998, returns are
those of the Dimensional Fund Advisors (DFA) Small Company Fund, which is a
market-value-weighted index of the ninth and tenth deciles of the New York Stock
Exchange (NYSE), plus stocks listed on the American Stock Exchange and over-the-
counter with the same or less capitalization as the upper bound of the NYSE
decile.
COMMON STOCK returns are based on the S&P 500 Composite Index, a
market-weighted, unmanaged index of 500 stocks (currently) in a variety of
industries. It is often used as a broad measure of stock market performance.
LONG-TERM GOVERNMENT BOND returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years.
TREASURY BILL returns are for a one-month bill. Treasuries are guaranteed
by the government as to the timely payment of principal and interest; equities
are not.
INFLATION is measured by the consumer price index (CPI).
I-2
<PAGE> 217
The following chart shows the performance of a hypothetical investment in
the following stock indices for the period indicated.
DIFFERENT TYPES OF STOCKS, DIFFERENT RETURNS
VALUE OF $1 INVESTED ON 12/31/98
<TABLE>
<CAPTION>
Dollars
-------
<S> <C>
Common Stocks................................. $39.17
Small Stocks.................................. $40.53
Foreign Stock................................. $32.43
</TABLE>
COMMON STOCK returns are based on the S&P 500 Composite Index, a
market-weighted, unmanaged index of 500 stocks (currently) in a variety of
industries. It is often used as a broad measure of stock market performance.
Source: Lipper, Inc.
SMALL STOCK performance for the beginning of the period through 1980 is
based on the returns of stocks making up the 5th quintile of the New York Stock
Exchange (NYSE) and, for 1981-1998, is based on the returns of the DFA Small
Company Fund, which is a market-value-weighted index of the ninth and tenth
deciles of the NYSE, plus stocks listed on the American Stock Exchange and
over-the-counter with the same or less capitalization as the upper bound of the
NYSE decile. Source: Ibbotson Associates.
FOREIGN STOCK returns are represented by the Morgan Stanley Capital
International Europe Australia Far East (EAFE) index, a common measure of
foreign stock performance. It is a market-weighted index of 20 countries.
Source: Lipper, Inc.
Geometric Returns are through 1998. Generally, returns of foreign stocks
are more volatile than those of common or small stocks.
This chart is for illustrative purposes only and is not indicative of the
past, present, or future performance of any TARGET Portfolio.
I-3
<PAGE> 218
This chart shows the performance of a hypothetical investment in short-term
U.S. Government securities adjusted for inflation for the period from January 1,
1998 through December 31, 1998.
TOO MANY SHORT-TERM SECURITIES
MAY NOT MAKE SENSE
INFLATION AND TAXES CAN ERODE YOUR INVESTMENT
<TABLE>
<S> <C>
Initial investment.......................................... $ 10,000
Interest income: 4.86%...................................... 486
Tax paid on interest (assumes 31% tax rate)................. -151
-------------
Net interest income......................................... 335
Adjust for 1.8% inflation................................... 180
-------------
Net investment.............................................. $ 10,155
</TABLE>
THE INVESTOR'S NET RETURN WAS ONLY 1.55%!
1997 Salomon Smith Barney Brothers 30-day T-bill return used for short-term
interest rate. Federal tax rate of 31% and 1998 inflation rate (CPI) were used.
Short-term rates can fluctuate.
Past performance is no guarantee of future results. This hypothetical
example is provided for informational purposes only. It is not intended to
represent any specific investment and is not indicative of past, present, or
future performance of any TARGET Portfolio.
I-4
<PAGE> 219
Each bar shows the best
and worst annualized return for
the specified holding periods
through 1998. For example, the
best one-year return occurred
in 1933 and the worst 10-year
annualized return occurred from
1929-1938. The first holding
period started on 12/31/25 and
the first 20-year period ended
on 12/31/45.
Common stock returns are
based on the S&P 500 Composite
Index, a market-weighted,
unmanaged index of 500 stocks
(currently) in a variety of
industries. It is often used as
a broad measure of stock market
performance.
This chart is for
illustrative purposes only and
is not indicative of the past,
present, or future performance
of any TARGET Portfolio.
Source: Ibbotson
Associates
TIME REDUCES YOUR RISK
BEST AND WORST ANNUALIZED RETURNS OF THE S&P
[S&P BEST AND WORST ANNUALIZED RETURNS BAR CHART]
I-5
<PAGE> 220
APPENDIX II -- 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
II-1
<PAGE> 221
to the overall growth of assets. The long-term investment results of compounding
may be greater than that of an equivalent initial investment in which the
proceeds of capital appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
II-2
<PAGE> 222
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Trust is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Trust.
INFORMATION ABOUT PRUDENTIAL
The Manager 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,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, the Prudential has
25 million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
approximately 1.5 million cars and insures approximately 1.2 million homes.
Money Management. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in assets
under management. Prudential Investments, a business group of Prudential (of
which Prudential Mutual Funds is a key part), manages over $211 billion in
assets of institutions and individuals. In Institutional Investor, July 1998,
Prudential was ranked eighth in terms of total assets under management, as of
December 31, 1997.
Real Estate. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents with over 1,400 offices
across the United States.(2)
- ---------------
(1) 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 the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to The Prudential Investment Portfolios, Inc. and Mercator Asset
Management, LP as the subadviser to The International Stock Series, a
portfolio of Prudential World Fund, Inc. There are multiple subadvisers for
The Target Portfolio Trust.
(2) As of December 31, 1997.
III-1
<PAGE> 223
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.(3)
Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves nearly
1.5 million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of November 30, 1998, Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the subadvisers
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth Fund, a growth-style equity fund managed by Jennison Associates LLC, a
premier institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitors
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(4) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Investment grade bond analysts monitor the financial
viability of different bond issuers in the investment grade corporate and
municipal bond markets--from IBM to small municipalities, such as Rockaway
Township, New Jersey. These analysts consider among other things sinking fund
provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
- ---------------
(3) On December 10, 1998 Prudential announced its intention to sell Prudential
HealthCare to Aetna Inc. for $1 billion.
(4) As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
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Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers met with several senior U.S. and foreign
government officials, on issues ranging from economic conditions in foreign
countries to the viability of index-linked securities in the United States.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(5)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment and financial
planning areas.
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect(SM), a state-of-the-art asset allocation software program
which helps financial advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------------
(5) As of December 31, 1998.
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APPENDIX IV
GLOSSARY OF INDICES
U.S. LARGE CAP STOCKS (S&P 500) -- The S&P 500 is a capital-weighted index
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The S&P 500 is an unmanaged
index.
U.S. SMALL CAP STOCKS (RUSSELL 2000) -- The Russell 2000 Index is a stock market
index comprised of the 2000 smallest U.S. domiciled publicly traded common
stocks that are included in the Russell 3000 Index. These common stocks
represent 10% of the total market capitalization of the Russell 3000 Index
which, in turn, represents approximately 98% of the publicly traded U.S. equity
market.
INTERNATIONAL STOCKS (MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA,
FAR EAST (EAFE) INDEX) -- The MSCI EAFE Index is an arithmetical average
weighted by market value of the performance of over 1000 non-U.S. companies
representing 20 stock markets in Europe, Australia, New Zealand and the Far
East. The EAFE Index is an unmanaged index.
U.S. BONDS (LEHMAN BROTHERS AGGREGATE BOND INDEX) -- The index is composed of
securities from the Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and Asset Backed Securities Index. Total
return comprises price appreciation/depreciation and income as a percentage of
the original investment.
INTERNATIONAL BONDS (WB INDEX) -- The Salomon Smith Barney Non-U.S. World
Government WB Index (WB Index) measures the total return performance of high
quality securities in major sectors of the international bond market. The Index
covers approximately 600 bonds from 17 currencies. Only high quality, straight
issues are included. The WB Index is calculated on both a weighted and an
unweighted basis. Generally, index samples for each market are restricted to
bonds with at least one year of remaining life. The WB Index is an unmanaged
index.
U.S. TREASURY BILLS (SALOMON BROTHERS 90 DAY INDEX) -- This index is constructed
by purchasing equal dollar amounts of three-month Treasury bills at the
beginning of three consecutive months. As each bill matures, all proceeds are
rolled over or reinvested in a new three-month bill. The income used to
calculate the monthly return is derived by subtracting the original amount
invested from the maturity value.
SALOMON SMITH BARNEY MORTGAGE-BASED SECURITIES INDEX (MBS INDEX) -- The MBS
Index is comprised of 30- and 15-year GNMA, FNMA and FHLMC pass-through, and
FNMA and FHLMC balloon mortgages. The MBS Index is an unmanaged index.
INFLATION (CPI) -- The Consumer Price Index for all urban consumers, not
seasonally adjusted, is used to measure the rate of change of consumer prices.
This measures inflation and is constructed by the U.S. Department of Labor,
Bureau of Labor Statistics, Washington D.C.
LARGE CAP GROWTH INDEX (RUSSELL 1000 GROWTH) -- Contains those Russell 1000
securities with a "growth" orientation. Securities in this index tend to exhibit
higher price-to-book and price-to-earnings ratios, lower dividend yields, and
higher forecasted growth rates than those in the Value universe.
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<PAGE> 226
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.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX -- The Lehman Brothers
Government/ Corporate Bond Index (LGCI) is a weighted index comprised of
publicly traded intermediate and long-term government and corporate debt with an
average maturity of 10 years. The LGCI is an unmanaged index.
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX -- The Lehman
Brothers Intermediate Government/Corporate Bond Index (Lehman Int. Gov't Corp.
Index) is a weighted index comprised of securities issued or backed by the U.S.
government and its agencies and securities publicly issued by corporations with
one to ten years remaining to maturity, rated investment grade and having $50
million or more outstanding. The Lehman Int. Gov't Corp. Index is an unmanaged
index.
LIPPER INTERNATIONAL EQUITY FUND AVERAGE -- Contains international equity funds
that report to Lipper Analytical Services. The funds are given equal weight in
constructing performance which prevents any one fund from having a greater
impact on the overall calculation. Each fund contained in the average has stated
that their objective matches that of the group. Single country funds are not
included in this group.
LIPPER CORPORATE BOND FUND AVERAGE -- Contains corporate bond funds that report
to Lipper Analytical Services. The funds have an average credit quality rating
of least an "A". The average maturity is greater than 10 years. The funds are
equally weighted to assure that no one fund has more of an impact on the
performance calculation than any other fund.
LIPPER INTERMEDIATE TERM BOND FUND AVERAGE -- Contains intermediate-term bond
funds that report to Lipper Analytical Services. The funds invest mainly in
investment grade debt instruments and have an average credit rating of "A". The
average maturity is between 5 to 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.
LIPPER MORTGAGE FUND AVERAGE -- Contains mortgage funds that report to Lipper
Analytical Services. The funds contain primarily U.S. mortgage obligations. The
average maturity is greater than 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.
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<PAGE> 227
LIPPER GOVERNMENT MONEY MARKET AVERAGE -- Contains Government money market funds
that report to Lipper Analytical Services. The funds invest in short-term U.S.
Government obligations. The funds are equally weighted to assure that no one
fund has more of an impact on the performance calculation than any other fund.
LIPPER WORLD INCOME FUND AVERAGE -- Contains world income funds that report to
Lipper Analytical Services. The funds are able to invest in debt instruments in
any country. The funds are equally weighted to assure that no one fund has more
of an impact on the performance calculation than any other fund.
MORNINGSTAR LARGE CAP GROWTH AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.
MORNINGSTAR LARGE CAP VALUE AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.
MORNINGSTAR SMALL CAP GROWTH AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.
MORNINGSTAR SMALL CAP VALUE AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.
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<PAGE> 228
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<C> <C> <S> <C>
(a) (1) Certificate of Trust.(2)
(2) Declaration of Trust.(2)
(b) By-Laws.(2)
(c) Not Applicable.
(d) (1) (i) Management Agreement, between the Registrant and Prudential
Investments Fund Management LLC.(2)
(ii) Amendment to Management Agreement.(2)
(2) (i) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and INVESCO Capital Management Inc.(3)
(ii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Nicholas-Applegate Capital Management,
Inc.(2)
(iii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Lazard Freres Asset Management for the
International Equity Portfolio.(2)
(iv) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Wellington Management Company.(2)
(v) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Delaware International Advisers Ltd.(3)
(vi) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Columbus Circle Investors.(2)
(vii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Pacific Investment Management
Company.(2)
(viii) Subadvisory Agreement between Prudential Mutual Fund
Management and Hotchkis and Wiley.(2)
(ix) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Investment Advisers, Inc.(2)
(x) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Lazard Freres Asset Management for the
Small Capitalization Value Portfolio.(2)
(xi) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Wood, Struthers & Winthrop Management
Corp.(1)
(xii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Oak Associates, Ltd.(1)
(e)(1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.(*)
(2) Form of Selected Dealer Agreement.*
(g) Custodian Contract between the Registrant and State Street
Bank and Trust Company.(2)
(h) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc.(2)
(i) Opinion of Shereff, Friedman, Hoffman & Goodman dated
November 4, 1992.(2)
(n) Financial Data Schedules.*
</TABLE>
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* Filed herewith.
** To be filed by future Post-Effective Amendment.
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<PAGE> 229
1. Incorporated by reference to the Registrant's Post-Effective Amendment No. 6
to its Registration Statement on Form N-1A filed via EDGAR on March 1, 1996
(File No. 33-50476).
2. Incorporated by reference to the Registrant's Post-Effective Amendment No. 7
to its Registration Statement on Form N-1A filed via EDGAR on March 11, 1997
(File No. 33-50476).
3. Incorporated by reference to the Registrant's Post-Effective Amendment No. 8
to its Registration Statement on Form N-1A filed via EDGAR on March 9, 1998
(File No. 33-50476).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 25. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended, (the Investment Company Act) and pursuant to Article VI of the
Fund's By-Laws (Exhibit (b) to the Registration Statement), officers, trustees,
employees and agents of the Registrant will not be liable to the Registrant, any
stockholder, officer, director, employee, agent or other person for any action
or failure to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be indemnified
against liabilities in connection with the Registrant, subject to the same
exceptions. Section 3817 of the Delaware Business Trust Act permits
indemnification of trustees who acted in good faith and reasonably believed that
the conduct was in the best interest of the Registrant. As permitted by Section
17(i) of the Investment Company Act, pursuant to Section 8 of the Distribution
Agreement (Exhibit (e)(1) to the Registration Statement), the Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, (Securities Act) may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Investment Company Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Investment Company Act and will be governed by the
final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit (d)(1)(i) to the
Registration Statement) and Section 4 of the Subadvisory Agreements (Exhibits
(d)(2) to the Registration Statement) limit the liability of Prudential
Investments Fund Management LLC (PIFM) and each Adviser, respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
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<PAGE> 230
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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(A) Prudential Investments Fund Management LLC
See "How the Trust is Managed -- Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, as most recently amended (File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<S> <C> <C>
Robert F. Gunia.............. Executive Vice President Vice President, Prudential Insurance
and Treasurer Company of America; Executive Vice
President and Treasurer, PIFM; Senior
Vice President, Prudential Securities
Incorporated
Neil A. McGuinness........... Executive Vice President Executive Vice President and Director of
Marketing, Prudential Mutual Funds &
Annuities (PMF&A); Executive Vice
President; PIFM
Brian M. Storms.............. Officer-in Charge, President, Prudential Investments;
President, Chief Officer-in Charge, President, Chief
Executive Officer and Executive Officer and Chief Operating
Chief Operating Officer, PIFM
Officer
Robert J. Sullivan........... Executive Vice President Executive Vice President, PMF&A; Executive
Vice President; PIFM
</TABLE>
(B) Columbus Circle Investors (CCI)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Advisers" in
the Statement of Additional Information constituting Part B of this Registration
Statement.
Information as to CCI's directors and executive officers is included in its
Form ADV filed with the Securities and Exchange Commission (File No. 801-31227),
as most recently amended, the text of which is incorporated herein by reference.
(C) Invesco Capital Management, Inc. (Invesco)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "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.
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<PAGE> 231
(D) Hotchkis and Wiley
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "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 "How the Trust is Managed -- Advisers and Portfolio Managers" 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 "How the Trust is Managed -- Advisers and Portfolio Managers" 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 Asset Management
See "How the Trust is Managed -- Advisers and Portfolio Managers" 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 & Co. 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) Delaware International Advisers Ltd. (DIAL)
See "How the Trust is Managed -- Advisers and Portfolio Managers" 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 DIAL's directors and executive officers is included in
its Form ADV filed with the Securities and Exchange Commission (File No.
801-37702), as most recently amended, the text of which is incorporated herein
by reference.
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<PAGE> 232
(I) Pacific Investment Management Company (PIMCO)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Advisers" in
the Statement of Additional Information constituting Part B of this Registration
Statement.
Information as to PIMCO's partners is included in its Form ADV filed with
the Securities and Exchange Commission (File No. 801-7260), as most recently
amended, the text of which is incorporated herein by reference.
(J) Wellington Management Company, LLP (WMC)
See "How the Trust is Managed -- Advisers and Portfolio Managers" 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 "How the Trust is Managed -- Advisers and Portfolio Managers" 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 "How the Trust is Managed -- Advisers and Portfolio Managers" 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 27. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for the Cash Accumulation Trust, Command Government
Fund, Command Money Fund, Command Tax-Free Fund, The Global Total Return Fund,
Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Balanced Fund, Prudential
California Municipal Fund, Prudential Distressed Securities Fund, Inc.,
Prudential Diversified Bond Fund, Inc., Prudential Diversified Funds, Prudential
Emerging Growth Fund, Inc., Prudential Equity Fund, Prudential Equity Income
Fund, Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Limited Maturity Fund, Inc., Prudential Government Income
Fund, Inc., Prudential Government Securities Trust, Prudential High Yield Fund,
Inc., Prudential High Yield Total Return Fund, Inc., Prudential Index Series
Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential International Bond Fund, Inc.,
Prudential Mid-Cap Value Fund, Prudential MoneyMart Assets, Inc., Prudential
Mortgage Income Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural
Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Real
Estate Securities Fund, Prudential
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<PAGE> 233
Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund, Inc.,
Prudential Special Money Market Fund, Inc., Prudential Structured Maturity Fund,
Inc., Prudential 20/20 Focus Fund, Prudential Tax-Managed Equity Fund,
Prudential Utility Fund, Inc., Prudential World Fund, Inc., The Prudential
Investment Portfolios, Inc. and The Target Portfolio Trust.
(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND
NAME(1) WITH UNDERWRITER OFFICES WITH REGISTRANT
------- --------------------- -----------------------
<S> <C> <C>
E. Michael Caulfield................... President None
Mark R. Fetting........................ Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
Jean D. Hamilton....................... Executive Vice President None
Ronald P. Joelson...................... Executive Vice President None
Brian M. Storms........................ Executive Vice President President
Gateway Center Three and
100 Mulberry Street Trustee
Newark, New Jersey 07102
John R. Strangfeld..................... Executive Vice President None
Mario A. Mosse......................... Senior Vice President and Chief None
Operating Officer
Scott S. Wallner....................... Vice President, Secretary and None
Chief Legal Officer
Michael G. Williamson.................. Vice President, Comptroller and None
Chief Financial Officer
C. Edward Chaplin...................... Treasurer None
</TABLE>
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(1) The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102, unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. 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,
100 Mulberry Street, Newark, New Jersey 07102-4077, and Prudential Mutual Fund
Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents required by
Rules 31a-1(b)(4), (5), (6), (7), (9), (10) and (11), 31a-1(d), and 31a-1(f)
will be kept at 100 Mulbery Street, Gateway Center Three, Newark, New Jersey
07102-4077 and the remaining accounts, books and other documents required by
such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services LLC.
C-6
<PAGE> 234
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "How the Trust is Managed" in the
Prospectus and the caption "Investment Advisory and Other Services" in the
Statement of Additional Information, constituting Parts A and B, respectively,
of this Post-Effective Amendment to the Registration Statement, Registrant is
not a party to any management-related service contract.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-7
<PAGE> 235
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 1st day of March, 1999.
THE TARGET PORTFOLIO TRUST
/s/ BRIAN M. STORMS
--------------------------------------
(Brian M. Storms, 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, and Principal Financial March 1, 1999
- --------------------------------------------------- and Accounting Officer
Grace C. Torres
/s/ EUGENE C. DORSEY Trustee March 1, 1999
- ---------------------------------------------------
Eugene C. Dorsey
/s/ DOUGLAS H. MCCORKINDALE Trustee March 1, 1999
- ---------------------------------------------------
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY Trustee March 1, 1999
- ---------------------------------------------------
Thomas T. Mooney
/s/ BRIAN M. STORMS President and Trustee March 1, 1999
- ---------------------------------------------------
Brian M. Storms
</TABLE>
C-8
<PAGE> 236
EXHIBIT INDEX
<TABLE>
<S> <C>
(e)(1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.
(2) Form of Selected Dealer Agreement.
(n) Financial Data Schedules
</TABLE>
<PAGE> 1
THE TARGET PORTFOLIO TRUST
Distribution Agreement
Agreement made as of July 1, 1998, between The Target
Portfolio Trust, a Delaware business trust (the Fund), and Prudential Investment
Management Services LLC, a Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund 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 Fund to
offer its shares for sale continuously;
WHEREAS, the shares of beneficial interest (all such shares
being returned to herein as Shares) of the Fund are divided into separate series
or portfolios (each a Portfolio), each of which is established by resolution of
the Trustees of the Fund, 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 Fund and the Distributor wish to enter into an
agreement with each other, with respect to the continuous offering of the Fund's
Shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell Shares of each
Portfolio to the public on behalf of the Fund and the Distributor hereby accepts
such appointment and agrees to act hereunder. The Fund hereby agrees during the
term of this Agreement to sell Shares of the Fund through the Distributor on the
terms and conditions set forth below.
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the
Fund to act as
<PAGE> 2
principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell
Shares of the Fund shall not apply to Shares of the Fund issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of all
(or substantially all) the assets or the outstanding shares of any such company
by the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Fund's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Fund. The term "Prospectus"
shall mean the Prospectus and Statement of Additional Information included as
part of the Fund'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
Fund 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 Fund
3.1 The Distributor shall have the right to buy from the Fund
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 Fund 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 Fund 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 Fund shall also have the right to suspend the sale of its Shares if a
banking moratorium shall have
2
<PAGE> 3
been declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing
by the Fund, shall be promptly advised of all purchase orders for Shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Shares. The Fund (or its agent)
will confirm orders upon their receipt, will make appropriate book entries and
upon receipt by the Fund (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 Fund 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 Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding Shares may be tendered for
redemption at any time, and the Fund 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 Fund
hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund 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 Fund 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 Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of Shares
as provided herein, the Fund agrees to sell its Shares so long as it has Shares
available.
3
<PAGE> 4
5.2 The Fund 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 Fund by independent public accountants.
The Fund 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 Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund 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 Fund 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 Fund may
approve; provided that the Fund 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 Fund 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 Fund. The Distributor
shall furnish such information and other material relating to its affairs and
activities as may be required by the Fund 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 Fund, 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 Fund to give any
information or to make any
4
<PAGE> 5
representations, other than those contained in the Registration Statement or
Prospectus and any sales literature approved by appropriate officers of the
Fund.
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 Fund shall approve the forms of such agreements. Within the United States,
the Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD. 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. Allocation of Expenses
The Fund 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 Fund 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 Fund as a broker or dealer, in such
states of the United States or other jurisdictions as shall be selected by the
Fund 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 Fund
decides to discontinue such qualification pursuant to Section 5.4 hereof.
Section 8. Indemnification
8.1 The Fund agrees to indemnify, defend and hold the
Distributor, its officers and directors and any person who controls the
Distributor within the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any reasonable counsel fees incurred in connection therewith)
which the Distributor, its officers, members or any such controlling person may
incur under the Securities Act, or under common law or otherwise, arising out of
or based upon any untrue statement of a material fact contained in the
Registration
5
<PAGE> 6
Statement or Prospectus or arising out of or based upon any alleged omission to
state a material fact required to be stated in either thereof or necessary to
make the statements in either thereof not misleading, except insofar as such
claims, demands, liabilities or expenses arise out of or are based upon any such
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information furnished by the Distributor to
the Fund 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 trustees or trustees who are
neither "interested persons" of the Fund 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 Fund's agreement to indemnify the
Distributor, its officers and directors and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or directors, or any
such controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund 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
Fund, its officers and Trustees and any person who controls the Fund, if any,
within the meaning of Section 15 of the Securities Act, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, 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 Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished by the Distributor to the Fund 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
Fund, 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
6
<PAGE> 7
the Fund, 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 Fund, or by the vote of a majority of
the outstanding voting securities of the Fund 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 Fund, 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.
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 Fund, or by the
vote of a majority of the outstanding voting securities of the Fund, 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 Jersey as at the
time in effect and the applicable provisions of the Investment Company Act. To
the extent that the applicable law of the State of New Jersey, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
7
<PAGE> 8
Section 12. Liabilities of the Fund
The Fund is a business trust organized under the Delaware
Business Trust Act pursuant to a certificate of trust dated July 29, 1992. The
Fund 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 Fund as a
whole. Neither the Trustees, officers, agents or shareholders of the Fund assume
any personal liability for obligations entered into on behalf of the Fund (or a
Portfolio thereof).
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: /s/ E. Michael Caulfield
E. Michael Caulfield
THE TARGET PORTFOLIO TRUST
By: /s/ Richard A. Redeker
Richard A. Redeker
8
<PAGE> 1
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i) a
broker-dealer registered with the Securities and Exchange Commission ("SEC");
(ii) a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"); and (iii) licensed by the appropriate regulatory agency
of each state or other jurisdiction in which Dealer will offer and sell Shares
of the Funds, to the extent necessary to perform the duties and activities
contemplated by this Agreement.
b. Dealer represents and warrants that each of its partners,
directors, officers, employees, and agents who will be utilized by Dealer with
respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects
subject to the Conduct Rules of the NASD and such Conduct Rules shall control
any provision to the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all
applicable state and federal laws and all rules and regulations promulgated
thereunder generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds
(including those of each of its classes) only at the regular public offering
price applicable to such Shares and in effect at the time of each transaction.
The procedures relating to all orders and the handling of
A-1
<PAGE> 2
each order (including the manner of computing the net asset value of Shares and
the effective time of orders received from Dealer) are subject to: (i) the terms
of the then current prospectus and statement of additional information
(including any supplements, stickers or amendments thereto) relating to each
Fund, as filed with the SEC ("Prospectus"); (ii) the new account application for
each Fund, as supplemented or amended from time to time; and (iii) Distributor's
written instructions and multiple class pricing procedures and guidelines, as
provided to Dealer from time to time. To the extent that the Prospectus contains
provisions that are inconsistent with this Agreement or any other document, the
terms of the Prospectus shall be controlling.
b. Distributor reserves the right at any time, and without
notice to Dealer, to suspend the sale of Shares or to withdraw or limit the
offering of Shares. Distributor reserves the unqualified right not to accept any
specific order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer
is not authorized to act as broker or agent for, or employee of, Distributor,
any Fund or any other dealer, and Dealer shall not in any manner represent to
any third party that Dealer has such authority or is acting in such capacity.
Rather, Dealer agrees that it is acting as principal for Dealer's own account or
as agent on behalf of Dealer's customers in all transactions in Shares, except
as provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its
sole discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders
placed through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if the
NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor or
from Dealer's customers.
A-2
<PAGE> 3
b. Dealer agrees to enter orders for the purchase of Shares
only from Distributor and only for the purpose of covering purchase orders
Dealer has already received from its customers or for Dealer's own bona fide
investment.
c. Dealer agrees to date and time stamp all orders received by
Dealer and promptly, upon receipt of any and all orders, to transmit to
Distributor all orders received prior to the time described in the Prospectus
for the calculation of each Fund's net asset value so as to permit Distributor
to process all orders at the price next determined after receipt by Dealer, in
accordance with the Prospectus. Dealer agrees not to withhold placing orders for
Shares with Distributor so as to profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and
sales of Shares made through Dealer and to furnish Distributor or regulatory
authorities with copies of such records upon request. In that regard, Dealer
agrees that, unless Dealer holds Shares as nominee for its customers or
participates in the NSCC Fund/Serv Networking program, at certain matrix levels,
it will provide Distributor with all necessary information to comply properly
with all federal, state and local reporting requirements and backup and
nonresident alien withholding requirements for its customer accounts including,
without limitation, those requirements that apply by treating Shares issued by
the Funds as readily tradable instruments. Dealer represents and agrees that all
Taxpayer Identification Numbers ("TINs") provided are certified, and that no
account that requires a certified TIN will be established without such certified
TIN. With respect to all other accounts, including Shares held by Dealer in
omnibus accounts and Shares purchased or sold through the NSCC Fund/Serv
Networking program, at certain matrix levels, Dealer agrees to perform all
federal, state and local tax reporting with respect to such accounts, including
without limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund
or is tendered for redemption within seven (7) business days after confirmation
by Distributor of the original purchase order from Dealer, Dealer shall forfeit
its right to any concession or commission received by Dealer with respect to
such Share and shall forthwith refund to Distributor the full concession allowed
to Dealer or commission paid to Dealer on the original sale. Distributor agrees
to notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from
Distributor shall be in Fed Funds, New York clearinghouse or other immediately
available funds and that such funds shall be received by Distributor by the
earlier of: (i) the end of the third (3rd) business day following Dealer's
receipt of the customer's order to purchase such Shares; or (ii) the settlement
date established in accordance with Rule 15c6-1 under the Securities Exchange
Act of 1934, as amended. If such payment is not received by Distributor by such
date, Dealer shall forfeit its right to any concession or commission with
respect to such order, and Distributor reserves the
A-3
<PAGE> 4
right, without notice, forthwith to cancel the sale, or, at its option, to sell
the Shares ordered back to the Fund, in which case Distributor may hold Dealer
responsible for any loss, including loss of profit, suffered by Distributor
resulting from Dealer's failure to make payment as aforesaid. If a purchase is
made by check, the purchase is deemed made upon conversion of the purchase
instrument into Fed Funds, New York clearinghouse or other immediately available
funds.
h. Dealer agrees that it: (i) shall assume responsibility for
any loss to the Fund caused by a correction to any order placed by Dealer that
is made subsequent to the trade date for the order, provided such order
correction was not based on any negligence on Distributor's part; and (ii) will
immediately pay such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the
purchase of Shares on behalf of any IRAs, 401(k) plans or other retirement plan
accounts, by mail, telephone, or wire, Dealer shall act as agent for the
custodian or trustee of such plans (solely with respect to the time of receipt
of the application and payments), and Dealer shall not place such an order with
Distributor until it has received from its customer payment for such purchase
and, if such purchase represents the first contribution to such a retirement
plan account, the completed documents necessary to establish the retirement
plan. Dealer agrees to indemnify Distributor and its affiliates for any claim,
loss, or liability resulting from incorrect investment instructions received by
Distributor from Dealer.
j. Dealer agrees that it will not make any conditional orders
for the purchase or redemption of Shares and acknowledges that Distributor will
not accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by
it in connection with its activities under this Agreement will be borne by
Dealer.
l. Dealer agrees that it will keep in force appropriate
broker's blanket bond insurance policies covering any and all acts of Dealer's
partners, directors, officers, employees, and agents adequate to reasonably
protect and indemnify the Distributor and the Funds against any loss which any
party may suffer or incur, directly or indirectly, as a result of any action by
Dealer or Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net
capital as specified by the rules and regulations of the SEC, NASD and other
regulatory authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor, the
total sales charges and dealer concessions or commissions, if any, payable to
Dealer shall be as stated on Schedule A to this Agreement, which may be amended
by Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must be
notified at the time of the sale that
A-4
<PAGE> 5
the sale qualifies for the reduced sales charge. If Dealer fails to notify
Distributor of the applicability of a reduction in the sales charge at the time
the trade is placed, neither Distributor nor any Fund will be liable for amounts
necessary to reimburse any investor for the reduction that should have been
effected. Dealer acknowledges that no sales charge or concession or commission
will be paid to Dealer on the reinvestment of dividends or capital gains
reinvestment or on Shares acquired in exchange for Shares of another Fund, or
class thereof, having the same sales charge structure as the Fund, or class
thereof, from which the exchange was made, in accordance with the Prospectus.
b. In accordance with the Funds' Prospectuses, Distributor or
any affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares purchased
in a Qualifying Sale are redeemed within twelve (12) months of the end of the
month of purchase, Distributor shall be entitled to recover any advance payment
attributable to the redeemed Shares by reducing any account payable or other
monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which
distribution plans have been adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended ("Rule 12b-1 Plans"), Distributor also is
authorized to pay the Dealer continuing distribution and/or service fees, as
specified in Schedule A and the relevant Fund Prospectus, with respect to Shares
of any such Fund, to the extent that Dealer provides distribution, marketing,
administrative and other services and activities regarding the promotion of such
Shares and the maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or
service fees under Rule 12b-1 Plans applicable to Shares purchased by Dealer's
customers, Distributor directs Dealer to provide enhanced shareholder services
such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees
shall be based on the value of Shares attributable to Dealer's customers and
eligible for such payment, and shall be calculated on the basis of and at the
rates set forth in the compensation schedule then in effect. Without prior
approval by a majority of the outstanding shares of a Fund, the aggregate annual
A-5
<PAGE> 6
fees paid to Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts
stated as the "annual maximums" in each Fund's Prospectus, which amount shall be
a specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and
the Distributor shall control over this Agreement in the event of any
inconsistency. Each Rule 12b-1 Plan in effect on the date of this Agreement is
described in the relevant Fund's Prospectus. Dealer hereby acknowledges that all
payments under Rule 12b-1 Plans are subject to limitations contained in such
Rule 12b-1 Plans and may be varied or discontinued at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions
whereby the Fund, under all ordinary circumstances, will redeem Shares held by
shareholders on demand. Dealer agrees that it will not make any representations
to shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its
customers at a price below that next quoted by the Fund for redemption or
repurchase, i.e., at the net asset value of such Shares, less any applicable
deferred sales charge, or redemption fee, in accordance with the Fund's
Prospectus. Dealer shall, however, be permitted to sell Shares for the account
of the customer or record owner to the Funds at the repurchase price then
currently in effect for such Shares and may charge the customer or record owner
a fair service fee or commission for handling the transaction, provided Dealer
discloses the fee or commission to the customer or record owner. Nevertheless,
Dealer agrees that it shall not under any circumstances maintain a secondary
market in such repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it
has made, if instructions in proper form, including any outstanding
certificates, are not received by Distributor within the time customary or the
time required by law, the redemption may be canceled forthwith without any
responsibility or liability on Distributor's part or on the part of any Fund, or
Distributor, at its option, may buy the shares redeemed on behalf of the Fund,
in which latter case Distributor may hold Dealer responsible for any loss,
including loss of profit, suffered by Distributor resulting from Distributor's
failure to settle the redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
A-6
<PAGE> 7
Distributor may, from time to time, provide Dealer with
written guidelines or standards relating to the sale or distribution of Funds
offering multiple classes of Shares with different sales charges and
distribution-related operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners,
directors, officers, employees, and agents is authorized to give any information
or make any representations concerning Shares of any Fund except those contained
in the Fund's then current Prospectus or in materials provided by Distributor.
b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising or
sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and
Distributor shall have no obligation or responsibility with respect to Dealer's
right to purchase or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with
information identifying the states or jurisdictions in which it is believed that
all necessary notice, registration or exemptive filings for Shares have been
made under applicable securities laws such that offers and sales of Shares may
be made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states
or jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws
regulating the sale of securities in the United States or any foreign
jurisdiction, with respect to the qualification or status of Dealer or Dealer's
personnel selling Fund Shares. Distributor shall not, in any event, be liable or
responsible for the issue, form, validity, enforceability and value of such
Shares or for any matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of
Shares in any foreign jurisdiction, except with the express written consent of
Distributor.
A-7
<PAGE> 8
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless
Distributor and the Funds and their predecessors, successors, and affiliates,
each current or former partner, officer, director, employee, shareholder or
agent and each person who controls or is controlled by Distributor from any and
all losses, claims, liabilities, costs, and expenses, including attorney fees,
that may be assessed against or suffered or incurred by any of them howsoever
they arise, and as they are incurred, which relate in any way to: (i) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the United States or any state or foreign
country) or any alleged tort or breach of contract, related to the offer or sale
by Dealer of Shares of the Funds pursuant to this Agreement (except to the
extent that Distributor's negligence or failure to follow correct instructions
received from Dealer is the cause of such loss, claim, liability, cost or
expense); (ii) any redemption or exchange pursuant to instructions received from
Dealer or its partners, affiliates, officers, directors, employees or agents; or
(iii) the breach by Dealer of any of its representations and warranties
specified herein or the Dealer's failure to comply with the terms and conditions
of this Agreement, whether or not such action, failure, error, omission,
misconduct or breach is committed by Dealer or its predecessor, successor, or
affiliate, each current or former partner, officer, director, employee or agent
and each person who controls or is controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless
Dealer and its predecessors, successors and affiliates, each current or former
partner, officer, director, employee or agent, and each person who controls or
is controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable
time, of any claim or complaint or any enforcement action or other proceeding
with respect to Shares offered hereunder against Dealer or its partners,
affiliates, officers, directors, employees or agents, or any person who controls
Dealer, within the meaning of Section 15 of the Securities Act of 1933, as
amended.
d. Dealer further agrees promptly to send Distributor copies
of (i) any report filed pursuant to NASD Conduct Rule 3070, including, without
limitation quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed
with any other self-regulatory organization in lieu of Rule 3070 reports
pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification
provisions shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
A-8
<PAGE> 9
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to this
Agreement may terminate this Agreement immediately by giving written notice to
the other party of that other party's material breach of this Agreement. Such
notice shall be deemed to have been given and to be effective on the date on
which it was either delivered personally to the other party or any officer or
member thereof, or was mailed postpaid or delivered to a telegraph office for
transmission to the other party's designated person at the addresses shown
herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the
appointment of a Trustee under the Securities Investor Protection Act or any
other act of insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing
means shall have no effect upon transactions entered into prior to the effective
date of termination and shall not relieve Dealer of its obligations, duties and
indemnities specified in this Agreement. A trade placed by Dealer subsequent to
its voluntary termination of this Agreement will not serve to reinstate the
Agreement. Reinstatement, except in the case of a temporary suspension of
Dealer, will only be effective upon written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any time by
written notice to Dealer. Dealer's placing of an order or accepting payment of
any kind after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and
existing and in good standing under the laws of the state of Delaware and is
duly registered or exempt from registration as a broker-dealer in all states and
jurisdictions in which it provides services as principal underwriter and
distributor for the Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's
charter and by-laws to enter into this Agreement and perform all activities and
services of the Distributor provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Distributor's ability to perform under this
Agreement.
A-9
<PAGE> 10
d. All requisite actions have been taken to authorize
Distributor to enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties found
elsewhere in this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing
under the laws of the state, commonwealth or other jurisdiction in which Dealer
is organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all activities
and services of the Dealer provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Dealer's ability to perform under this
Agreement.
c. All requisite actions have been taken to authorize Dealer
to enter into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement,
subject to any enforcement or other proceeding with respect to its activities
under state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with Distributor
have a debit balance, Distributor shall be permitted to offset and recover the
amount owed from any other account Dealer has with Distributor, without notice
or demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in
accordance with the laws of the state of New Jersey, not including any provision
which would require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
A-10
<PAGE> 11
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only,
are not a party hereof, and are not to be used in construing or interpreting any
aspect hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements. This Agreement shall be binding upon the
parties hereto when signed by Dealer and accepted by Distributor.
A-11
<PAGE> 12
17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements and/or understandings of the parties. This
Agreement shall be binding upon the parties hereto when signed by Dealer and
accepted by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By:____________________________________
Name:__________________________________
Title:_________________________________
Date:__________________________________
DEALER: _______________________________
By: ______________________________
(Signature)
Name: ______________________________
Title: ______________________________
Address:_______________________________
_______________________________
_______________________________
Telephone: ___________________________
NASD CRD # __________________________
Prudential Dealer # __________________
(Internal Use Only)
Date: ______________________________
A-12
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<NAME> THE TARGET PORTFOLIO TRUST:
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<NAME> THE TARGET PORTFOLIO TRUST:
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<NAME> INTERNATIONAL BOND PORTFOLIO
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<NAME> TOTAL RETURN BOND PORTFOLIO
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<NAME> INTERMEDIATE-TERM BOND PORTFOLIO
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<NAME> THE TARGET PORTFOLIO TRUST:
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<NAME> MORTGAGE BACKED SECURITIES PORTFOLIO
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<NAME> THE TARGET PORTFOLIO TRUST
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<NAME> US GOVERNMENT MONEY MARKET PORTFOLIO
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