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THE TARGET PORTFOLIO TRUST(R)
Statement of Additional Information
May 1, 1999
(Revised on May 27, 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:
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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
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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 (as revised on
May 27, 1999), a copy of which may be obtained from the Trust upon request.
TABLE OF CONTENTS
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PAGE
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History of the Trust........................................ B-2
Description of the Portfolios, Their Investments and
Risks..................................................... B-2
Investment Restrictions..................................... B-35
Management of the Trust..................................... B-36
Control Persons and Principal Holders of Securities......... B-39
Investment Advisory and Other Services...................... B-41
Brokerage Allocation and Other Practices.................... B-47
Capital Shares, Other Securities and Organization........... B-51
Purchase, Redemption and Pricing of Shares.................. B-51
Shareholder Investment Account.............................. B-52
Net Asset Value............................................. B-54
Taxes, Dividends and Distributions.......................... B-55
Performance Information..................................... B-58
Financial Statements........................................ B-63
Report of Independent Accountants........................... B-110
Appendix I -- Historical Performance Data................... I-1
Appendix II -- General Investment Information............... II-1
Appendix III -- Information Relating to Prudential.......... III-1
Appendix IV -- Glossary of Indices.......................... IV-1
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TMF 158 B
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HISTORY OF THE TRUST
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.
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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.
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 time of issuance. Zero coupon U.S. Government securities do not require the
periodic payment of
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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.
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 agencies and
instrumentalities. The U.S. Government Money Market Portfolio will normally
limit its investments in money market instruments to securities issued or
guaranteed by the U.S. Govern-
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ment or its agencies. Money market 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. The Mortgage
Backed Securities Portfolio will limit its investment in money market
investments to those issued by U.S. issuers. 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
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S&P or the equivalent by another NRSRO), offer a higher current yield than is
offered by higher-rated securities, but also (i) will likely have some quality
and protective characteristics that, in the judgment of the rating
organizations, are outweighed by large uncertainties or major risk exposures to
adverse conditions and (ii) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The market values of certain of these securities also
tend to be more sensitive to individual corporate developments and changes in
economic conditions than higher-quality bonds. In addition, medium and
lower-rated securities and comparable unrated securities generally present a
higher degree of credit risk. The risk of loss due to default by these issuers
is significantly greater because medium and lower-rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. The Advisers, under
the supervision of the Manager and the Trustees, in evaluating the
creditworthiness of an issue whether rated or unrated, take various factors into
consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for each Portfolio to obtain accurate market
quotations for 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" in the
Prospectus.
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:
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PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
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INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM
BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
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AAA/Aaa 64.3% 46% 21%
AA/Aa 35.7% 1% 6%
A/A -- 1% 4%
BBB/Baa -- 6% 18%
BB/Ba -- 8% 7%
B/B -- -- --
CCC/Caa -- -- --
CC/Ca -- -- --
C/C -- -- --
Unrated -- 38%(1) 44%(2)
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(1) 38% of the debt obligations held by the Portfolio were
unrated, but were deemed comparable to AAA/Aaa rated
obligations by the sub-adviser.
(2) 44% of the debt obligations held by the Portfolio were
unrated, but were deemed comparable to AAA/Aaa rated
obligations by the sub-adviser.
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 semi-governmental issuers
include, among others, the Province of Ontario and the City of Stockholm.
Foreign government securities also include mortgage-backed securities issued by
foreign government entities including semi-governmental entities.
A 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 securities purchased by the
International Equity and International Bond Portfolios are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect each 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 each
Portfolio. If the value of a foreign currency rises against the U.S. dollar, the
value of a Portfolio's assets denominated in that currency will increase;
correspondingly, if the value of a foreign currency declines against the U.S.
dollar, the value of a Portfolio's assets denominated in that currency will
decrease. Under the Internal Revenue Code, the Portfolios are 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 Portfolios' distributable
income.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental interpretation, speculation and
other economic and political conditions. Although the International Equity and
International Bond Portfolios value their assets daily in U.S. dollars, the
Portfolios will not convert their holdings of foreign currencies to U.S. dollars
daily. When a Portfolio converts its holdings to another currency, it may incur
conversion costs. Foreign
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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 Portfolios will
treat the euro as a separate currency from that of any participating state.
The conversion may adversely affect the Portfolios 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
Portfolios' service providers, or by entities with which the Trust or its
service providers do business, are not capable of recognizing the euro as a
distinct currency at the time of, and following, euro conversion. In addition,
the conversion could cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect a
Portfolio'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 Portfolios as determined under existing tax law.
The Trust's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Trust and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Trust's other service providers to address the
conversion. The Trust has not borne any expense relating to these actions.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES
MORTGAGE BACKED SECURITIES -- GENERAL. The 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 semi-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.
ASSET-BACKED SECURITIES. The Large Capitalization Value Portfolio, Small
Capitalization Value Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in asset-backed securities. Through the use of
trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to the mortgage pass-through
structures or in a pay-through structure similar to the CMO structure. A
Portfolio may invest in these and other types of asset-backed securities that
may be developed in the future. Asset-backed securities present certain risks
that are not presented by mortgage backed securities. Primarily, these
securities do not have the benefit of a security interest in the related
collateral. Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, some of which may reduce the ability to obtain full payment. In the case
of automobile receivables, the security interests in the underlying automobiles
are often not transferred when the pool is created, with the resulting
possibility that the collateral could be resold. In general, these types of
loans are of shorter average life than mortgage loans and are less likely to
have substantial prepayments.
TYPES OF CREDIT ENHANCEMENT. Mortgage backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, those securities may contain elements of
credit support which fall into two categories: (1) liquidity protection and
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(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. A 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 the
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Adviser is 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.
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 either within or outside of the
United States and securities that have legal or contractual restrictions on
resale (restructured securities). Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Manager anticipates that the market for
certain restricted securities such as institutional commercial paper,
convertible securities and foreign securities will expand further as a result of
this regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the NASD.
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<PAGE> 18
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
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.
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<PAGE> 19
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 seek 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 currently include the use
of foreign currency forward contracts, options, futures contracts and options
thereon. A 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 these
strategies 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 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.
B-19
<PAGE> 20
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 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 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 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.
B-20
<PAGE> 21
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. A Portfolio may also buy and write
straddles (i.e., a combination of a call and a put written on the same security
at the same strike price where the same segregated collateral is considered
"cover" for both the put and the call). In such cases, a Portfolio will
segregate with its Custodian cash or other liquid assets equivalent to the
amount, if any, by which the put is "in-the-money, "i.e., the amount by which
the exercise price of the put exceeds the current market value of the underlying
security. It is contemplated that a Portfolio's use of straddles will be limited
to 5% of the Portfolio's net assets (meaning that the securities used for cover
or segregated as described above will not exceed 5% of the Portfolio'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, 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
B-21
<PAGE> 22
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 a Portfolio, 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.
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
B-22
<PAGE> 23
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 take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference
B-23
<PAGE> 24
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 no greater than the risk
in connection with options on securities in the index.
SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercises of index
options are settled in cash, a call writer such as a 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 herein.
Price movements in a Portfolio's security holdings probably will not
correlate precisely with movements in the level of the index and, therefore, the
Portfolio bears the risk that the price of the securities held by the Portfolio
may not increase as much as the index. In such event, the Portfolio would bear a
loss on the call which is not completely offset by movements in the price of the
Portfolio's security holdings. It is also possible that the index may rise when
the Portfolio's stocks do not rise. If this occurred, the Portfolio would
experience a loss on the call which is not offset by an increase in the value of
its portfolio and might also experience a loss in its portfolio. However,
because the value of a diversified portfolio will, over time, tend to move in
the same direction as the market, movements in the value of the Portfolio in the
opposite direction as the market would be likely to occur for only a short
period or to a small degree.
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<PAGE> 25
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 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.
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
B-25
<PAGE> 26
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, 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 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.
B-26
<PAGE> 27
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 Portfolio's total assets. 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 or currencies being
hedged is imperfect and there is a risk that the value of the securities or
currencies being hedged may increase or decrease at a greater rate than a
specified futures contract resulting in losses to a Portfolio.
A Portfolio may sell a futures contract to protect against the decline in
the value of securities or currencies 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.
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
B-27
<PAGE> 28
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.
Successful use of futures contracts is also subject to the ability of an
Adviser to forecast movements in the direction of the market and interest rates
and other factors affecting equity securities and currencies generally. In
addition, there may exist an imperfect correlation between the price movements
of futures contracts purchased by the 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 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.
B-28
<PAGE> 29
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-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 precise matching of forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. A 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
B-29
<PAGE> 30
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.
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.
INDEXED COMMERCIAL PAPER. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in commercial paper which is indexed to certain
specific foreign currency exchange rates. The terms of such commercial paper
provide that its principal amount is adjusted upwards or downwards (but not
below zero) at maturity to reflect changes in the exchange rate between two
currencies while the obligation is outstanding. A Portfolio will purchase such
commercial paper with the currency in which it is denominated and, at maturity,
will receive interest and principal payments thereon in that currency, but the
amount of principal payable by the issuer at maturity will change in proportion
to the change (if any) in the exchange rate between the two specified currencies
between the date the
B-30
<PAGE> 31
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.
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 other liquid assets with its
Custodian, it will not be subject to the requirements described in this
paragraph.
B-31
<PAGE> 32
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 other liquid assets or secured by an irrevocable letter
of credit in favor of the Portfolio in an amount equal to at least 100%
determined daily, of the market value of the loaned securities. The collateral
is segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay 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 or by a Portfolio at any time. If
the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and 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 pursuant to procedures approved by the Board of Trustees and when
the income which can be earned from such loans justifies the attendant risks.
Upon termination of the loan, the borrower is required to return the securities
to a Portfolio. Any gain or loss in the market price during the loan period
would inure to a Portfolio.
Since voting or consent rights which accompany loaned securities pass to
the borrower, a Portfolio will follow the policy of calling the loaned
securities, in whole or in part as may be appropriate, to permit the exercise of
such rights if the matters involved would have a material effect on 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 or may share the interest earned on collateral with the borrower.
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 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
B-32
<PAGE> 33
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
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
B-33
<PAGE> 34
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 a Portfolio is required to segregate assets in connection with certain
portfolio transactions, it will designate cash or liquid assets as segregated
with the Trust's Custodian, State Street Bank and Trust Company (State Street).
"Liquid assets" mean cash, U.S. Government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets equal in value to its obligations in respect of potentially leveraged
transactions, marked-to-market daily. These include forward contracts,
when-issued and delayed delivery securities, futures contracts, written options
and options on futures contracts (unless otherwise covered). If collateralized
or otherwise covered, in accordance with Commission guidelines, these will not
be deemed to be senior securities.
(d) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a temporary defensive strategy or pending
investment of proceeds from sales of the 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. Commercial paper will be rated, at the time of purchase, at lease
"A-2" by S&P or "Prime-2" by Moody's, or the equivalent by another NRSRO or, if
not rated, issued by an entity having an outstanding unsecured debt issue rated
at least "A" or "A-2" by S&P or "A" or "Prime-2" by Moody's or the equivalent by
another NRSRO. 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.
In addition, the Large Capitalization Value and Small Capitalization Value
Portfolios may invest without limit in corporate and other debt obligations and
the Large Capitalization Growth Portfolio may invest without limit in repurchase
agreements when the Adviser believes that a temporary defensive position is
appropriate.
(e) PORTFOLIO TURNOVER
Portfolio turnover rate is generally the percentage computed by dividing
the lesser of portfolio purchases or sales (excluding all securities, including
options, whose maturities or expiration date at acquisition were one year or
less) by the monthly average value of the long-term portfolio. High portfolio
turnover (100% or more) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by each
Portfolio. See "Brokerage
B-34
<PAGE> 35
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."
During the fiscal year ended December 31, 1998, the International Bond, Total
Return Bond and Intermediate-Term Bond Portfolios experienced relatively high
portfolio turnover rates. The portfolio turnover rate for the International Bond
Portfolio was largely attributable to unusually high purchase and redemption
activity in that Portfolio during 1998. The portfolio turnover rate for the
Total Return and Intermediate-Term Bond Portfolios was largely attributable to
the roll-over of mortgage-backed securities.
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
B-35
<PAGE> 36
secured by real estate, securities of companies which invest or deal in real
estate and publicly traded securities of real estate investment trusts.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws. The Portfolios may purchase restricted
securities without limit.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which the Portfolio will not hold more than 3% of the outstanding
voting securities of any one investment company, will not have invested more
than 5% of its total assets in any one investment company and will not have
invested more than 10% of its total assets (determined at the time of
investment) in such securities or one or more investment company's, or except as
part of a merger, consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Portfolio may invest in the securities of
companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the value of the Portfolio's total
assets.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
13. Buy or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell financial futures contracts and options thereon.
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.
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(**) THE TRUST DURING PAST FIVE YEARS
---------------- ------------- ----------------------
<S> <C> <C>
Eugene C. Dorsey (72) Trustee Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now
Freedom Forum); former Publisher of four
Gannett newspapers and Vice President of
Gannett Co., Inc.; past Chairman, Independent
Sector, Washington, D.C. (national coalition
of philanthropic organizations); former
Chairman of the American Council for the
Arts; Director of the advisory board of Chase
Manhattan Bank of Rochester; and Trustee or
Director of 17 other funds within the
Prudential Mutual Funds.
</TABLE>
B-36
<PAGE> 37
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(**) THE TRUST DURING PAST FIVE YEARS
---------------- ------------- ----------------------
<S> <C> <C>
Douglas H. McCorkindale (59) Trustee Vice Chairman (since March 1984) and President
(since September 1997) of Gannett Co. Inc.
(publishing and media); Director of
Continental Airlines, Inc., Gannett Co., Inc.
and Frontier Corporation; and Trustee or
Director of 23 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, Executive Service Corps of
Rochester, Monroe County Water Authority,
Rochester Jobs, Inc., Monroe County
Industrial Development Corporation and
Northeast Midwest Institute; President,
Director and Treasurer, First Financial Fund,
Inc. and The High Yield Plus Fund, Inc.; and
Trustee or Director of 33 other funds within
the Prudential Mutual Funds.
*John R. Strangfeld, Jr. Trustee and Chief Exectuive Officer, Chairman, President
(45) President and Director of The Prudential Investment
Corporation (since January 1990); Executive
Vice President of the Prudential Global Asset
Management Group of Prudential (since
February 1998); Chairman of Pricoa Capital
Group (since August 1989); Chief Executive
Officer of Private Asset Management Group of
Prudential (November 1994-December 1998)
Robert F. Gunia (51) Vice Vice President (since September 1997) of
President Prudential Investments; Executive Vice
President and Treasurer (since December
1996), Prudential Investments Fund Management
LLC (PIFM); Senior Vice President (since
March 1987) of Prudential Securities
Incorporated (Prudential Securities);
formerly Chief Administrative Officer (July
1990-September 1996), Director (January
1989-September 1996), and Executive Vice
President, Treasurer and Chief Financial
Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice
President and Director (since May 1989) of
The Asia Pacific Fund, Inc. and Director or
Trustee of 44 funds within the Prudential
Mutual Funds.
David F. Connor (35) Secretary Assistant General Counsel (since March 1998) of
PIFM; Associate Attorney, Drinker Biddle &
Reath LLP prior thereto.
</TABLE>
B-37
<PAGE> 38
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(**) THE TRUST DURING PAST FIVE YEARS
---------------- ------------- ----------------------
<S> <C> <C>
Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of
Principal PIFM; First Vice President (since March 1993)
Financial and of Prudential Securities; formerly First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc. and
Vice President (July 1989-March 1994) of
Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments; formerly First Vice President
(February 1993-September 1996) of Prudential
Mutual Fund Management, Inc.
</TABLE>
- ---------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential, Prudential Securities or PIFM.
** Unless otherwise stated, the address of the directors and officers is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.
The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Advisors and Distributor, decide upon matters of general
policy. The Trustees also review the actions of the Trust's officers, who
conduct and supervise the daily business operations of the Trust.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
72, except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. Mr. Dorsey is scheduled to retire on December 31,
1999.
Pursuant to the Management Agreement with the Trust, the Manager pays all
compensation of officers and employees of the Trust as well as the fees and
expenses of all Trustees of the Trust who are affiliated persons of the Manager.
The Trust currently pays each of its Trustees who is not an affiliated
person of the Manager or a Portfolio's Adviser annual compensation of $6,000, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Trustee may change as a result of the introduction of additional
funds upon the boards of which the Trustee may be asked to serve.
Trustees may receive their Trustee's fees pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of Trustee's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an exemptive order
from the Commission, at the daily rate of return of a 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.
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.
B-38
<PAGE> 39
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*.......................................... $7,500 $ 70,000(17/46)**
Douglas H. McCorkindale*................................... $7,500 $ 70,000(23/40)**
Thomas T. Mooney*.......................................... $7,500 $115,000(35/70)**
</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 $85,445 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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 16, 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 16, 1999, the owners, directly or indirectly, of more than 5%
of the outstanding shares of beneficial interest of any Portfolio were as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS PORTFOLIO (% OF PORTFOLIO)
- ---- ------- --------- ----------------
<S> <C> <C> <C>
Campbell Union High Sch Dist 3235 Union Ave. Mortgage Backed 543,389(7.9%)
Special Building Fund San Jose, CA 95124-2009 Securities Portfolio
Nation Asset MGMT Pledge Washington Mall West U.S. Government 34,225,665(11.8%)
Account for Credit LYONNAIS Reid ST Money Market
Hamilton, HM11 Portfolio
Bermuda
Trout TDG Fund LTD Pledge Washington Mall U.S. Government 31,638,244(11.0%)
Account For Credit LYONNAIS One Church ST, 4th FL Money Market
Hamilton, HM11 Portfolio
Bermuda
Trout TDG Fund LTD Washington Mall U.S. Government 15,825,912(5.5%)
One Church ST, 4th FL Money Market
Hamilton, HM11 Portfolio
Bermuda
Spire Overseas LTD 48 Par Laville Road U.S. Government 18,297,538(6.3%)
Suite 464 Money Market
Hamilton, HM11 Portfolio
Bermuda
Prudential Securities C/F 8287 E. Olive Ave. U.S. Government 44,085,827(15.3%)
Mrs. Jorene Briner Fresno, CA 93727-9549 Money Market
IRA DTD 10/23/96 Portfolio
Prudential Mutual Funds Accounting Gateway Center Three International Bond 261,343(8.1%)
100 Mulberry Street 9th FL Portfolio
Newark, NJ 07102-4077
</TABLE>
B-39
<PAGE> 40
As of April 16, 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....................... 17,879,825 (99.87%)
Large Capitalization Value Portfolio........................ 17,471,973 (99.98%)
Small Capitalization Growth Portfolio....................... 9,698,118 (99.79%)
Small Capitalization Value Portfolio........................ 8,781,632 (99.99%)
International Equity Portfolio.............................. 14,862,944 (98.47%)
International Bond Portfolio................................ 3,231,778 (99.87%)
Intermediate-Term Bond Portfolio............................ 10,229,537 (99.78%)
Total Return Bond Portfolio................................. 6,377,128 (99.44%)
Mortgage Backed Securities Portfolio........................ 6,888,568 (99.77%)
U.S. Government Money Market Portfolio...................... 288,869,738 (99.99%)
</TABLE>
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<PAGE> 41
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND ADVISERS
The Manager of the Trust is Prudential Investments Fund Management LLC
(PIFM or the Manager) Gateway Center Three, 100 Mulberry Street, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Trust, comprise the Prudential Mutual Funds. See "How
the Fund is Managed -- Manager" in the Prospectus. As of March 31, 1999, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $71.6 billion. According to the
Investment Company Institute, as of December 31, 1998, the Prudential Mutual
Funds was the 18th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to the Management Agreement with the Trust (the Management
Agreement), PIFM, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations of
the Trust and the composition of the Trust's 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.
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 retained 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>
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<PAGE> 42
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
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.
B-42
<PAGE> 43
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% .60% $1,666,766 $1,453,397 $1,216,415
Large Capitalization Value Portfolio............. .60% .60% .60% 1,692,469 1,521,474 1,253,390
Small Capitalization Growth Portfolio............ .60% .60% .60% 975,926 939,417 848,974
Small Capitalization Value Portfolio............. .60% .60% .60% 922,536 864,964 663,383
International Equity Portfolio................... .70% .70% .70% 1,724,342 1,718,754 1,551,382
International Bond Portfolio..................... .50% .50% .50% 153,602 175,813 193,939
Total Return Bond Portfolio...................... .45% .45% .45% 278,041 216,559 212,605
Intermediate-Term Bond Portfolio................. .45% .45% .45% 455,487 430,089 367,755
Mortgage Backed Securities Portfolio............. .45% .45% .45% 331,815 322,907 324,962
U.S. Government Money Market Portfolio........... .25% .25% .25% 266,250 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.
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 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.
B-43
<PAGE> 44
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% $833,383 $726,699 $608,208
Large Capitalization Value
Portfolio......................... 0.60% 0.30% 846,235 762,237 626,695
Small Capitalization Growth
Portfolio......................... 0.60% 0.30% 487,963 469,709 424,487
Small Capitalization Value
Portfolio......................... 0.60% 0.30% 461,267 432,482 331,692
International Equity Portfolio...... 0.70% 0.40% 985,388 982,146 886,504
International Bond Portfolio........ 0.50% 0.30% 92,161 105,488 116,363
Total Return Bond Portfolio......... 0.45% 0.25% 154,467 120,307 118,114
Intermediate-Term Bond Portfolio.... 0.45% 0.25% 253,048 238,938 204,308
Mortgage Backed Securities Portfolio... 0.45% 0.25% 184,342 179,393 180,534
U.S. Government Money Market
Portfolio......................... 0.25% 0.125% 133,125 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 $9.7 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 $11.5
billion in assets under management. Oak is registered as an investment adviser
under the Investment Advisers Act of 1940. It is a limited liability company
organized under the laws of the State of Ohio. James D. Oelschlager owns a
controlling interest (99%) of Oak.
LARGE CAPITALIZATION VALUE 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
B-44
<PAGE> 45
corporation, is an indirect, wholly-owned subsidiary of AMVESCAP PLC, a global
money management firm. As of December 31, 1998, INVESCO had approximately $146
million of assets under management for clients located throughout the U.S.,
Europe and Japan.
Hotchkis and Wiley, 800 West Sixth Street, Fifth Floor, Los Angeles,
California 90017, is a division of The Merrill Lynch Capital Management Group of
Merrill Lynch Asset Management, L.P. It was established in 1980 and has
specialized in the large-cap market since its inception. 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 $14 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
Sawgrass Asset Management, L.L.C. (Sawgrass), 4337 Pablo Oaks Court,
Building 200, Jacksonville, FL 32224, serves as one of two Advisers to the Small
Capitalization Growth Portfolio. Sawgrass was formed in 1998 as a Delaware
limited liability company. AmSouth Bank owns 50% of the shares of Sawgrass, and
employees of Sawgrass own the remaining 50% of the shares of Sawgrass. AmSouth
Bank is a subsidiary of AmSouth Bancorporation. Sawgrass has been an Advisor to
the Portfolio since May 27, 1999. As of May 24, 1999, Sawgrass had approximately
$250 million in assets under management for corporate, municipal, public and
state retirement plans and mutual funds.
Investment Advisers, Inc. (IAI), 3700 First Bank Place, P.O. Box 357,
Minneapolis, Minnesota 55440 serves as the second Adviser in addition to
Sawgrass. 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 $6 billion in assets.
SMALL CAPITALIZATION VALUE PORTFOLIO
Lazard Asset Management (Lazard), 30 Rockefeller Plaza, New York, New York
10112, serves as one of two Advisers to the Small Capitalization Value Portfolio
of the Trust. Lazard has been an Adviser to the Portfolio since January 2, 1995.
Lazard is a division of Lazard Freres & Co. LLC (Lazard Freres), a New York
limited liability company. Lazard provides investment management services to
both individual and institutional clients and, together with its global
affiliates, had more than $64 billion of assets under management as of March 31,
1999. In addition to portfolio management, Lazard Freres provides a wide variety
of investment banking, brokerage and related services.
Wood, Struthers & Winthrop Management Corp. (WSW), 277 Park Avenue, New
York, New York 10172, serves as the other Adviser to the Small Capitalization
Value 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 $10 billion in
assets under management. WSW is a subsidiary of Donaldson, Lufkin & Jenrette
Securities Corporation (DLJSC), 277 Park Avenue, New York, New York 10172. DLJSC
is a wholly owned subsidiary of Donaldson Lufkin & Jenrette Inc (DLJ Inc), 35.3%
of which is owned by The Equitable Life Assurance Society of the United States
(LIFE), 787 Seventh Avenue, New York, New York 10019, a wholly-owned subsidiary
of The Equitable Companies Incorporated (Equitable), 787 Seventh Avenue, New
York, New York 10019. Equitable owns directly an additional 42.9% of DLJ Inc.
Approximately 60.8% of the outstanding voting common stock as well as certain
convertible preferred stock of Equitable is beneficially owned by AXA, a French
insurance holding company. A
B-45
<PAGE> 46
group of five French mutual insurance companies, Uni Europe Assurance Mutuelle,
Alpha Assurances I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, AXA
Assurances Vie Mutuelle, and AXA Assurances I.A.R.D. Mutuelle (the "Mutuelles"),
owned directly and indirectly through two French holding companies, Finaxa and
Midi Participations, shares representing over 50% of the voting shares of AXA.
The Mutuelles are owned by approximately 1.5 million policyholders.
INTERNATIONAL EQUITY PORTFOLIO
Lazard has served as the Adviser to the International Equity Portfolio
since its inception. Lazard 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, United Kingdom, 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, a diversified financial services organization. As of
December 31, 1998, DIAL had approximately $11.8 billion in assets under
management with approximately $4.3 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 current Managing Directors and two former
Managing Directors of PIMCO. PIMCO Partners, G.P., is the sole general partner
of PAH. PIMCO is registered as an investment advisor with the Commission and as
a commodity trading advisor with the CFTC. As of December 31, 1998, PIMCO had
approximately $157.9 billion of asset under management.
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 management
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of December 31, 1998, WMC
had approximately $211 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
B-46
<PAGE> 47
maintains certain financial and accounting books and records pursuant to an
agreement with the Trust.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Trust.
It is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer agency
services to the Trust, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account of $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....................... $104,000
Large Capitalization Value Portfolio........................ 105,700
Small Capitalization Growth Portfolio....................... 104,000
Small Capitalization Value Portfolio........................ 89,000
International Equity Portfolio.............................. 102,200
International Bond Portfolio................................ 33,300
Total Return Bond Portfolio................................. 41,600
Intermediate-Term Bond Portfolio............................ 46,000
Mortgage Backed Securities Portfolio........................ 49,180
U.S. Government Money Market Portfolio...................... 17,700
</TABLE>
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036 currently serves as the Trust's independent accountants and, in that
capacity, audits the Trust's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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
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<PAGE> 48
options. On foreign securities exchanges, commissions may be fixed. Orders may
be directed to any broker, dealer or futures commission merchant including, to
the extent and in the manner permitted by applicable law, Prudential Securities,
one of the Advisers or an affiliate thereof (an affiliated broker).
Equity securities traded in the over-the-counter market and bonds,
including convertible bonds, are generally traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission, although
the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain money market
instruments and U.S. Government agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Trust will
not deal with an affiliated broker in any transaction in which such affiliated
broker acts as principal. Thus, for example, a Portfolio will not deal with an
affiliated broker/dealer acting as 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
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<PAGE> 49
remuneration received by an affiliated broker must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold during a comparable period of time. This standard would allow
an affiliated broker to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Trustees, including a majority of the
non-interested Trustees, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to an
affiliated broker are consistent with the foregoing standard.
In accordance with Section 11(a) under the Securities Exchange Act of 1934,
as amended, an affiliated broker may not retain compensation for effecting
transactions on a national securities exchange for the Trust unless the Trust
has expressly authorized the retention of such compensation. Section 11(a)
provides that an affiliated broker must furnish to the Trust at least annually a
statement setting forth the total amount of all compensation retained by such
affiliated broker from transactions effected for the Trust during the applicable
period. Brokerage and futures transactions with an affiliated broker are also
subject to such fiduciary standards as may be imposed by applicable law.
The table below sets forth certain information concerning the payment of
commissions by the Trust, including the commissions paid to Prudential
Securities or any affiliate of the Trust or the Advisers for the three years
ended December 31, 1998. For the three years ended December 31, 1998, the
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....... $282,210 $355,856 $210,835 $149,768 $152,335 $116,061 $327,706 $378,654 $332,672
Total brokerage commissions
paid to Prudential
Securities or affiliates of
the Trust or the Advisers... $2,700 -- $1,182 $24,209 9,334 $5,910 -- -- --
Percentage of total brokerage
commissions paid to
Prudential Securities or
affiliates of the Trust or
the Advisers................ 0.9% -- 5.4% 16.2% 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... 0.9% -- 7.0% 11.5% 5.4% 4.6% -- -- --
</TABLE>
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<PAGE> 50
<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............................ $206,037 $152,188 $ 86,214 $449,262 $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>
<TABLE>
<CAPTION>
MORTGAGE BACKED TOTAL RETURN INTERMEDIATE-TERM
SECURITIES PORTFOLIO BOND PORTFOLIO BOND 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........ $750 $5,642 $9,800 $10,042 $6,573 $7,046 $14,424 $12,888 $8,674
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 $118,146 (41.9%), $11,681
(7.8%), $271,910 (83%), $54,751 (26.6%) and $80,422 (17.9%), respectively, to
firms which provided research, statistical or other services to the Advisers.
The Advisers have not separately identified a portion of such brokerage
commissions as applicable to the provision of such research, statistical or
other services.
B-50
<PAGE> 51
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. As of December
31, 1998, the Total Return Bond Portfolio held securities of Goldman Sachs
Group, L.P., Lehman Brothers Holdings, Inc. and State Street Bank & Trust
Company in the aggregate amount of $997,750, $2,099,140 and $774,000,
respectively. As of December 31, 1998, the Intermediate-Term Bond Portfolio held
securities of Lehman Brothers Holdings, Inc., Goldman Sachs Group, L.P. and
State Street Bank & Trust Company in the aggregate amount of $3,497,223,
$1,895,725 and $1,167,000, respectively. As of December 31, 1998, the Mortgage
Backed Securities Portfolio held securities of Salomon Brothers Mortgage
Securities in the aggregate amount of $320,097. As of December 31, 1998, the
U.S. Government Money Market Portfolio held securities of Lehman Brothers
Holdings, Inc., PaineWebber Inc., Paribas and Swiss Bank Corp. in the aggregate
amount of $9,347,000, $9,347,000, $9,347,000 and $9,347,000, respectively.
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.
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
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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... $18.29 $15.87 $15.35 $14.98 $15.54 $9.52
====== ====== ====== ====== ====== =====
<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... $10.49 $10.36 $10.47 $1.00
====== ====== ====== =====
</TABLE>
RESTRICTIONS ON SALES OF PORTFOLIO SHARES
The payment of redemption proceeds may be postponed or the right of
redemption suspended at times (1) when the New York Stock Exchange is closed for
other than customary weekends and holidays, (2) when trading on such Exchange is
restricted, (3) when an emergency exists as a result of which disposal by a
Portfolio of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Portfolio fairly to determine the value of its
net assets, or (4) during any other period when the Commission, by order, so
permits; provided that applicable rules and regulations of the Commission shall
govern as to whether the conditions prescribed in (2), (3) or (4) exist.
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.
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.
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<PAGE> 53
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 Trust.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
INDIVIDUAL RETIREMENT ACCOUNTS
An individual retirement account (IRA) permits the deferral of federal
income tax on income earned in the account until the earnings are withdrawn. The
following chart represents a comparison of the earnings in a personal savings
account with those in an IRA, assuming a $2,000 annual contribution, an 8% rate
of return and a 39.6% federal income tax bracket and shows how much more
retirement income can accumulate within an IRA as opposed to a taxable
individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- -------------------------------------- -------- --------
<S> <C> <C>
10 years.............................. $ 26,165 $ 31,291
15 years.............................. 44,675 58,649
20 years.............................. 68,109 98,846
25 years.............................. 97,780 157,909
30 years.............................. 135,346 244,692
</TABLE>
- ---------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Trust or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in 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.
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<PAGE> 54
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 a U.S. Government
security for which quotations are available shall be valued at a price provided
by an independent broker/dealer or pricing service. Pricing services consider
such factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations.
Securities that are actively traded in the over-the-counter market
including listed securities for which the primary market is believed by the
Manager in consultation with the appropriate Adviser to be over-the-counter are
valued at the average of the most recently quoted bid and asked prices provided
by a principal market maker. Securities issued in private placements are valued
at the mean between the bid and asked prices provided by primary market dealers.
Private placement securities for which no bid and asked prices are available and
other securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
investment adviser under procedures described above. Short-term debt securities
are valued at cost, with interest accrued or discount amortized to the date of
maturity, if their original maturity was 60 days or less, unless this is
determined by the Trustees not to represent fair value. Short-term securities
with remaining maturities of 60 days or more, for which market quotations are
readily available, are valued at their current market quotations as provided by
an independent broker/dealer or pricing service. Options on securities that are
listed on an exchange and futures contracts and options thereon traded on a
commodities exchange or board of trade shall be valued at the last sale price at
the close of trading of the applicable exchange or board of trade or, if there
was no sale on the applicable exchange or board of trade, at the average of
quoted bid and asked prices as of the close of such exchange or board of trade.
Over-the-counter options are valued at the mean between bid and asked prices
provided by a dealer. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents at the current rate obtained by a
recognized bank or dealer. Forward currency exchange contracts are valued at the
current cost of covering or offsetting such contracts.
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<PAGE> 55
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 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. 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. 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 Securities
Portfolio are electing to treat net capital losses of approximately $860,100,
$155,500,
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<PAGE> 56
$374,100 and $22,000, respectively, incurred in the two-month period ended
December 31, 1998 as having been incurred in the following year.
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 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
B-56
<PAGE> 57
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
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
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<PAGE> 58
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.
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
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<PAGE> 59
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 4.51% and 4.62%, 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 1.48%, 5.36%, 5.75%, and 6.07%, respectively.
A Portfolio's yield fluctuates, and an annualized yield quotation is not a
representation by a Portfolio as to what an investment in the Portfolio will
actually yield for any given period. Yields for a Portfolio will vary based on a
number of factors including changes in net asset value, market conditions, the
level of interest rates and the level of income and expenses.
AVERAGE ANNUAL TOTAL RETURN
The Trust may from time to time advertise the average annual total return
of a Portfolio. Average annual total return is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1++T)(n) = ERV
<TABLE>
<S> <C> <C> <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).
B-59
<PAGE> 60
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 in the table below. The average annual total returns
do not reflect the fees associated with the TARGET Program.
<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............. 44.22% 21.38% 21.38% 17.48% 17.48%
Large Capitalization
Value Portfolio....... 10.25% 18.14% 18.14% 15.38% 15.38%
Small Capitalization
Growth
Portfolio............. 2.55% 12.42% 12.42% 13.48% 13.46%
Small Capitalization
Value Portfolio....... -6.62% 9.42% 9.42% 12.91% 12.90%
International Equity
Portfolio............. 15.49% 11.22% 11.22% 14.53% 14.53%
International Bond
Portfolio............. 8.55% N/A N/A 4.67% 4.58%
Total Return Bond
Portfolio............. 8.28% 7.47% 7.40% 7.93% 7.85%
Intermediate-Term Bond
Portfolio............. 7.09% 6.93% 6.93% 7.34% 7.33%
Mortgage Backed
Securities
Portfolio............. 6.37% 7.15% 7.11% 7.45% 7.36%
</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-60
<PAGE> 61
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 in the table below. The aggregate total
returns do not reflect the fees associated with the TARGET Program.
<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...................... 44.22% 163.46% 163.46% 162.24% 162.24%
Large Capitalization Value
Portfolio...................... 10.25% 130.15% 130.15% 135.42% 135.42%
Small Capitalization Growth
Portfolio...................... 2.55% 79.60% 79.60% 113.11% 113.11%
Small Capitalization Value
Portfolio...................... -6.62% 56.85% 56.85% 106.81% 106.81%
International Equity Portfolio... 15.49% 70.16% 70.16% 125.25% 125.25%
International Bond Portfolio..... 8.55% N/A% N/A% 23.53% 23.01%
Total Return Bond Portfolio...... 8.28% 43.33% 42.92% 57.93% 57.18%
Intermediate-Term Bond
Portfolio...................... 7.09% 39.79% 39.79% 52.83% 52.68%
Mortgage Backed Securities
Portfolio...................... 6.37% 41.23% 41.23% 53.73% 53.00%
</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-61
<PAGE> 62
(This Page Intentionally Left Blank)
B-62
<PAGE> 63
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
B - 63
<PAGE> 64
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
B - 64
<PAGE> 65
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
B - 65
<PAGE> 66
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
B - 66
<PAGE> 67
<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
B - 67
<PAGE> 68
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
B - 68
<PAGE> 69
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
B - 69
<PAGE> 70
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>
CONSTRUCTION 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
B - 70
<PAGE> 71
<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
B - 71
<PAGE> 72
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
B - 72
<PAGE> 73
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
B-73
<PAGE> 74
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
------------
CONSTRUCTION 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
B-74
<PAGE> 75
<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
B-75
<PAGE> 76
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
B-76
<PAGE> 77
<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%.............. $141,557,250
============
</TABLE>
- ---------------
* Non-income producing security.
** Rate represents yield at purchase date.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-77
<PAGE> 78
THE TARGET PORTFOLIO TRUST
International Equity Portfolio
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
US$
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
B-78
<PAGE> 79
<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
B-79
<PAGE> 80
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
B-80
<PAGE> 81
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$27,058,702)...... 27,393,913
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-81
<PAGE> 82
THE TARGET PORTFOLIO TRUST
INTERNATIONAL BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL US$
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
B-82
<PAGE> 83
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
B-83
<PAGE> 84
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
B-84
<PAGE> 85
<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
B-85
<PAGE> 86
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
B-86
<PAGE> 87
<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
B-87
<PAGE> 88
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
B-88
<PAGE> 89
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
B-89
<PAGE> 90
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
B-90
<PAGE> 91
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
B - 91
<PAGE> 92
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
B - 92
<PAGE> 93
<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
B - 93
<PAGE> 94
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
B - 94
<PAGE> 95
<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
B - 95
<PAGE> 96
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
B - 96
<PAGE> 97
<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
B - 97
<PAGE> 98
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
B - 98
<PAGE> 99
<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
B - 99
<PAGE> 100
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
B - 100
<PAGE> 101
<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
B - 101
<PAGE> 102
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
B - 102
<PAGE> 103
<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
B - 103
<PAGE> 104
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
B - 104
<PAGE> 105
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 - 105
<PAGE> 106
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 - 106
<PAGE> 107
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 - 107
<PAGE> 108
- --------------------------------------------------------------------------------
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 - 108
<PAGE> 109
<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 - 109
<PAGE> 110
THE TARGET PORTFOLIO TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Trustees of
The Target Portfolio Trust
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of the Large
Capitalization Growth Portfolio, Large Capitalization Value Portfolio, Small
Capitalization Growth Portfolio, Small Capitalization Value Portfolio,
International Equity Portfolio, International Bond Portfolio, Total Return Bond
Portfolio, Intermediate-Term Bond Portfolio, Mortgage Backed Securities
Portfolio and U.S. Government Money Market Portfolio (constituting The Target
Portfolio Trust, hereafter referred to as the "Trust") at December 31, 1998, the
results of each of their operations for the year then ended, and the changes in
each of their net assets and each of their financial highlights for each of the
two years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion expressed
above. The accompanying financial highlights for the three periods in the period
ended December 31, 1996 were audited by other independent accountants, whose
opinion dated February 21, 1997 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
- --------------------------------------------------------------------------------
B - 110
<PAGE> 111
APPENDIX I -- HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart illustrates that large pension plans use the methods listed in
the percentages indicated for the period December 1977 through December 1987.
HOW YOU ALLOCATE YOUR ASSETS
MAINLY DETERMINES YOUR RETURN
(BASED ON A STUDY OF LARGE PENSION PLANS)
91.5% Asset Allocation
6.7% Security Selection/Other
1.8% Market Timing
Source: Financial Analysts Journal, May/June 1991: "Deteminants of
Portfolio Performance II: An Update," by Gary Brinson, Brian Singer and Gilbert
Beebower. Results are based on the 10-year performance records of 82 pension
funds. The study updates and supports a similar study done in 1986. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any TARGET Portfolio.
I-1
<PAGE> 112
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)
[DOLLARS]
$ 9 Inflation
$ 15 T-Bills
$ 44 Bonds
$2,351 Common Stock
$5,117 Small Stock
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> 113
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
[BAR CHART]
$39.17 Common Stocks
$40.53 Small Stocks
$32.43 Foreign Stock
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> 114
This chart shows the performance of a hypothetical investment in short-term
U.S. Government securities adjusted for inflation for the period from January 1,
1998 through December 31, 1998.
TOO MANY SHORT-TERM SECURITIES
MAY NOT MAKE SENSE
INFLATION AND TAXES CAN ERODE YOUR INVESTMENT
<TABLE>
<S> <C>
Initial investment.......................................... $ 10,000
Interest income: 4.86%...................................... 486
Tax paid on interest (assumes 31% tax rate)................. -151
-------------
Net interest income......................................... 335
Adjust for 1.8% inflation................................... 180
-------------
Net investment.............................................. $ 10,155
</TABLE>
THE INVESTOR'S NET RETURN WAS ONLY 1.55%!
1998 Salomon Smith Barney Brothers 30-day T-bill return used for short-term
interest rate. Federal tax rate of 31% and 1998 inflation rate (CPI) were used.
Short-term rates can fluctuate.
Past performance is no guarantee of future results. This hypothetical
example is provided for informational purposes only. It is not intended to
represent any specific investment and is not indicative of past, present, or
future performance of any TARGET Portfolio.
I-4
<PAGE> 115
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 TIME REDUCES YOUR RISK
1929-1938. The first holding BEST AND WORST ANNUALIZED RETURNS OF THE S&P
period started on 12/31/25 and [S&P BEST AND WORST ANNUALIZED RETURNS BAR
the first 20-year period ended CHART]
on 12/31/45.
Common stock returns are
based on the S&P 500 Composite
Index, a market-weighted,
unmanaged index of 500 stocks 1933 1994-98 1949-58 1979-98
(currently) in a variety of 1931 1928-32 1929-38 1929-48
industries. It is often used as
a broad measure of stock market
performance.
This chart is for
illustrative purposes only and 1 year 5 years 10 years 20 years
is not indicative of the past,
present, or future performance
of any TARGET Portfolio.
Source: Ibbotson
Associates
I-5
<PAGE> 116
APPENDIX II -- GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years -- the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing -- buying securities when prices are low and selling them
when prices are relatively higher -- may not work for many investors because it
is impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
II-1
<PAGE> 117
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Trust is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Trust.
INFORMATION ABOUT PRUDENTIAL
The Manager, PIC(1) and Jennison Associates LLC are subsidiaries of
Prudential, which is one of the largest diversified financial services
institutions in the world and, based on total assets, the largest insurance
company in North America as of December 31, 1997. Principal products and
services include life and health insurance, other healthcare products, property
and casualty insurance, securities brokerage, asset management, investment
advisory services and real estate brokerage. Prudential (together with its
subsidiaries) employs almost 81,000 persons worldwide, and maintains a sales
force of approximately 10,100 agents and 6,500 domestic and international
financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the Rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, the Prudential has
25 million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
approximately 1.5 million cars and insures approximately 1.2 million homes.
Money Management. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in assets
under management. Prudential Investments, a business group of Prudential (of
which Prudential Mutual Funds is a key part), manages over $211 billion in
assets of institutions and individuals. In Institutional Investor, July 1998,
Prudential was ranked eighth in terms of total assets under management, as of
December 31, 1997.
Real Estate. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents with over 1,400 offices
across the United States.(2)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.(3)
Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves nearly
1.5 million customers across 50 states.
- ---------------
1 PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company LLP serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to The Prudential Investment Portfolios, Inc., Prudential 20/20
Focus Fund and Prudential Diversified Funds and Mercator Asset Management LP
as the subadviser to The International Stock Series, a portfolio of Prudential
World Fund, Inc. There are multiple subadvisers for The Target Portfolio
Trust.
2 As of December 31, 1997.
3 On December 10, 1998 Prudential announced its intention to sell Prudential
HealthCare to Aetna Inc. for $1 billion.
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INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of November 30, 1998, Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the subadvisers
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth Fund, a growth-style equity fund managed by Jennison Associates LLC, a
premier institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitors
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(4) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Investment grade bond analysts monitor the financial
viability of different bond issuers in the investment grade corporate and
municipal bond markets--from IBM to small municipalities, such as Rockaway
Township, New Jersey. These analysts consider among other things sinking fund
provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers met with several senior U.S. and foreign
government officials, on issues ranging from economic conditions in foreign
countries to the viability of index-linked securities in the United States.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1998, assets held by Prudential Securities for its
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4 As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
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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.
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5 As of December 31, 1998.
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APPENDIX IV
GLOSSARY OF INDICES
U.S. LARGE CAP STOCKS (S&P 500) -- The S&P 500 is a capital-weighted index
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The S&P 500 is an unmanaged
index.
U.S. SMALL CAP STOCKS (RUSSELL 2000) -- The Russell 2000 Index is a stock market
index comprised of the 2000 smallest U.S. domiciled publicly traded common
stocks that are included in the Russell 3000 Index. These common stocks
represent 10% of the total market capitalization of the Russell 3000 Index
which, in turn, represents approximately 98% of the publicly traded U.S. equity
market.
INTERNATIONAL STOCKS (MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA,
FAR EAST (EAFE) INDEX) -- The MSCI EAFE Index is an arithmetical average
weighted by market value of the performance of over 1000 non-U.S. companies
representing 20 stock markets in Europe, Australia, New Zealand and the Far
East. The EAFE Index is an unmanaged index.
U.S. BONDS (LEHMAN BROTHERS AGGREGATE BOND INDEX) -- The index is composed of
securities from the Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and Asset Backed Securities Index. Total
return comprises price appreciation/depreciation and income as a percentage of
the original investment.
INTERNATIONAL BONDS (WB INDEX) -- The Salomon Smith Barney Non-U.S. World
Government WB Index (WB Index) measures the total return performance of high
quality securities in major sectors of the international bond market. The Index
covers approximately 600 bonds from 17 currencies. Only high quality, straight
issues are included. The WB Index is calculated on both a weighted and an
unweighted basis. Generally, index samples for each market are restricted to
bonds with at least one year of remaining life. The WB Index is an unmanaged
index.
U.S. TREASURY BILLS (SALOMON BROTHERS 90 DAY INDEX) -- This index is constructed
by purchasing equal dollar amounts of three-month Treasury bills at the
beginning of three consecutive months. As each bill matures, all proceeds are
rolled over or reinvested in a new three-month bill. The income used to
calculate the monthly return is derived by subtracting the original amount
invested from the maturity value.
SALOMON SMITH BARNEY MORTGAGE-BASED SECURITIES INDEX (MBS INDEX) -- The MBS
Index is comprised of 30- and 15-year GNMA, FNMA and FHLMC pass-through, and
FNMA and FHLMC balloon mortgages. The MBS Index is an unmanaged index.
INFLATION (CPI) -- The Consumer Price Index for all urban consumers, not
seasonally adjusted, is used to measure the rate of change of consumer prices.
This measures inflation and is constructed by the U.S. Department of Labor,
Bureau of Labor Statistics, Washington D.C.
LARGE CAP GROWTH INDEX (RUSSELL 1000 GROWTH) -- Contains those Russell 1000
securities with a "growth" orientation. Securities in this index tend to exhibit
higher price-to-book and price-to-earnings ratios, lower dividend yields, and
higher forecasted growth rates than those in the Value universe.
LARGE CAP VALUE INDEX (RUSSELL 1000 VALUE) -- Contains those Russell 1000
securities with a "value" orientation. Securities in this index tend to exhibit
lower price-to-book and price-to-earnings ratios, higher dividend yields, and
lower forecasted growth rates than those in the Growth universe.
SMALL CAP GROWTH INDEX (PSI SMALL CAP GROWTH INDEX) -- This index is created by
screening the twentieth through forty-fifth percentiles of market value in the
Compustat universe for companies with growth characteristics. Growth stocks have
historical sales growth rates that are greater than 10%, rank in the top half of
the Institutional Brokers Estimate System (I/B/E/S) universe based on forecasted
growth rate, and have low payouts and debt/capital ratios.
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SMALL CAP VALUE INDEX (PSI SMALL CAP VALUE) -- This index is created by
screening the twentieth through forty-fifth percentiles of market value in the
Compustat universe for companies with value characteristics. Value stocks rank
in the bottom 50% of the universe based on a normalized P/E ratio. Companies
must have sustainable dividend rates.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX -- The Lehman Brothers
Government/ Corporate Bond Index (LGCI) is a weighted index comprised of
publicly traded intermediate and long-term government and corporate debt with an
average maturity of 10 years. The LGCI is an unmanaged index.
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX -- The Lehman
Brothers Intermediate Government/Corporate Bond Index (Lehman Int. Gov't Corp.
Index) is a weighted index comprised of securities issued or backed by the U.S.
government and its agencies and securities publicly issued by corporations with
one to ten years remaining to maturity, rated investment grade and having $50
million or more outstanding. The Lehman Int. Gov't Corp. Index is an unmanaged
index.
LIPPER INTERNATIONAL EQUITY FUND AVERAGE -- Contains international equity funds
that report to Lipper Analytical Services. The funds are given equal weight in
constructing performance which prevents any one fund from having a greater
impact on the overall calculation. Each fund contained in the average has stated
that their objective matches that of the group. Single country funds are not
included in this group.
LIPPER CORPORATE BOND FUND AVERAGE -- Contains corporate bond funds that report
to Lipper Analytical Services. The funds have an average credit quality rating
of least an "A". The average maturity is greater than 10 years. The funds are
equally weighted to assure that no one fund has more of an impact on the
performance calculation than any other fund.
LIPPER INTERMEDIATE TERM BOND FUND AVERAGE -- Contains intermediate-term bond
funds that report to Lipper Analytical Services. The funds invest mainly in
investment grade debt instruments and have an average credit rating of "A". The
average maturity is between 5 to 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.
LIPPER MORTGAGE FUND AVERAGE -- Contains mortgage funds that report to Lipper
Analytical Services. The funds contain primarily U.S. mortgage obligations. The
average maturity is greater than 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.
LIPPER GOVERNMENT MONEY MARKET AVERAGE -- Contains Government money market funds
that report to Lipper Analytical Services. The funds invest in short-term U.S.
Government obligations. The funds are equally weighted to assure that no one
fund has more of an impact on the performance calculation than any other fund.
LIPPER WORLD INCOME FUND AVERAGE -- Contains world income funds that report to
Lipper Analytical Services. The funds are able to invest in debt instruments in
any country. The funds are equally weighted to assure that no one fund has more
of an impact on the performance calculation than any other fund.
MORNINGSTAR LARGE CAP GROWTH AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.
MORNINGSTAR LARGE CAP VALUE AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.
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MORNINGSTAR SMALL CAP GROWTH AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.
MORNINGSTAR SMALL CAP VALUE AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.
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